Friday, April 27, 2012

South Jersey office market seeing shift

by Natalie Kostelni
"After years of being dominated by two local real estate investment trusts, several new landlords have entered the South Jersey office market. As Liberty Property Trust and Brandywine Realty Trust pared down their suburban office holdings, local entrepreneurial real estate investors saw an opening and stepped up to buy these and other properties that have come up for sale. This ownership shift is something the market hasn’t seen in nearly two decades and could change the way some real estate deals get done.
“REITs have different goals. They have more people to answer to such as shareholders and board members, and private owners don’t; they can make a decision standing in front of a prospect.”

Some of the new players in South Jersey include Somerset Properties Inc., Veritas Real Estate, Hill Properties, and Tequesta Properties Inc. Veritas has been buying in South Jersey for the last two years and has so far accumulated 10 buildings with an eye to buy more. One of its biggest assets is Four Greentree Centre, which is an office building totaling 62,000 square feet in Marlton. Veritas has bought from a variety of sellers including Liberty, banks who have taken back properties as well as regional owners. “With some of the changing dynamics in the market and opportunity presenting itself, we saw a chance now to take an equity position and build up a portfolio,” said Rick Schwartz of Veritas. “I think you’re seeing a situation where you need well-capitalized owners to come in, and underwrite and invest smart. We don’t have the constraints of the REITs. They have dynamics and performance guidelines from a financial perspective. You can do certain things to drive occupancy that don’t necessarily create value and that has an impact on the market in terms of value.” That’s not what Veritas is about, Schwartz said. The owners live in South Jersey and find it important to be hands on, build relationships with tenants and for the long haul. “We plan to be a permanent fixture in the market,” Schwartz said.

Tequesta Properties of Marlton has similar motives. It owns six buildings in South Jersey including One and Five Greentree and 30 Lake Center Drive in Marlton. The company launched a round of capital improvements to its buildings including installing solar panels to completely redoing the lobby, bathrooms and corridors at One Greentree. The lobby hasn’t been renovated since the 1980s. “We want to show we care and we are here to stay for a while,” said Todd Levin, operations manager at Tequesta. “It’s definitely a changing landscape and pretty exciting for companies like Tequesta. We’re going to be able to change the way things were being done.” During the recession, South Jersey experienced little new business growth, so landlords poached tenants from one another to fill vacancies at low rents. While Levin can appreciate why property owners might strike such deals, it’s not a strategy for Tequesta. “We see the leases that were done like that and we’re not doing those deals anymore,” Levin said. “We’re in business to make money. It’s a stability thing and we want to make it clear to the tenant what the rate is and fit out. There’s no game involved. Tenants want that openness.”

Somerset closed earlier this month on a $146 million deal with Liberty Property in which it bought 34 properties. Of those, four were in South Jersey. Somerset is re-entering the area office market after a hiatus. “We see some opportunity in this product type,” said Mark White, a principal at Somerset of Lower Gwynedd. “We think South Jersey and this property type is a proxy for the broader economy, and we’re optimistic that as economic conditions improve so will the value of these properties. It has been out of favor with investors for years and we tend to be a contrarian investor.” A majority of leases completed in the office market during the first quarter were done by these new owners and show rents higher than some previous deals completed over the past year. “The new owners are trying to hold the line on what rental rates should realistically be in southern New Jersey and not give away the house just to win deals and buy occupancy at steep discounts." Two years ago, average starting rents stood at about $6 to $10 a square foot and now it’s up around $10 to $12, he said."
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