Evolving Real Estate Trends in New Jersey
The conditions created by the COVID-19 pandemic forced many businesses to make changes to adapt to the “new normal.” For example, the stay-at-home orders, social distancing requirements, and other customer/employee safety measures resulted in limiting the number of employees on the production floor, installing new barriers to prevent transmission, adding sanitization protocols, and much more. At the same time, office buildings were virtually empty as employees were permitted to work from home under remote work policies.
Although the changes were necessary to cope with pandemic realities, these experiences have significantly impacted commercial real estate. According to the Cushman & Wakefield 2nd Quarter Market Beat Report, the overall office vacancy rate for Mercer County is 16%, Middlesex County is 18.3%, and Somerset County is 29%. Meanwhile, industrial space leasing is at a near-century high as demand far outpaces supply. Thus, it appears the commercial real estate market in the Garden State is undoubtedly experiencing a period of transition, despite increased office reopenings and vaccination rates.
The pandemic’s impact was confirmed at the CoreNet Global, New Jersey Chapter’s Annual State of the Market event, held on September 30, 2021. During the program, a panel of industry leaders presented a comprehensive analysis of the current commercial office and industrial real estate market. The data confirms that significant shifts in demand have driven up vacancy rates in office subleases. In contrast, very little industrial space is available in the state, despite record-high rents are being charged. A couple of other key takeaways from the event include:
Office Space
An important lesson learned from the pandemic is that businesses do not need large office spaces to run the business. Many are saving money by reducing overall square footage and allowing employees to work remotely. This has driven office space vacancy to a high of 27%, with the most sublease space available in the last 18 years. Many employers have decided to move to Class A premium office space for the amenities and re-imagined space that includes open seating and collaboration space. As a result, Class B and lower office space vacancies have become prime conversion targets.
Industrial Space
The availability of industrial real estate below 150,000 square feet is extremely difficult to find. This has driven the cost of rent up 33% over last June and is expected to reach a record high increase of 50% soon. The rise in demand has been driven by Amazon’s entrance into the market, appliance, and other light manufacturing. As a result, conditions have forced companies to look outside New Jersey in Delaware or Pennsylvania to find the needed square footage.
Unfortunately, it appears that relief will not be coming anytime soon. While many construction projects were delayed during the pandemic, the lack of materials, specifically steel, is causing the problem. The delays are so bad that many refuse to provide a project completion timeline until the steel is on the job site.
These changes to the real estate market reflect the profound impact the pandemic continues to have on New Jersey businesses. While it is impossible to predict the future, it seems that these conditions will likely continue to persist.
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©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.