According to JLL, after slipping to 24.9 percent at year-end 2014, the overall office vacancy rate for Northern and Central New Jersey ticked slightly higher to 25.3 percent in the first quarter of 2015. This is 10 percent above the national office vacancy rate of 15.8 percent in the first quarter of 2015 as reported by the National Association of Realtors last week.
Lackluster demand compounded by corporate consolidations and restructurings have caused the vacancy rate for all building classes in Central and Northern New Jersey office markets to hover around 25.0 percent since midyear 2013.
After reporting an unprecedented 10 consecutive quarters of negative net absorption dating back to the third quarter of 2012, a rebound in demand for Class A office space in Northern New Jersey led to 114,560 square feet of absorption in the first quarter of 2015. The Northern New Jersey Class A vacancy rate subsequently retreated 30 basis points from year-end 2014 to 26.8 percent.
Northern New Jersey Class A vacancy's lower rate can be traced to activity in the Parsippany submarket. With more than 286,000 square feet absorbed, this submarket recorded the largest volume of positive absorption in the state's Class A market. Leases involving Arthur J. Gallagher & Co, Cisco Systems, Langan Engineering and Securitas Security Services pulled Parsippany's Class A vacancy rate to 27.3 percent after ranging near 30.0 percent for the past two years. Competitive rental rates, combined with the submarket's proximity to several major highways, contributed to the recent uptick in demand.
"A lack of sustained job growth has kept much of the Northern and Central New Jersey office market in neutral," said Robert Kossar, Executive Managing Director and Market Director for JLL's New Jersey operations. "Although the state benefited from the addition of 6,200 jobs in February, the professional/business and financial services sectors collectively shed 3,000 jobs. We don't expect to see the New Jersey office market kick into high gear until these vital sectors demonstrate accelerating employment gains."
The Northern and Central New Jersey office market posted approximately 2.0 million square feet in leases in the first quarter of the year, compared with 2.4 million square feet in transactions in the previous quarter. Although the banking/financial services sector was responsible for most of the leasing velocity witnessed in the second half of 2014, professional/business services companies stepped up to the plate in early 2015, despite headwinds in the labor market. The professional/business services sector accounted for 40.0 percent of total transactions in the first quarter of 2015, following by banking/financial services companies, which accounted for 30.0 percent of completed leases.
Approximately 901,200 square feet of new construction was underway in the Northern and Central New Jersey office market in early 2015, compared to nearly 1.7 million square feet in development one year ago. The only speculative project under construction consisted of a 32,500-square-foot building at 466 Springfield Avenue in Summit.
New Jersey Office Highlights of Q1, 2015 include:
The Northern and Central New Jersey overall vacancy rate increased to 25.3 percent, compared with 24.9 percent at year-end 2014. The state's overall vacancy rate has remained within a few percentage points of 25.0 percent for at least the past two years.
Demand for Class A space in the Hudson Waterfront boosted its average asking rental rate to $38.47 per square foot, the highest Class A rental rate in the state. The Metropark submarket's asking rental rate of $32.21 per square foot represented the highest Class A rent in Central New Jersey.
A rising supply of office availabilities presents opportunities for tenants seeking space in the Bergen North submarket. Since bottoming out at 15.4 percent in mid-2013, the overall vacancy rate has significantly risen, reaching 38.9 percent in early 2015. Contributing to the higher vacancy rate this quarter was 217,520 square feet marketed for sublease by supermarket chain A&P at 2 Paragon Drive in Montvale. Bergen North's overall vacancy rate is poised to climb higher as Mercedes-Benz begins moving its U.S. headquarters from Montvale to Atlanta.
Tenant requirements in Central New Jersey led to nearly 133,400 square feet of absorption in the Metropark submarket in the first quarter, representing the largest volume of positive net absorption in Central New Jersey. Notable transactions contributing to this absorption included Direct Energy's 50,650-square-foot lease at 194 Wood Avenue South in Iselin, MetLife Insurance's 29,520 square feet at 186 Wood Avenue South in Iselin and SmartLinx's 14,300-square-foot sublease from BT Americas at 333 Thornall Street in Edison. With an overall vacancy rate of 22.6 percent, the Metropark submarket reported the second lowest vacancy rate in Central New Jersey, followed by the Princeton submarket, which posted a 19.4 percent vacancy rate.
Looking ahead, the Northern and Central New Jersey's rapidly aging office inventory will pose a challenge to building owners seeking tenants that prefer modern, more efficient buildings to house their operations. Approximately one-half of the 159.0 million-square-foot office market was developed during the 1980s. By 2020, Garden State office buildings will average around 35 years old. Furthermore, while the overall office vacancy rate was 25.3 percent in early 2015, 1980s-era buildings posted an average vacancy rate of more than 26.0 percent, while office product completed since 2010 registered a vacancy rate of just 15.3 percent.