The true test of recovery in the market is when prospective users of space or real estate investors begin competing for buildings. When that happens, someone is going to win, and someone is going to lose. That’s the only thing that creates velocity, and makes the market move in a significant way. That’s happening now, and it’s taken a few would-be purchasers and tenants by surprise. Our recommendation is that if you find a good deal, take it. Sometimes trying to make a good deal into an even better deal can blow up in your face. The other major difference from one year ago today is credit. There are banks that are lending, particularly to companies looking to own and occupy buildings.

GlobeSt.com: What do New Jersey rents look like?

Marchisio: New Jersey rents are all over the map. In the office sector it’s fair to say that in across the board rents could be down as much as 15% to 25% depending on the market. Absorption in the third quarter was negative by almost 900,000 square feet. Although the average asking rental in New Jersey is somewhere in the low to mid twenty dollar range, the deal strike price is way below the asking price. We just made a mid-sized office deal, meaning less than 20,000 square feet, in a class B building in the Morris County marketplace. The rents started in the $15 per square foot range, with modest increases over the term of the lease. We’re talking gross numbers, not net. The landlord also spent a fair amount of money on improvements to put the tenant into the space as well.

The market is a grind, but it’s improving. While the third quarter of 2010 showed negative absorption, the first two quarters in the Northern New Jersey office market saw positive absorption. I don’t think the negative number in the third quarter is worthy of any headlines just yet. If we go another one or two negative absorption quarters beyond this one, we could very well be experiencing an unfortunate trend. So, for now, two out of three isn’t bad.

The overarching theme in the office sector seems to be short-term solutions. Companies are still being very cautious before making long-term decisions. In addition, they don’t want to incur the cost of a move, or the business disruption associated with moving. All they really want to do is hunker down and keep the business churning. Eventually, these companies will be faced with making long-term decisions. After a while the band-aides start to fall off.

On the industrial side the picture is a bit rosier, at least in the small and mid sized range. The big box market is still very soft. Most recently we were representing a tenant looking for 300,000 square feet in the Exit 8A marketplace. Running a search of buildings with minimum ceiling heights of 30-foot clear we showed the prospect 14 buildings. If we searched ceiling heights down to 24-foot clear the list would have grown exponentially. Actual deal rents at 8A today are 25% to 40% lower than they were at their high point. What was once a $4.50 NNN deal in the big box market is now a $3.25 to $3.50 deal. For second-generation buildings of 24-foot clear heights, deal prices fall below $3 per square foot.

As mentioned before, the small market (up to 25,000 square feet) and the midsized market (up to 100,000 square feet) are doing okay. Rents are down, but velocity is decent. There were a few deals done in Port Elizabeth for modern buildings. The rents were in the $6.50 range, but these rents were significantly less than the owners were hoping for. I expect that in 2011 we will see a fairly large uptick in port activity and port-related industrial properties will be the beneficiary.

GlobeSt.com: Are building sales beginning to pick up?

Marchisio: Building sales to user/occupant purchasers are definitely picking up. With pricing levels at much lower levels, owning as opposed to renting makes a big difference for the entrepreneurial business owner. The recent availability of capital for these type purchases has made things happen in this arena. Companies with good credit are seeing loan to value of between 75/25 and 70/30 from conventional banks and insurance companies. Because of these two factors, properly priced product, and a receptive lending market, buildings are selling. In fact, well-priced product in both the office and industrial asset classes are attracting multiple offers and creating competition.

GlobeSt.com: What are cap rates like, or has that been establish yet?

Marchisio: Because of the amount of capital chasing quality real estate, cap rates have not risen too greatly, even in a less than stellar economic environment. Industrial cap rates are between 7.5% and 9%, depending on quality of asset and location. Theoretically, office cap rates are between 8% and 10%, if you can find a building that’s trading.

Interestingly, in this recent downturn, many owners of office and industrial property have turned to multi-family residential as the investment of choice. Those cap rates are running 4.5% for quality assets to 6 for lesser type product. Multifamily residential is popular now because you can ride the market. The short-term nature of the leases is what makes this asset type attractive. You can drop or raise your rents as needed.

The issue facing owners of commercial owners today is trying to structure deals that start out low today to entice a tenant, but increase the rent over the term of the lease so over time you make your money back. Tenants today want low rents at the start, and they also want to lock in at low rates over the long term. You can’t blame them, but it makes it very difficult for the owner of the building to ever get their heads above water.

GlobeSt.com: Are you seeing distressed sales start to mount? Is it still mainly note sales?

Marchisio: We are seeing some distressed product coming to the market, but not in any great quantity. Most of the product we are seeing is of poor quality, in secondary and third tier locations, hence the distressed nature of the property. With all the issues facing our state, the Northern New Jersey marketplace is still a great place to invest in and own commercial real estate.

Therefore, the better product doesn’t usually become distressed. The owner either gets it rented, sells it or someone comes along and buys the debt before the bank winds up with it. So, yes, I would say the majority of the transactions are note sales as opposed to distressed sales. We will see what 2011 brings. My guess is that banks and owners will work closely together to ensure a softer landing come 2012.

GlobeSt.com: What do you think 2011 holds in terms of leasing, sales and, finally, distressed assets?

Marchisio: 2011 will be an improvement over 2010. The office sector will recover most slowly, as users of office space have learned to make due with smaller work forces. This is not a phenomenon of just the last couple of years however.

Businesses began operating in a leaner fashion just after 9/11 and they haven’t changed the practice since. I see this practice continuing for years to come, so the recovery in the office sector will be slow. That said, medical office space should lead the way in 2011 and beyond. We believe that owning medical office buildings is a safer play. These buildings are more costly to fit out, but over the long term doctors don’t typically move. Out patient centers and surgery centers and wellness clinics are becoming more prevalent as well.

Industrial will see significant improvement, with certain industry sectors like food, and lower-end imports such as furniture, clothing and electronics heading the pack. Just think of all the sorts of products you find at stores like Target, Kohl’s and Home Goods to name a few. I’ve been in some pretty fancy homes furnished by Home Goods. Industrial uses related to medical will prosper as well. Interestingly, warehousing companies employ more people that they used to.

Years ago, there was a school of thought that believed automation would replace people in the industrial sector. This has not turned out to be so in many cases. Although manufacturing has left the state of New Jersey, assembly, pick and pack and fulfillment services have prospered. Today’s modern warehouse employs many more people than it did 10 years ago.

Retail will remain sluggish, and when it comes to foreclosures, I believe they will be common in this sector. Mom-and-pop infill stores are struggling and going out of business. These are the smaller stores that typically pay the highest rents in a center. Even though a shopping center may be one third infill, the rents paid by the smaller stores may comprise half the centers revenue because the per square foot cost is so much higher. Just because the nationally known, larger stores are still occupying the center doesn’t mean the center is healthy. The national retailers are almost always paying the lowest price per square foot.

All in all, 2011 will see improvement, and cautious optimism will be the theme. Industrial vacancy rates should fall and rental rates should rise. Office vacancy rates and rental rates will remain unchanged through 2011. The good news is many businesses should decide to make long-term decisions. I believe we will see the flight to quality in the office sector continue, as business move from class B buildings to A buildings. Unfortunately, this won’t do much for the vacancy rates around New Jersey, but it should bode will for some of the state’s class A office buildings. This will cause owners of B product to upgrade their buildings in an attempt to maintain occupancy levels. On the investment side, industrial, residential and medical will be the investment of choice.