Tuesday, December 11, 2018

Small Leases Rise to Dominate New Jersey's Office Market

When it comes to office leasing in New Jersey, it's not a big deal anymore.

During the past five years or so, office leases for less than 10,000 square feet, relatively small deals, have increased so much that they now dominate that sector of the Garden State's real estate market.

"New Jersey has become a small deal market. The Incredible Shrinking Deal."

Last year marked a five-year low in the number of large-sized office lease transactions in New Jersey, and leasing through the third quarter in 2018 the number of big leases is pacing to drop even more this year. At the same time, the volume of small leases has been on an upswing since 2013, the report said.

CoStar data supports those findings, as well, with the average space leased declining from 2013 to 2018. In 2013 for New Jersey, there were 3,896 leases signed for an average of 4,375 square feet per lease, according to CoStar Market Analyst Adin Perera. This past year, there were 4,031 leases averaging less square footage, 4,047, he said. Year to date in 2018, the average square footage has dropped all the way down to 3,355 for the 3,142 leases signed so far, according to CoStar, which tracks office rentals as small as under 1,000 square feet, even 50 square feet.

Statistics vary from CoStar's, but support the same trend.

"The growing prominence of small deals can also be seen in the declining average transaction size in the market. The average deal size in the first three-quarters of 2018 was 11,950 square feet, a 37.5 percent drop from the high-point mark set in 2015. While the 2018 year-to-date figure is a slight uptick over 2017, the growing volume of transactions below 10,000 square feet suggests that the average transaction size will remain far below the peak level for the near term."

While New Jersey has enjoyed job growth and declining unemployment, the fundamentals of its office market have stayed the same. The state remains saddled with large outdated suburban office buildings and parks that millennial-seeking companies aren't interested in, leading to fewer large lease transactions of 50,000 square feet or more and less leasing activity, the brokerage said.

Fewer large companies appear to be relocating to the Garden State, in part because of its high cost to do business and its old office parks, according to Perera. Merck's former corporate campus in leafy Readington, New Jersey, remained on the market for years until IT provider Unicom Corp. bought it this year.
“The combined impact of too many large blocks and not enough large-block demand suggests that the market is likely to see the current availability and rent levels persist. Changing the trajectory of the market will require reducing the oversupply of space and realigning available inventory to better meet the demands of current and future tenants in the market.”

There have only been 16 office leases involving 50,000 square feet or more so far this year, according to CoStar. Last year, there were 33 such large deals. That was a drop from 53 large lease deals in 2016, and 65 in 2015, CoStar said.

There was "a mismatch" between supply and demand regarding the size of spaces available in the New Jersey market.

"On the one hand, there is an ample supply of spaces available in the larger size categories ... On the other hand, looking at the smaller space availabilities, there is a potential shortage. Our forecast indicates 194 potential new transactions to take place in the fourth quarter of the year, but only 277 currently available blocks of 10,000 square feet or below to accommodate that demand. Landlords are frequently reluctant to break up larger blocks of space for a variety of reasons and despite an obvious potential solution, small tenants may find themselves facing a dearth of desirable suites in the sizes that they need."

Based on that landscape,  landlords are advised to offer flexible lease terms, consider shared-space alternatives, upgrade properties to better compete for tenants, and to repurpose outdated office properties.

Small leases are not necessarily a bad thing since such tenants are sometimes start-ups or smaller businesses with potential for growth.

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