Thu, Mar 13, 2014

Business, Real Estate

NRBP Real Estate Forecast for Newark 2014 Detail Analysis (two of three part article)

BY lyanne


Each year the Newark Regional Business Partnership (NBRP), presents an annual real estate Market Forecast, presenting a detail, informative and comprehensive analysis of Newark’s Real Estate market,  Real Estate Economist.


Heidi Learner,  Chief Economist for Studley, a global commercial real estate services firm specializing in tenant representation. As chief economist, Ms. Learner develops real-time measures of supply and demand for commercial space in order to assist the firm’s clients in understanding the continually evolving economics of the real estate markets.  Ms learner has an extensive background in macroeconomics analysis and forecasting, and shared her perspective on the macroeconomic condition in Newark and the commercial real estate market of Newark in comparison to Northern New Jersey office market.   She began with a quick Macro overview of the Newark market in comparison to other NJ markets, reveal a sluggish market but has shown improvement in the real estate outlook over the prior year.  She said, “We first look at utilizing Office Employment, a measurements we typically can forecast future Office demand.  Office employment consist of three sectors, the first is financial activities, which consist mainly Real Estate and insurance firms, the second sector is information technology, computer systems and design firms, and the third sector consist of publishing and the professional services firms, which include law  and accounting  firms.  If we look at each of these sectors on a quarterly basis within Essex County, and compare 2012 to 2013,  we see no growth in any of the three sectors year over year, with some declines over year over year basis.  


If we look at Office Employment at the Greater Newark metropolitan division, where we have monthly data Office Employment peaked in 2007, 270,000 employees, with our most recent data for December 2013, Office Employees is at 254,000, so we are still not at the level we were at six years ago.  Now some might suggest that we include government workers in the office market since they occupy such a sizable share of office space, particularly in administrative jobs.  But when we look at public administrative jobs, the number of these jobs have fallen by .8 percent  which is in line with the reduction in office employment, both the private and the public  sectors.


Now lets look at unemployment rates, it is good news that the unemployment rate in Essex County has dropped to 8.5 percent as of December 2013, it still a lot higher then the overall NJ rate of 7.3% and is higher than the national unemployment rate of 6.6%.  And is some what disappointing that the unemployment rate in the city of Newark December 2012, the latest census data, was reported as 22.6%.  Behind this disappointing statistic, potentially good reasons the unemployment rate has gone up rather come down as is the case in other major cities, might be due to people returning to the labor force in Newark, which has not been the case in other cities.  If we look at the civilian labor force participation rate which is the number of people who are either employed and unemployed as a percentage of all people between the ages of 16 and older.  We see this number has gone up between 2010 and 2012, so as more people return to the labor force it can take a while before the unemployment levels begins to come down, and in the short term could cause the unemployment rate to rise.  So this is one bright spot in what otherwise is a disappointing figure.

Two areas where Newark needs to make some ground.  The first is with regards to the population and the second with regard to education.  We need to attract more people that call Newark home.  Newark population growth has paled in comparison to other cities, whether Hudson water front, Jersey City,  New Brunswick or New Jersey as a whole.  We also need to raise the education levels for both younger and older residence of Newark alike.  We see this in a very small increase in percentage of high school graduates who reside in Newark in the last several years.  Now an improvement in both sectors who increase Newark attraction as a business destination and help foster Newark’s continued growth.


Commercial real estate Market, we see there are 66 class A & B buildings in Newark, which have a total of 14 Million sq/ft .  Nearly 70 percent of that stock is class A space, even though  both A & B vacancy and availability rates are high relative history, average rental rates have risen over the last several years.  Total occupied space hasn’t return to level in 2007 and 08′.  Moreover up until the second half of 2013, the availability rate has been rising so the increase in availability has not been due to new construction but rather, companies  utilizing less space over time.  When we compare Newark to similar markets in the region, here where Newark stands out.  When we look at the sum total of net office space that firms moved into less space firms moved out of, we see around the region, net absorption was negative,  or declining, that true of the Hudson water front area, Parsippany and even in downtown Manhattan.  But this hasn’t been the case in  Newark, where we have seen an increase of 269,000 sq/ft.  A large portion of this increase was largely attributed to the new Panasonic Tower, the positive trend for absorption but with more robust incentives the trend to positive absorption could continue.  Especially, since there is ample space for firms looking to reposition or upgrade.  As mentioned net absorption was positive for Newark, but in generally Newark leasing performance has been much smaller then neighboring area.  Rental activity class A & B space run generally around 200,000 sq/ft per year which is substantially  smaller then other markets Metro Park Woodbridge,  Parsippany and Hudson water front, and we can see these by looking at the total leasing activity by percentages of available space in 2013, we can see that Newark has had very little space turnover from renewals or new leases.  Now we have spoken about activities but not prices, base rents have been rising over the last several quarters, but even here tenants have been in the driver seat, especially the larger deals of access of 50,000 sq/ft.


While asking rents are higher, actual net taking rents are lower, and thats because landlord have been increasing their concession packages.  So once tenant improvements and free rent is included net taking rent has been dropping below $30 per sq/ft. We again might see typical concession for larger deals over 50,000 sq/ft, of the order of tenant improvements about $25-$35 per sq/ft, with one months free rent per lease term.  With concession up in Newark, base rents in other areas in New Jersey have been declining.  Newark has been following the pattern similar to lower Manhattan, increases in base rents with higher incentives.  Its promising, in this sense to see the same rent price patterns as we see as lower manhattan where in other markets have been falling.  Lease turnover have been slower in Newark, but not the case in other Northern New Jersey.  When looking at the largest deals in New Jersey last year, law firm Sedgwick into 26,000 sq/ft that was once the offices of Latham & Watkins.  We will be watching the law firm sector a lot in the up coming months  with other law firm mobility by the moves of law firms, Patton Boggs, and McElroy, Deutsch, Mulvaney & Carpenter.  Future deals, specifically looking at office under construction.  Specially Office space under construction in Northern New Jersey, 1/2 of all Office construction is already pre-leased, which we discussed lasted year, the Prudential Headquarters, most of prudential current office space in Gateway are already included in our availability numbers.  But when 78,000 sq/ft when it become available, could increase Newark’s availability rate has the potential to rise from 26 to 27 percent respectively.  Another factor that could increase that rate is whether there will be other departments consolidated into the new headquarters.

What does this mean for 2014, there are several buildings extensive availability currently even aside from Prudential future vacancy of 2, 3, and 4 Gateway Centers.  The top 10 largest availability in Newark  have over 2.3 million sq/ft available more then 2/3rd of all class A & B space.  So office availability is concentrated among few building.  Newark could see increased opportunity as a result Opportunity Act 2013, that Jim just spoke about, we believe that these program will have an positive impact on office space in Newark.  So in conclusion, with lots of available space, landlord incentives, and enhance state incentives things in Newark, are slowly but steadily improving.”


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