Jones Lang LaSalle
N.J. developers line up for office boom
After years-long slump, firms are poised to risk millions and build
Sunday, February 12, 2006
BY MATTHEW FUTTERMAN
Star-Ledger Staff
When it comes to construction of office space, competitors watch the moves of SJP Properties the way investors watch George Soros, the renowned investor.
After developing 11 million square feet of office space in northern New Jersey the past two decades -- including the hugely successful Morris Corporate Center near Route 80 in Parsippany -- SJP is the industry's pacesetter.
So when company founder, Steve Pozycki and right-hand man Peter Eppie pass maps around the conference room in Parsippany and predict 2006 will be the year construction of speculative office space returns to New Jersey, the market might want to pay attention.
"I'd say in six to nine months, you're going to start seeing some major speculative construction, especially on the prime locations, and no one has better locations that are approved and ready to go than we do," said Peter Eppie, executive vice president at SJP.
Slow but steady job growth and mounting demand for premium office space are leading developers to begin moving ahead with something that has been virtually unheard of since the Internet bubble popped and the stock market collapsed five years ago: Putting up new office buildings without a prospective tenant ready to fill it.
It's a risky game, with hundreds of millions of dollars in potential losses if a building sits vacant for long. But there can be huge gains if a developer can open a building just as the biggest corporations are expanding. That SJP and several other top developers feel the risk is now worth taking signals their confidence in the economy and a general belief that corporate expansion is on the horizon.
CLASS A DEMAND
New office construction is important because increasing the supply of space can make for a buyer's market in one of the biggest expenses lines for both Fortune 500 companies and small businesses.
"The demand is there for Class A space," said Pat Murphy, executive managing director at the New Jersey division of CB Richard Ellis, referring to the market's premium, most cutting edge and well-located product. "Companies are ready to pay more for Class A space that will get an extra 10 percent productivity from employees."
The irony is, the traditional measures of the economy as a whole and the local commercial office market in particular don't suggest the conditions are ripe for a boom.
The state's commercial vacancy rate is still above 18 percent, with more than 30 million square feet of empty space on the market, according to industry studies. Brokers' reports show the average asking rent rose just 2 cents per square foot during the final quarter of 2005.
New Jersey's telecommunications industry has lost 15,300 jobs in recent years, and the pharmaceutical industry has added just 1,100 jobs since 2001, according to a study by Cushman & Wakefield, the a leading brokerage.
Yet, the early ripples of a wave of speculative construction have already started.
The Gale Co. began construction of a five-story, 175,000-square-foot building in Parsippany last year and expects to complete it this fall.
Reckson Associates, a real estate investment trust, or REIT, has erected the steel frame of a 313,000-square-foot office building in West Windsor it plans to complete by the end of the year.
Advance Realty, based in Bedminster, is spending $60 million dollars renovating a 300,000-square-foot building in Morris Township so it can get to the market faster than its competitors planning new construction.
"We can deliver a product comparable to new construction six to seven months quicker than other people can," said Greg Senkevitch, Advance's chief operating officer.
Then there is SJP, which is deciding where to strike first among four prime sites where it has approvals to build a total of more than 2 million square feet of space in Woodbridge, Parsippany, Hoboken and Bridgewater.
The reasons, industry experts said, can be found if you look behind the traditional numbers.
GROWING TREND
Gil Medina, executive managing director of Cushman & Wakefield New Jersey, said most job growth has come in the leisure and hospitality industries, which don't traditionally use much office space. But balance sheets of the largest corporations show a record amount of cash to pay for new space, and a lot of the available space is obsolete, he said.
"Those dynamics, despite the economic trends and a troubling fiscal forecast for the state, are going to drive construction," he said.
Peter Morici, an economist at the University of Maryland, said the trend in New Jersey will be repeated in metropolitan areas throughout the country.
"I am expecting a stronger year for commercial construction overall, in and around the cities whose economies are driven by knowledge industries -- media, telecommunications, finance, etc. -- and durable goods other than autos," Morici said. "The economy is slowing but not faltering. Cities with a stake in those industries will have robust demand for commercial space."
Still, there are skeptics who still remember all those empty glass boxes during the early 1990s after the last office construction boom.
Emanuel Stern, president of Secaucus-based Hartz Mountain Industries, started a boomlet of speculative construction in the late 1990s when he built two towers in Jersey City. He has no plans to dive back in now.
"I don't see it," Stern said of the supposed demand. "The market is getting into an equilibrium. We're seeing a lot more activity. But I can't see the market supporting a lot of spec construction.
"I can't speak to every submarket in the state, but in our submarkets, I don't see the waterfront or the Meadowlands going into spec office development anytime soon."
However, Todd Rechler, senior vice president at Reckson Associates, said the right project in an underserved market will rent.
"The Princeton market is ready for a premiere class A office complex," he said. "It's a product that will be like no other in that market place. We're focused on the quality assets in the quality markets."
Both Murphy and Medina said Rechler understands what they themselves have been hearing from the companies they represent -- that they're are willing to pay for premium office space the industry defines as Class A, where every need is met.
Features of the next generation of premium space include a location at the intersection of major highways, high ceilings, lots of light, granite lobbies with expensive wood fixtures and fast elevators, Murphy said. Temperature controls from office to office also are in demand, as are parking decks connected to the building.
"Believe it or not, people really don't want to get wet," he said.
Matthew Futterman can be reached at (973) 392-1732 or mfutterman@starledger.com.
N.J. developers line up for office boom
After years-long slump, firms are poised to risk millions and build
Sunday, February 12, 2006
BY MATTHEW FUTTERMAN
Star-Ledger Staff
When it comes to construction of office space, competitors watch the moves of SJP Properties the way investors watch George Soros, the renowned investor.
After developing 11 million square feet of office space in northern New Jersey the past two decades -- including the hugely successful Morris Corporate Center near Route 80 in Parsippany -- SJP is the industry's pacesetter.
So when company founder, Steve Pozycki and right-hand man Peter Eppie pass maps around the conference room in Parsippany and predict 2006 will be the year construction of speculative office space returns to New Jersey, the market might want to pay attention.
"I'd say in six to nine months, you're going to start seeing some major speculative construction, especially on the prime locations, and no one has better locations that are approved and ready to go than we do," said Peter Eppie, executive vice president at SJP.
Slow but steady job growth and mounting demand for premium office space are leading developers to begin moving ahead with something that has been virtually unheard of since the Internet bubble popped and the stock market collapsed five years ago: Putting up new office buildings without a prospective tenant ready to fill it.
It's a risky game, with hundreds of millions of dollars in potential losses if a building sits vacant for long. But there can be huge gains if a developer can open a building just as the biggest corporations are expanding. That SJP and several other top developers feel the risk is now worth taking signals their confidence in the economy and a general belief that corporate expansion is on the horizon.
CLASS A DEMAND
New office construction is important because increasing the supply of space can make for a buyer's market in one of the biggest expenses lines for both Fortune 500 companies and small businesses.
"The demand is there for Class A space," said Pat Murphy, executive managing director at the New Jersey division of CB Richard Ellis, referring to the market's premium, most cutting edge and well-located product. "Companies are ready to pay more for Class A space that will get an extra 10 percent productivity from employees."
The irony is, the traditional measures of the economy as a whole and the local commercial office market in particular don't suggest the conditions are ripe for a boom.
The state's commercial vacancy rate is still above 18 percent, with more than 30 million square feet of empty space on the market, according to industry studies. Brokers' reports show the average asking rent rose just 2 cents per square foot during the final quarter of 2005.
New Jersey's telecommunications industry has lost 15,300 jobs in recent years, and the pharmaceutical industry has added just 1,100 jobs since 2001, according to a study by Cushman & Wakefield, the a leading brokerage.
Yet, the early ripples of a wave of speculative construction have already started.
The Gale Co. began construction of a five-story, 175,000-square-foot building in Parsippany last year and expects to complete it this fall.
Reckson Associates, a real estate investment trust, or REIT, has erected the steel frame of a 313,000-square-foot office building in West Windsor it plans to complete by the end of the year.
Advance Realty, based in Bedminster, is spending $60 million dollars renovating a 300,000-square-foot building in Morris Township so it can get to the market faster than its competitors planning new construction.
"We can deliver a product comparable to new construction six to seven months quicker than other people can," said Greg Senkevitch, Advance's chief operating officer.
Then there is SJP, which is deciding where to strike first among four prime sites where it has approvals to build a total of more than 2 million square feet of space in Woodbridge, Parsippany, Hoboken and Bridgewater.
The reasons, industry experts said, can be found if you look behind the traditional numbers.
GROWING TREND
Gil Medina, executive managing director of Cushman & Wakefield New Jersey, said most job growth has come in the leisure and hospitality industries, which don't traditionally use much office space. But balance sheets of the largest corporations show a record amount of cash to pay for new space, and a lot of the available space is obsolete, he said.
"Those dynamics, despite the economic trends and a troubling fiscal forecast for the state, are going to drive construction," he said.
Peter Morici, an economist at the University of Maryland, said the trend in New Jersey will be repeated in metropolitan areas throughout the country.
"I am expecting a stronger year for commercial construction overall, in and around the cities whose economies are driven by knowledge industries -- media, telecommunications, finance, etc. -- and durable goods other than autos," Morici said. "The economy is slowing but not faltering. Cities with a stake in those industries will have robust demand for commercial space."
Still, there are skeptics who still remember all those empty glass boxes during the early 1990s after the last office construction boom.
Emanuel Stern, president of Secaucus-based Hartz Mountain Industries, started a boomlet of speculative construction in the late 1990s when he built two towers in Jersey City. He has no plans to dive back in now.
"I don't see it," Stern said of the supposed demand. "The market is getting into an equilibrium. We're seeing a lot more activity. But I can't see the market supporting a lot of spec construction.
"I can't speak to every submarket in the state, but in our submarkets, I don't see the waterfront or the Meadowlands going into spec office development anytime soon."
However, Todd Rechler, senior vice president at Reckson Associates, said the right project in an underserved market will rent.
"The Princeton market is ready for a premiere class A office complex," he said. "It's a product that will be like no other in that market place. We're focused on the quality assets in the quality markets."
Both Murphy and Medina said Rechler understands what they themselves have been hearing from the companies they represent -- that they're are willing to pay for premium office space the industry defines as Class A, where every need is met.
Features of the next generation of premium space include a location at the intersection of major highways, high ceilings, lots of light, granite lobbies with expensive wood fixtures and fast elevators, Murphy said. Temperature controls from office to office also are in demand, as are parking decks connected to the building.
"Believe it or not, people really don't want to get wet," he said.
Matthew Futterman can be reached at (973) 392-1732 or mfutterman@starledger.com.
posted by Jones Lang LaSalle NJ News Blog at 11:53 AM
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