May 2013-Southern New Jersey Office & Retail Market Update First Quarter 2013
WCRE RESEARCH FINDS POSITIVE TRENDS AND SIGNALS OF CAUTIOUS BUT STEADY GROWTH
Every quarter WCRE surveys the Southern New Jersey office market and provides analysis of a variety of factors that affect its overall performance. Our market research comprises approximately 16 million square feet of Class A & B office and flex product in Burlington, Camden, and Gloucester Counties.
The first quarter of 2013 will be remembered by many because after a long climb back, the Dow Jones Industrial Average closed at an all-time high of 14,578. The rebound in the market certainly helped boost confidence, and has helped set the tone for a more bullish atmosphere in commercial real estate for 2013. The commercial real estate recovery, although slow, has been underway with steadily improving fundamentals, low interest rates, and aggressive monetary easing that has been paving the way towards a continued and sustainable recovery in the sector.
Demand for office space in the Southern New Jersey office market during the first quarter still seemed to be moving at a cautious pace, but new deal activity represented 43% of all transactions. While the overall vacancy rate for our region remains in the upper teens (18-19%), rental rates continue their slow upward climb back and have stabilized.
The first quarter saw many deals of significant size, with properties in prime locations out-performing the overall market vacancy rate. Q1 showed approximately 300,000 sf of new lease deals and renewals executed, a gain of nearly 8.5% compared to the first quarter of 2012. Many of the lease transactions during the first quarter were for government, healthcare, legal and financial/mortgage services. There are more than 200,000 sf of new deals and renewals awaiting signature in April alone, so we anticipate substantial gains in the next quarter.
Office employment growth has picked up, and the annual employment revisions are showing that job growth has been stronger but still well below the July 2007 peak. The US labor market has recovered about half of the 8.8 million jobs lost to the Great Recession. We are still seeing employers working to consolidate and reduce the amount of space needed per employee, especially in higher rent areas. We have also noted a move among businesses toward increased space efficiency, thanks to the impact of technology on workforce flexibility.
New Jersey’s jobless rate edged down by two-tenths to 9.3%, which is slowly improving from last year’s 35-yearhigh of 9.8%, but remains well above the national rate of 7.7%. Considering the pressures on the New Jersey economy at the end of last year, these figures appear to be better than expected.
There are still no signs of significant office construction. Until the Southern New Jersey region absorbs its surplus of vacant space, most new construction will be geared towards build-to-suits or specialty opportunities.
INVENTORY, TRANSACTIONS, AND RATES
- Overall vacancy in the office market of A & B product is still hovering in the 18-19% range, but the market has stabilized, and average rental rates continue to increase compared to 2011 and 2012 figures.
- Average rents for Class A & B product continue to show strong support in the range of $10-$14.00/sf NNN with an overall market average of $11.00/sf NNN for the deals completed during the first quarter.
- New lease deal activity for the first quarter is in the range of approximately 130,000 sf of new deals and/ or expansions to the market. This is approximately 8.5% above fi rst quarter 2012 figures. This positive trend indicated improving growth, but we are still in a weak labor market and more robust job growth is needed to lower the overall vacancy in our region.
FINANCIAL MARKETS
In a more encouraging development, the investment market continues to show strength, with new money entering the market as investors continue to seek opportunity. Exceptionally low interest rates should remain low for some time, and delinquency rates on existing mortgage loans continue to decrease.
INVESTMENT NEWS FROM THE 1ST QUARTER:
- The debt available in the investment market is as good, or better, than it ever has been, with the CMBS market poised for a massive rebound in 2013.
- Rates for high quality commercial assets are in the low to mid 4% range.
- The investment sales sector is seeing intense competition to purchase quality properties.
- Interest rates remain at record lows, and several large office buildings and portfolios came under agreement during the first quarter.
- Opportunity should continue well into the future due to the extremely low borrowing rates that central banks have maintained as a result of the economic uncertainty. The 10-year Treasury yield sits at 1.87% as of March 31st, and continues its uptick from the end of the previous quarter, when it stood at 1.78%. KEY PLAYERS IN MARKET All of the new major owners and REITS are showing a significant increase in deal activity and occupancy – both renewals and new deals – and are all cautiously optimistic.
Liberty Property Trust controls approximately 1.3 million square feet of office and flex product in Southern New Jersey and their over overall portfolio is now approximately 85% occupied. The 8% drop in vacancy is attributed to +/-88,000 sf coming back to market at 8000 & 12000 Commerce Parkway in Mount Laurel.
Brandywine Realty Trust controls approximately 2.5 million square feet in Southern New Jersey and its overall occupancy is approximately 87%, unchanged from last quarter.
Mack-Cali’s overall portfolio is approximately 1.283 million square feet in Southern New Jersey and its overall occupancy of office and flex space is approximately 91.5%.
Whitesell’s overall office portfolio is approximately 1.5 million square feet in Southern New Jersey and its overall occupancy of office space is approximately 80%
KEY SECTORS SHOWING STRENGTH DURING Q1 2013
The healthcare, computer services, insurance, defense contracting, consulting, engineering, and finance sectors were very active in Southern New Jersey. The chart on the next page summarizes the key lease transactions completed during the first quarter.
SIGNS OF CONTINUED RECOVERY AND MODEST GROWTH IN AREA RETAIL
The first quarter of 2013 saw solid retail sales figures and signs of expansion in consumer spending, with jobs and housing data also gaining strength. Retailers reported a faster pace of sales in January than during the recent holiday period, and cited continued gains in February, making for moderate growth overall. Indeed, area retail sales recently posted the largest rise since September 2012. Stronger retail sales were evident throughout the region across a variety of malls and outlet centers serving the range from high-end to lower-end consumers. These positive indicators are great for the overall retail real estate sector in Southern New Jersey and the Philadelphia region.
The most encouraging sign is a shift toward more personal services and high-end restaurants opening in what used to be a market dominated by discount retailers and food chains. As we observed throughout much of 2012, the first quarter shows a low vacancy rate in many of the key shopping centers in the region, as properties in prime locations are outperforming the overall market vacancy rate.
Further down the spectrum, landlords of neighborhood and strip shopping centers in secondary markets are reporting minimal leasing activity and prolonged periods for deals to consummate, but still they are more optimistic than at this time last year.
Demand for well-located retail properties is still very high, so Triple Net leased properties are still being leased at high prices per square foot and low CAP rates. Properties with credit investment grade tenants such as CVS, Wawa, and larger banks such as PNC are trading for CAP rates as low as 4%-5% and properties with tenants with low investment grade are trading at 8%-9% CAP rates.
Major retail deals reported during the first quarter included Whole Foods Market opening at the Ellisburg Circle Shopping Center on Route 70 in Cherry Hill. The approximately 47,000 sf store is planned to open in the spring of 2014. Another major development is the continued revitalization of Camden, NJ. A new shopping center is planned along Admiral Wilson Boulevard to be anchored by a 75,000 sf Shop Rite, controlled by the Ravitz family. The developer is the Goldenberg Group, and expected completion is in 2015. This would be the first major grocer to open in Camden in 30 years.
INVESTMENT PRODUCT
The market is still experiencing a shortage of retail investment product, compared to demand from investors. Strong anchored properties and income producing investment properties are trading at historically high prices, with cap rates still decreasing.
INVENTORY AND RATES
- Overall retail vacancy in the market is still hovering in the 17-18% range, but the market has stabilized.
- Average rental rates have increased compared to 2012.
- Class A retail product rental rates continue to show strong support in the range of $30-$40.00/sf NNN.
- Class B product shows support in the range of $15- $23/sf NNN.
