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Office Market

CRE experts see strong suburbs market, financial market volatility

Adapting to shifting demographics and investing in non-traditional opportunities were some of the key issues addressed by a panel of commercial real estate leaders at NAIOP New Jersey’s Annual Meeting and Commercial Real Estate Outlook.

Held at the Short Hills Hilton, more than 300 industry professionals attended the event, which included the election of the commercial real estate development association’s 2016 officers and trustees.

Benjamin Breslau, international director of Americas research with Jones Lang LaSalle, provided an overview of how economic, industry, demographic and even innovation and political trends may impact commercial real estate in the region.

“Financial markets will remain volatile as the tug of war continues between healthy growth in the economy and the three key factors responsible for the current instability: the Chinese economy, oil prices and the Federal Reserve System. The good news is we will be able to weather the storm.”

Breslau said factors like positive job growth, low gas prices at the pump and the housing market uptick all lead to consumer confidence – and that is working in the industry’s favor. He noted that 2.7 million jobs were added last year, and unemployment is expected to drop below 5.0 percent in 2016. This is likely to have a significant impact on hiring. “The war for talent will be one of the biggest issues facing the real estate industry going forward.”

According to Breslau, many of the trends that are most important for the commercial real estate industry are not dependent on the economy. Shifts such as the growth of e-commerce, the workplace evolution and Millennials coming into the market as Baby Boomers retire will continue to fuel dramatic changes in the office, residential and industrial landscape.

One key shift cited by Breslau is the national trend toward urbanization. “Transit-oriented, dense, urban environments are doing well, and suburban markets are slow. One of the greatest opportunities for developers and investors over the next decade may very well be reinventing the suburbs.”

NAIOP NJ CEO Michael McGuinness added, “There is already significant traction occurring in other parts of the country that clearly will be replicated in New Jersey as well.”

This was one of several themes echoed during the panel discussion led by Caren Franzini of Franzini Consulting, who served for 18 years as CEO of the New Jersey Economic Development Authority.

“We see a long future ahead for the suburbs,” said Mitchell Rudin, CEO of Mack-Cali Realty Corporation. Although the firm announced in 2015 a long-term plan to shift its focus to urban waterfront and transit-accessible properties in both office and residential markets, he noted,

“We will be retaining 80 percent of our office portfolio and investing in amenities and other improvements that address work-life balance.”

Rudin believes that demand for mixed-use projects will remain strong in New Jersey as the real estate industry continues to embrace the synergy between office, retail and multifamily.

Noting Mack-Cali’s planned repositioning of its Harborside complex on the Jersey City Waterfront, he said, “There are 135,000 workers and residents within walking distance of the property who are prospective patrons of retail and dining establishments.”

Ed Russo, CEO of Russo Development, was equally positive about residential development in New Jersey’s suburban markets.

Russo noted, “In addition, this year’s Supreme Court ruling relieving COAH of responsibility for affordable housing rules – and putting it in the hands of municipalities – is opening an enormous opportunity we haven’t seen in years.”

Jeff Milanaik, principal and market officer with Chicago-based Bridge Development Partners, LLC, noted that a lack of quality warehouse and logistics space has boosted interest in industrial sites outside traditional submarkets such as the Meadowlands and port region.

“We’re looking at opportunities for industrial sites north of Exit 8A on the New Jersey Turnpike,” said Milanaik, citing his firm’s redevelopment of the former Tuscan Dairy property in Union as an example.

“Our focus is on mature submarkets containing tired properties and facilities that clearly need to be redeveloped. These sites can present an array of challenges, but the key to success is working with a competent team and investors who are willing to undertake some risk.”

Russo, added that while there are certainly project-related challenges and issues, strong fundamentals in the industrial real estate market are leading to an extremely positive outlook for the future.

“With the shortage of available space and increased competition, we are finally starting to see some meaningful appreciation in rents, which is long overdue. We expect this trend to continue in 2016.”

In terms of current and future challenges, each of the panelists cited the cost of developing projects – particularly fees charged by municipalities and counties – as an ongoing cause for concern.

“Every town has its own methodology and fee structures that often result in substantial price increases,” said Milanaik. “We have to be experts in politics these days in order to shepherd projects through.”

Franzini’s final question addressed New Jersey’s efforts to attract businesses. Milanaik said, “We are seeing an increase in companies coming into high tier-one communities like Newark and Carteret.”

But Russo noted that while New Jersey offers meaningful incentives, it needs to do considerably more, especially if we are serious about attracting growing business sectors like technology.

“Given New York’s tremendous incentive packages, New Jersey’s only choice is to step up its game.”

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