This article was published by “The Real Deal” a New York Real Estate publication. With available state financing and urban investment funds providing gap financing, Newark and New York Developers see the time is ripe for development in Newark.
Lured by economic incentives, developers rush into the NJ city, prompting an unprecedented real estate boom
By David Jones
The long-blighted city of Newark, New Jersey, is undergoing its biggest economic growth period since the 1950s.
Indeed, in mid-September, the city opened its first new office tower in 20 years: the new North American headquarters of electronic giant Panasonic. And a week later, Teachers Village, a $150 million housing, retail and education complex, opened its first two buildings.
Those two projects are just a sign of things to come. More than a third of the state’s new economic development is taking place in Newark, including a long-anticipated Whole Foods supermarket, a 23-story residential tower backed by basketball legend Shaquille O’Neal, and a new Marriott hotel.
Ron Shapiro, the head of Rutgers University’s Center for Real Estate Studies, said Newark’s turnaround can be largely attributed to a few investors who’ve taken a risk on the city and paved the way for others.
“I think people were waiting on the sidelines, waiting for someone to lead them through the maze,” said Shapiro, who was also a former executive at several banks, including Union Center National Bank and Wells Fargo.
Penciling out Newark
The groundwork for Teachers Village started in 2005, when developer Ron Beit’s RBH Group partnered with billionaires Warren Lichtenstein and Nicolas Berggruen, in addition to other investors, to buy a cluster of parcels in a distressed commercial district across from Newark City Hall.
The investors sat on those properties — burned-out storefronts, bankrupt land and parking lots — for two years before approaching lenders and government officials in late 2007.
“We always knew it was going to be difficult,” Beit told The Real Deal last month at his Newark construction trailer. “We never knew when we would be able to get buildings out of the ground.”
However, the investors found a willing lender in Goldman Sachs and shaped a project with an education theme. The complex will ultimately include three charter schools, 65,000 square feet of retail, and 205 residential units targeted largely toward teachers.
Newark officials are banking on the Richard Meier-designed project to turn the area into a 24/7 destination. The transformation started in 2007, when the $375 million Prudential Center — home to the New Jersey Devils NHL team and the New York Liberty, the WNBA team — opened.
However, in recent months, new developments have been popping up on an almost weekly basis. Experts attribute the growth to two factors: first, increased demand for urban development; and second, economic incentives from the city, state and federal government.
Mayor Cory Booker — who in October was elected to the U.S. Senate and was replaced by an interim mayor who is serving until a May 2014 election is held — aggressively courted businesses when he was in office. He claims to have brought in $1 billion in economic development so far, with an additional $2 billion in the pipeline. The former mayor worked closely with Gov. Chris Christie, a Newark native, who has argued that the economic growth of Newark, the biggest city in New Jersey, is good for the state overall.
For Scott O’Neil, the president of Devils Arena Entertainment, the sudden interest from developers in the area around the Prudential Center comes as no surprise — and is no coincidence.
“The state of New Jersey has clearly made development in Newark a priority,” he said.
In September, for example, Christie signed a bill to streamline the state’s five economic incentive programs to retain and lure companies to targeted communities, including Newark.
A company relocating to Newark might qualify for up to $15,000 in tax credits per job, per year, for up to a decade, Timothy Lizura, president and CEO of the New Jersey Economic Development Authority, told TRD.
Goldman Sachs — through its Urban Investment Group arm — is one of the lenders that has bet on the city. Goldman’s willingness to risk its capital there has, in turn, led other, more jittery, lenders and investors to do the same.
The bank “believes Newark has incredible fundamentals,” Goldman’s Margaret Anadu told TRD.
“We’re double bottom-line investors, so we’re looking to create demonstrable social impact in everything we do,” said Anadu, the vice president of Goldman’s Urban Investment Group.
Given the city’s long history of economic struggles, however, most projects require public subsidies to pencil out.
“In many instances, [new projects] need some type of subsidy to make the numbers work,” said Adam Zipkin, a Newark deputy mayor, who also headed economic development under Booker.
For example, Teachers Village received roughly $49 million in tax credits and $33 million in loans, bonds and grants from a host of sources, largely because the market-rate office and retail rents do not meet normal underwriting standards. (According to Jones Lang LaSalle, in the third quarter, the average asking rents in Newark were $24.53 overall and $33.73 for Class A space. By comparison, the average asking rents in Manhattan in October were $59.25 overall and $62.91 for Class A space, according to Colliers International.)
Panasonic, meanwhile, received a $100-million-plus tax credit to stay in New Jersey. Its co-developer, New Jersey-based SJP Properties, said the incentives were critical to financing the development.
“Construction costs are so high today, that without some type of incentive, the cost of new construction [could not] be justified,” said Jeff Schotz, SJP’s executive vice president of leasing and marketing.
Today, Panasonic is moving more than 800 employees from Secaucus — and Newark is using the deal as a way to market the city to new investors.
Meanwhile, Manhattan-based L&M Development is teaming up with Newark-based Hanini Group on a $120 million renovation of the landmark Hahne & Co. department store at 609 Broad Street. Built in 1901, the 400,000-square-foot building is being converted into a mixed-use complex. Whole Foods will anchor the site, which includes another 80,000 square feet of office and community space and 180 (market-rate and affordable) loft-style rental apartments.
And in one of Newark’s more controversial deals, Prudential Financial was awarded $211 million in state tax credits to develop a new $444 million, 20-story office tower.
However, the owner of the city’s nearby four-building Gateway Center office complex, where Prudential currently has space, sued to block the 787,000-square-foot office-and-retail development.
Lawyers for two of the Gateway landlords — Manhattan-based C&K Properties and Tahl Propp — have argued that moving thousands of employees out of Gateway to the new complex would flood the market with over 900,000 square feet of vacant space and undermine Gateway rents.
“The state is supposed to look at the net benefit of creating a tax incentive,” said attorney Paul Josephson, who represents the landlords, which own three of the four buildings. “The result would be that much supply coming onto the market all at once.”
Prudential officials, who settled with a third Gateway landlord, declined to comment on the new office tower. But they noted that incentive programs are necessary to help drive new development in the city. “Like many urban markets there’s a significant amount of complexity to doing business here,” said Ommeed Sathe, Prudential’s vice president and head of social investments.
Uncle Sam’s helping hand.
Since 2010, the New Jersey EDA has provided more than $525 million in tax credits and grants to spur more than $749 million in projects, including Teachers Village, Panasonic’s headquarters, the Shaquille O’Neal project, a Courtyard by Marriott hotel, a 125,000-square-foot retail-and-residential project from Tucker Development, and a 106-room Hotel Indigo, which is being co-developed by InterContinental and Hanini.
In addition to the state incentives, New Market federal tax credits, which are available to low-income communities, are helping close the financing gap for real estate projects.
For example, Biotrial, a French pharmaceutical research firm, is getting a 20 percent federal tax credit to help finance its $25 million, 70,000-square-foot North American headquarters in Newark’s University Heights Science Park, which is set to open in 2014. (Another 20 percent is coming from state and local subsidies.)
Scott Singer, executive vice president at Manhattan-based financial broker Singer & Bassuk, said the government incentives and gap financing are finally allowing Newark, which has been economically blighted for 40 years, to reach its full potential again.
“People that go to Newark now with their eyes wide open, and walk the areas that have started to be transformed by these developments, see it’s readily apparent that the city has dramatically changed.”