ELMWOOD PARK, NJ-With job losses continuing at a brisk pace, demand for office space throughout the Garden State is waning. Yet there are some pockets of strength, finds a fourth-quarter report from Marcus & Millichap Real Estate Investment Services.
After 81,600 workers were let go last year, 129,500 employees are expected to be cut this year, representing a decline in payrolls of 3.3%. Office-using employment sectors will reduce head counts by 5.8%, or 55,200 jobs, according to Marcus & Millichap.
However, class A buildings located in several close-in markets in Northern New Jersey, such as the Meadowlands and the Hackensack/Teaneck submarket, showed year-over-year improvements in vacancy and asking rents. In Central and Southern New Jersey, operating fundamentals in class B/C buildings fared the best.
Throughout the state, however, the lack of demand for office space will result in a 180 basis-point climb in vacancies to 18.2% this year. That comes on the heels of an 80 basis-point increase last year.Similarly, asking rents are forecast to fall 0.7% to $25.47 per square foot this year, and effective rents will deflate 5.3% to $20.55 per square foot. Asking and effective rents increased 2.3% and 0.5% in 2008, respectively.
Ongoing job losses have also hampered the sales market, with deal velocity dropping by 33% over the past 12 months, following a 5% decline the prior year. The median price has decreased by 4% in the past year to $151 per square foot. In the previous one-year period, prices had remained flat.
"Despite easing investment demand, office deals continue to be closed in some markets across New Jersey," says Michael Fasano, regional manager of the New Jersey office of Marcus & Millichap, in a statement.
Specifically, Northern New Jersey, due to its concentration of businesses, residents and office properties, accounted for 60% of all office sales in the past 12 months. In that region, median sales prices fell 5% to $162 per square foot compared to a gain of 3% in the prior year. However, the Marcus & Millichap report points out that an increasing number of distressed asset sales is skewing the sale price trends.
Pushed by falling revenues, cap rates have risen 40 basis points year-over-year to approximately 7.5% statewide. Concerns over additional NOI reductions will keep upward pressure on initial yields well into 2010, conclude Marcus & Millichap researchers.
Looking ahead, conservative investors will continue to focus on newer office properties near major transportation corridors. Aggressive buyers will target similar assets, but may seek higher returns by taking on properties with expiring leases, less desirable tenant mixes or elevated vacancy rates.
Office inventory in the state will grow by 933,000 square feet in 2009, following the addition of 729,000 square feet last year. Of that amount, Northern New Jersey accounts for 577,000 square feet, with Central New Jersey taking 356,000 square feet. No major completions are on tap for the southern portion of the state.