Friday, March 16, 2012

South Jersey office space in doldrums

by Natalie Kostelni
"Nearly a dozen South Jersey office buildings are in a state of transition.

This comes after mortgage lenders who originally made loans on the buildings regained control of the properties and are trying to shore up vacancies in preparation for an eventual sale. In other cases, after having taken the building back from owners, these financial institutions have sold the loans at deep discounts and moved on.

The South Jersey office market has been challenged.

Many landlords have been overwhelmed with large vacancies and a dearth of tenants to fill the space. In some instances, deep pocketed landlords could strike attractive deals with tenants while other owners, particularly those with Class B and Class C office space, couldn’t compete for deals.

“I think it’s a local realization of what has been happening all over the country. I don’t think it’s a poor reflection on the people who are losing their properties but a reflection of the market. The market is struggling. If you’re looking for 5,000 square feet and put a pin on the map at Route 73 and Fellowship Road, you’ll hit 100-plus within a five-mile radius.”

The South Jersey office market in Burlington, Camden and Gloucester counties totals 17.6 million square feet. Of that space, more than 3.3 million square feet is vacant. That puts the overall vacancy rate at 19.27 percent. Class B space is faring even worse with a 24.64 percent vacancy rate.

Howard Needleman, who runs Needleman Management and owns dozens of office properties in South Jersey, sees a deeper problem plaguing that market.

“The No. 1 problem in South Jersey is there are no new tenants,” Needleman said. “South Jersey consists of a lot of lawyers, an enormous amount of medical facilities and a couple of major tenants such as Comcast and Lockheed Martin Lockheed Martin Latest from The Business Journals Follow this company but there is no new Lockheed Martin. There is no new new coming in.”

As a result, many existing South Jersey tenants contracted during the recession. That meant little to no space has been absorbed, he said. Another issue compounding matters has been tenants who have moved out of Class B and C space into A space on the cheap, leaving the lesser buildings in weaker locations to flounder.

“There’s too much space and not enough companies moving in,” Needleman said.

Consider 51 Haddonfield Road in Cherry Hill. The 96,419-square-foot building has 76,032 square feet available as some firms relocated or went out of business. The building was bought in 2008 for $11.6 million. Later, Bank of America took the property back and a New York firm is on track to buy the note for $3.3 million. At the Fairways Corporate Center, two buildings — 4300 and 4350 Haddonfield Road — are suffering steep vacancies and have their notes up for sale. In Voorhees, 401 White Horse Road went into special servicing. The 222,000-square-foot building has 85,000 square feet vacant.

Three Executive Campus in Cherry Hill is another property that took a hit. Years ago, Stone & Webster Engineering Corp. occupied the entire 444,873-square-foot structure but by 2000 it had filed Chapter. 11 and was sold to the Shaw Group Inc. Shaw had been in 150,000 square feet in the building but moved out and now about half of it is empty. The loan was sold and foreclosed upon. Five and Six Executive Campus also have their loans up for sale. Five Executive, a 65,000-square-foot building, is filled but Six Executive has half of its 100,000 square feet vacant.

Though many of these buildings are in transition, some believe their situation has the potential to eventually help stabilize the market. It might bring in some fresh, new ownership to the market, which can give the market a boost.

These buyers may get such good deals acquiring the properties that they can finally bring a cash infusion to reposition the properties, take care of some deferred maintenance and even strike some deals to bring in tenants.

Some see an opportunity to take another stab at a property.

“I hate to see good owners disappear or get hurt in the process but in some cases, they may actually be the ones who are successful at buying the properties back at a better price and repositioning the properties accordingly.”
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