High Productivity Hurts Occupancy in Recovery

SHORT HILLS, NJ-The economy is recovering both nationally and in New Jersey, but some of the positive indicators overall may actually prove problematic for real estate. That was one of the key takeaways of remarks from industry observers at the annual meeting of NAIOP’s New Jersey chapter, held here on Wednesday evening. The nation’s gross domestic product has rebounded, jobs are coming back slowly and productivity is high. And the last may be part of a problem that will affect office and industrial space for years to come. “The biggest challenge is the stabilizing of what we’re trying to accomplish in New Jersey,” said David Simson, vice chairman and COO for Newmark Knight Frank New Jersey. The state is following a national trend of consolidation. The Great Recession began in December 2007 and ended in June 2009, according to the Dating Committee of the National Council of Economic Research, noted Joseph Seneca, professor of economics at the Edward J. Bloustein School of Planning & Public Policy at Rutgers University. The 19-month-long downturn was the longest since the Great Depression. Growth has finally resumed, with the last six quarters posting positive output. In fact, output is now back at pre-recession levels. Employment is not, however. From January 2008 to December ‘09, the nation lost 8.5 million private sector jobs. Last year saw a gain of just over 1.3 million jobs, a “modest 15% recovery,” Seneca said. “This is a respectable start, but only a start.” The real challenge for real estate professionals, however, is that productivity has recovered despite the slow job rebound. “The country is providing the same amount of output as it did before the recession began, but with seven million fewer workers,” Seneca said. New Jersey regained just 8,200 jobs between February and December ‘09, with the last month of the year actually posting a loss of 13,300 jobs. Fewer workers require less office space, particularly since this downturn was the first predominantly white-collar recession in the state’s history. The state lost 265,100 jobs in the 1989-1992 recession, but just 12.3% of those were in the service industry. This recession saw the loss of 245, 500 jobs, 62.3% in the service business. Many corporations who are buying buildings or leasing new space are in fact moving from other areas in the state, trading up to newly affordable class A buildings. “But a lot of the companies that are upgrading the space are actually downsizing,” said David Welsh, managing principal and founder of Normandy Real Estate Partners. The telecommunications and pharmaceuticals industries, which had expanded during previous downturns, actually are shrinking. There are bright spots: Some New York City-based tenants are looking to New Jersey, a phenomenon not seen in the last two years, said Adam Spies, senior managing director with Eastdil Secured. Still, replacing all that lost office space will require more marketing to other areas. Gov. Chris Christie will announce his next budget on Feb. 22, and the speakers said they were looking forward to seeing what incentives might be offered to relocating companies. And New Jersey has an advantage in this area. “New Jersey is located directly between Boston and Washington, DC, with immediate access to New York,” Simson said. “You can’t replace that. We have a location and infrastructure you cannot duplicate.” And there are positives on both the national and state front. This year will see additional benefits from the federal stimulus, and consumer confidence is increasing as household balance sheets improve. Seneca predicted consumer spending would rise by 3% this year. A weaker dollar and growth among emerging markets should help US exports. And federal incentives should boost capital spending at home. New Jersey also should benefit from a focus on fiscal responsibility and job growth from both parties.