Real Estate Forum - July August 2011

NEWS FRONT
New Jersey Reconnects With Its Industrial Roots

NEWARK—With $500 million being poured into the Port Newark Container Terminal by private investors and the $1-billion reconstruction of the Goethals Bridge underway, the Garden State’s industrial market recovery far outstrips that of the nation.

According to Cushman & Wakefield, Northern and Central New Jersey leasing activity in the sector rose 62.6% in the first quarter of 2011 over Q1 of last year, from 2. 6 million square feet in 2010 to 4. 7 million square feet in 2011. The US industrial market saw 68 million square feet of activity in Q1, up 12.5% from 60. 4 million square feet in the year-ago quarter.

“Industrial leasing activity in the
Garden State has steadily increased over
the past several months and is expected
to continue on a positive trajectory,” notes
Gil Medina, C&W’s executive managing
director in New Jersey. “An uptick in
renewal activity is expected, as tenants
continue looking to restructure leases in
order to take advantage of the market.
Specific industries—primarily retail, ship-
ping and logistics—will continue to keep
leasing activity alive in areas such as Exit
8A and the Port Region, which have
proven to be the nucleus of industrial
activity here.”
As good as the statistics are, New Jersey
was not the market with the largest
increases in leasing activity. Long Island
saw a 172% rise, followed by suburban
Maryland (up 118.8%) and Silicon Valley
(up 65.1%).

The national vacancy rate declined to 10.2% at the end of Q1, a 0.1 percentage point decrease from 10.3% at year-end 2010.

Overall absorption was 7. 7 million square feet at the end of Q1 for the US, up from negative 15. 8 million square feet at this time last year. Overall absorption has returned to a positive status in Northern and Central New Jersey as well, registering 1. 7 million square feet at the end of the first quarter, up from negative 4. 6 million square feet one year ago.

“Leasing activity has returned to levels we haven’t seen since pre-recession,” says Jim Dieter, executive vice president and head of US industrial brokerage at C&W. “With this strong rebound in demand, coupled with declining supply, the US industrial market is steadily making its way toward recovery.”—Debra Hazel

DC: Private Sector Leads Recovery

The Washington, DC region’s economy remains strong, and that is helping to support demand in the region’s office markets. DC’s real gross regional product grew at a 5.9% annualized rate in 2010—twice the national GDP growth rate. The region’s employment market remained healthy, having added 10,100 seasonally adjusted non-farm jobs during the first quarter of After experiencing a surge during 2010, office demand returned to more subdued levels. DC Metro registered 489,000 square feet of net absorption in the first quarter of 2011—slightly less than half of the average quarterly demand. Vacancy increased slightly to 13.1%. These changes were due primarily to one large move-out in Northern Virginia and a slow recovery from private-sector leasing. The federal government continued to drive demand, accounting for 80% of gross leasing activity in the District. Metro-wide asking rents continued to tick up during the first quarter to $35.25 per square foot. Average asking rents were the second highest in the nation behind New York City.

On the supply side, the development pipeline continued to diminish. However, developers broke ground on two speculative developments in Arlington, VA during the first quarter of 2011.

By Jeffrey Kottmeier

The market anticipates that developers will consider additional new buildings or retrofits as tenants desire new space.

Office investment sales continued at a rapid pace in the first months of 2011 as investors were attracted to strong metro markets such as Washington, DC. DC Metro registered $1.9 billion in sales in the first quarter, or $7.6 billion on an annualized basis. Sales are on pace to surpass the $5.4-billion historical annual average.

Looking forward, the DC region will continue to lead the nation’s economic recovery in 2011. Employment in the area will grow steadily over the next three years and return to historical norms. Federal government employment will most likely moderate due to an increased focus on reducing federal spending. Still, history shows that the DC region has received annual increases in federal outlays every year for the past 25 years.

The private sector will drive future growth with the profes-sional- and business-services sector leading job growth as well as demand for office space, although new jobs may take a while to transform into demand. An unknown amount of shadow space will need to be absorbed before companies generate requirements for supplementary room. We anticipate net demand to increase in 2012 and 2013 as shadow inventory burns off. Attracting a highly educated work force and offering some of the highest incomes in the nation, the DC region will continue to draw new residents, adding 158,000 people over the next three years.

Jeffrey Kottmeier is vice president and director of research of Cassidy Turley’s Washington, DC office. He can be contacted at Jeffrey.Kottmeier@cassidyturley. com. The views expressed here are the author’s own.