REAL ESTATE REPORT
By: Mike Mathis
Prospects for the region’s commercial real estate market this year are teetering between strong and tepid, but no one seems to be too concerned about a collapse. The Princeton area’s commercial real estate experts agree that retail space will continue its strong performance but that office space will experience a downturn.
"I don’t think 2007 will be as good as 2006, but it’ll still be good," said Ted Kraus, president of TKO/Real Estate Advisory Group in Hamilton. "Short of a terrorist attack or something unknown, if we stay the course, we should have a decent 2007."
Richard Brunelli, president of Old Bridge-based commercial broker R.J. Brunelli & Co., said the retail sector in 10 of the state’s 21 counties which his firm monitors remains strong despite a continued cool residential sector.
Mr. Brunelli said he expects the trend to continue through 2007, with prevailing vacancy rates to remain low. He predicted that Princeton, Lawrence and East Windsor will continue to be attractive locations for commercial developers and tenants this year.
As long as the area’s employment picture, framed by high technology firms, higher education and state government, remains clear, the retail sector will be strong, Mr. Brunelli said.
"I don’t expect there will be much of a change," Mr. Brunelli said. "The local economy is strong. Mercer County is the place where all the professionals live and work. You have all the ingredients for retail success.
"It’s pretty rosy, at least for retail in Mercer County," he said.
Mr. Brunelli pointed to the Washington Town Center development under construction at Route 130 and 33 in Washington Township as a catalyst that will encourage other retailers who are not committed to space there to locate nearby.
"For years, the Quaker Bridge Mall area was where people could do their regional shopping," Mr. Brunelli, said. "There’s a tremendous demand along Route 1, but nobody’s building anything.
"The real money is over on Route 1 (but) we can’t find locations for (retailers who want to locate there)," said Mr. Brunelli, whose firm represents 20 retailers. "Route 130 is where the new development will fill in."
Mr. Kraus said clothing retailers will be more selective in choosing locations to open, and upscale retailers will continue to expand.
Douglas Twyman, senior vice president of Collier Houston & Co.’s Princeton office, predicted that office vacancy rates will inch upward this year. There is about 39 million square feet of office space in Mercer and Middlesex counties, he said. The current vacancy rate of 12.5 percent is the highest vacancy rate in the Princeton submarket in the past three years, an increase of almost 1 percent from six months ago, when the vacancy rate was 11.6 percent, according to statistics provided by Mr. Twyman’s office. Rents have been stable or flat and haven’t decreased, he said.
According to Mr. Twyman’s office, there are 55 buildings currently for sale in the Princeton area submarket, the most of any submarket in central New Jersey. The submarket includes Princeton, East Windsor, West Windsor, Ewing, Hamilton, Hopewell, Lawrence and parts of Trenton and extends into Middlesex County.
Meanwhile, the pace of construction of office space has increased significantly, with more than 1.75 million square feet of office space under construction.
Major projects include a 313,046 square-foot building on University Square Drive and a 140,000-square-foot building in Carnegie Center West, both in West Windsor; two large class A office buildings totaling 280,000 square feet on Route 31 in Ewing, and two 100,000 square-foot buildings in Cranbury, one on Prospect Plains Road and one on South River Road.
Rental rates have held pretty steady over the past year at around $24.50 per square foot range for all classes of office space. Mr. Twyman said 90 percent of the 650,000 square feet of new construction ready to be occupied this year has not been leased.
Hamilton Township is an especially hot area for new office construction and Lawrence is still strong, Mr. Twyman said. Mr. Twyman said he hasn’t seen many concessions made by developers or landlords in the form of rent breaks or added amenities to newer buildings because the cost of construction is increasing.
"(The office sector) remains a healthy market in terms of leasing capacity," Mr. Twyman said. "With the exception of what’s built or under construction, you won’t see any construction activity. I don’t see anything new until we catch up with what’s already been constructed.
"If anything, landlords may kick in an amount toward renovations rather than giving a tenant a dramatic concession on the asking rent," he said.
Mr. Twyman cited modest job growth in New Jersey last year as the reason why the office sector has cooled. With fewer jobs created, he said, there is less of a need for companies to lease office space.
"There’s a dramatic relationship with the two," Mr. Twyman said. "With modest job growth, I don’t see more than one-quarter of the new office space rented this year."
The number of building permits issued for retail and office projects in the state is monitored and analyzed by the state Department of Community Affairs, which did not have statistics beyond September 2006.
Milt Charbonneau, a vice president at Colliers Houston & Co., said Hamilton as a submarket is growing. He has said ancillary markets to the Route 1 corridor such as Interstate 295, Interstate 95, and Route 130 and 206 are becoming more desirable for those seeking to build office space.
"In 2007, Hamilton will come to the forefront like Lawrenceville," Mr. Charbonneau said, adding "Everything is coming together there. It’s great for tenants."
There is some apprehension among some that the economy could take a downturn, causing the office and retail sectors to decline.
Mr. Kraus, the TKO/Real Estate Advisory Group president, said banks are beginning to analyzing deals more stringently in an environment where consumer debt is growing and unrest in the Middle East could trigger high oil costs that could ripple through the economy.
"There isn’t any form of commercial real estate that isn’t happy," Mr. Kraus said. "But the optimism is stranger than the reality. We haven’t seen a major slowdown in a while, and some people’s debt is growing higher.
"There’s so much uncertainty, and we’re highly leveraged as a society, so there’s no leeway," Mr. Kraus said.
Michele Siekerka, president and chief executive officer of the Mercer Regional Chamber of Commerce, acknowledged that there was an abundance of vacancies of Class A office space, but said she was hopeful commercial growth would continue due to a good job market.
She said the chamber is utilizing events such as the 70th annual Chamber Walk to Washington, one of the state’s longest-standing networking events, to lure new companies to the region.
"You bring business leaders together from across the state who wouldn’t necessarily think of Mercer County," Ms. Siekerka said. "We’re a good place to do business. Everyone is cautiously optimistic."