During the first five months of 2008, New Jersey has shed nearly 11,000 jobs, which boosted the state's unemployment rate to 5.4 percent. Hesitant about the challenging economic climate, many business sectors remained reluctant to make significant capital and labor investments, which has translated into a diminished appetite for additional real estate holdings. Any uptick in demand for office product has often been countered by consolidations. The net result of this struggle has been an office availability rate ranging just below 20 percent since early 2007. By mid-2008, the overall availability rate, which includes direct and sublet space, was approximately 19.8 percent.

Meanwhile, the supply of available sublease space in the Northern and Central New Jersey office market ticked higher in 2008, as companies shuffled their real estate holdings to reduce operating expenses. A rising tide of sublease space is often one of the most distinct indicators of a transitional office market. More than 7.4 million sf was available for sublease in mid-2008 compared to 6.5 million sf available one year ago. Sublease space accounted for nearly 25 percent of the total available space in the Northern and Central New Jersey office market in mid-2008.

The transitional office market conditions will likely continue to encourage flight to quality opportunities for companies seeking to relocate their operations from Class B to Class A space. This migration contributed to nearly 318,000 sf being absorbed in the Class A market during the first half of 2008, compared to 290,400 sf of negative net absorption in the Class B market. While the Northern and Central New Jersey average asking Class A rental rate remained relatively constant near $28.50 per square foot since year-end 2007, effective rents reflecting free rent allocations in signed leases are likely to be lower, especially in those submarkets impacted by significant Class A availabilities. The effective rents are more indicative of the current market conditions than asking rents, as landlords propose favorable lease options and incentives to potential tenants with space requirements.

Limited leasing velocity involving corporate relocations rather than significant real estate expansions is expected to provide the storyline for the Northern and Central New Jersey office market during the second half of the year. Pockets of growth scattered throughout the state, rather than widespread leasing activity spanning multiple submarkets, are likely to guide the course of the office market until sustained demand can make a dent in rising inventories.