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2019 Forecast Issue Real estate

Even before political and trade conflicts recently erupted, real estate developers across New Jersey and elsewhere were facing a host of opportunities and challenges going into 2019. Now, in addition to confronting the specter of increasing interest rates, a possible economic slowdown, and changes in the way that people work, they’ve got short-term concerns like the fallout of possible gridlock in Washington, D.C. How will they respond? Developers have to look years ahead, so a laser-like focus on long-term trends helps, according to experts.

Even before political and trade conflicts recently erupted, real estate developers across New Jersey and elsewhere were facing a host of opportunities and challenges going into 2019. Now, in addition to confronting the specter of increasing interest rates, a possible economic slowdown, and changes in the way that people work, they’ve got short-term concerns like the fallout of possible gridlock in Washington, D.C. How will they respond? Developers have to look years ahead, so a laser-like focus on long-term trends helps, according to experts.

Andrew Judd

Cushman & Wakefield, senior managing director and New Jersey market leader

Judd

New Jersey is well poised to capitalize on the recent upturn in office activity, continued demand from ecommerce and traditional industrial users, and the strength of the capital markets sector. New Jersey’s commercial real estate industry will also benefit from robust fundamentals across product and transaction types throughout the new year, all driven by the state’s diverse and evolving industry mix.

While the rate of growth may not be as robust as 2018, we are anticipating stable growth in 2019. That said, while unsettling headlines may cause concern, we view these as short-term bumps in the road. The fact remains that demand for modern, dynamic and supportive work environments will continue to drive the market in New Jersey throughout 2019 and beyond.

Michael J. DeMarco

Mack-Cali Realty Corp. CEO

DeMarco

We believe that the level of activity in the commercial real estate space in New Jersey will continue to increase and that demand for well-located Class A space will remain high, due to the market’s strong fundamentals. While we recognize that the costs of construction materials and labor are on the rise, we don’t see this as a major cause for concern — actually, we welcome a bit of market inflation. We expect that interest rates and unemployment rates, as well as the state’s ability to have a sound financial plan in place with regard to tax rates, will be the most influential factors impacting the commercial real estate market. Additionally, millennial marriage and family patterns, income growth, and housing preferences will continue to drive our real estate strategy and decisions.

Ted Zangari

Zangari

Sills Cummis & Gross member, real estate department chair

State lawmakers will not allow the GrowNJ employer incentive program to naturally expire in July. This spring, in tandem with negotiations over what will likely be a very difficult budget, the governor and legislature will approve a measure to revamp and extend GrowNJ. The revised program will mostly reward high paying positions, newly created jobs, life science, technology and manufacturing industries, stranded office campuses, and urban centers.

David Schoner

Coldwell Banker New Homes, vice president

The proliferation of apartment residences under construction will continue throughout northern and central New Jersey. The high end of the for-sale market will be smaller due to a lack of job growth. That, combined with property tax concerns, forces people into apartments who would otherwise be buying.

Schoner

The residential real estate developers who are building for-sale product that are most likely to succeed are the ones who have established a niche in the market. Our client Mark Built Homes, for instance, has been very successful building luxurious, exclusive, boutique, brand new residences in desirable communities, such as Madison Place in Madison, Summit Place in Summit, James Place in Morristown, and 365 Ocean in Long Branch. Those are communities that appeal to affluent buyers, many of whom are “moving down” from a larger single-family home.

The tastes of millennials and baby boomers in residential real estate are actually very similar, almost identical at times. Millennials tend to embrace social lounge spaces a little more on a day-to-day basis, but other than that they all want the same things. They want the “cool stuff,” the open floorplan, the functional layout.

Everyone wants walkability. They want to be able to walk to restaurants, espresso bars, and entertainment venues. They want to be able to catch a train to Manhattan. They want a quality home. If you are designing a residential community with millennials in mind, the baby boomers will also buy it, and vice versa.

Rising interest rates will have a small dampening effect on demand, although demand for new housing will still be solid. People want to own a home, but there is an inability to deliver new homes with prices and taxes at a level that is commensurate with expectations. Communities that tend to have a lot of cash buyers will be less affected.

Edwin Cohen

Prism Capital Partners LLC principal

Cohen

Development and redevelopment in New Jersey – across sectors – will continue to accommodate the changing needs of tenants and subsequently advance the state’s economic health in 2019. On the office front, companies are investing in workplaces that offer the amenities, image and atmosphere needed to draw the best talent, as they recognize this as the key to fostering business growth and prosperity. In turn, the commercial real estate community continues to put forth projects that are revitalizing and redefining the regional market.

The Garden State is also seeing a new surge in demand for state-of-the-art laboratory space, which is bringing to life Governor Murphy’s vision of New Jersey becoming the destination of choice for innovative companies. Life sciences users, too, are seeking settings that provide quality of life for their employees. Across the board, tenants’ desire for a strong sense of “place” today extends beyond the corporate campus, which means communities that offer desirable housing, dining, retail, culture and recreational opportunities are particularly attractive to developers and space users alike.

Matt McDonough

Transwestern New Jersey office managing director

Looking ahead to 2019, there are some notable trends on the horizon. As the industrial market continues to explode – and shows no signs of slowing down – the office market is also trending in a positive direction. Despite rising interest rates, brisk economic activity is expected to propel office leasing velocity, tenant walk-throughs, and asking rents higher throughout most of the U.S.

McDonough

Zeroing in on New Jersey’s office market, we expect to see slow and steady growth. Obsolete facilities in the state are prime for redevelopment and in some cases, are also being repurposed for other uses including industrial and residential. We are also witnessing a shift in the way corporations are using office space, with an increased focus on amenities that are helping to attract and retain tenants including walkability to dining and retail, and access to transportation.

While work-at-home and co-working has continued to expand this past year, we expect the pendulum will swing back a bit – with more companies aiming to strike a balance that will allow for a healthy office culture. Lastly, transit-oriented locations will continue to be very appealing for real estate owner and tenants alike.

Jesse Harty

Prologis senior vice president and market officer NJ/NY

Harty

Rent growth is accelerating for logistics all over the world, and the New York-New Jersey industrial real estate market exemplifies this trend. Same-day delivery is evolving into same-hour delivery in some places, and consumers are insisting on a broader selection and availability of goods. As a result, selecting a market and a property are now business-critical decisions that favor high-quality space in prime locations near urban centers.

In 2018, Prologis increased its New Jersey portfolio to 37 million square feet. In addition to acquiring DCT Industrial, we signed leases with several new customers, including e-commerce startup The RealReal. We expect that high customer demand and a low vacancy rate will persist into 2019.

Market dynamics and limited available land will push developers to be more creative and opportunistic in finding new land sites. Prologis, for example, is currently developing two buildings totaling 1.5 million square feet in central New Jersey. We also expect continued interest from e-commerce and other companies looking for robust and responsive “last touch” networks. This growth is driven by online retailers, which need approximately 1.2 million square feet per billion dollars of online sales on average — three times the distribution center space required for traditional brick-and-mortar retailers.

Michael Alan Seeve

Mountain Development Corp. president

Seeve

The continued growth of technology in every aspect of our lives will continue to affect the way we use commercial space, work together, and efficiently deploy our time and resources in the coming year. Incorporating these changes into the buildings we own and manage to the benefit of our tenants is essential and a priority for MDC.

Locally, property owners and tenants will continue to collaborate, finding clever ways to use buildings as more than just “space” – incorporating brand identity, team building, opportunities for networking, and creating dynamic work settings.

Samir Guzman

Paramount Assets executive director of leasing and marketing

Paramount Assets is always cognizant of developing a retail environment in which both tenants and the town can be mutually successful. We saw an increased number of fast-casual restaurant chains entering a number of New Jersey’s urban markets in 2018, a trend that we expect will continue in 2019 and beyond.

Guzman

These concepts are excellent traffic drivers in downtown locales, meeting increased consumer demand for healthier and higher-quality menu options at an affordable price point. Also, within the restaurant sector, traditional fast-food restaurants will continue returning to dense urban markets they had previously abandoned, but this time in spaces designed to accommodate a smaller footprint.

The ability to operate one of these restaurants without a drive-through saves the business owner money and affords a quicker development timeline.  Newark, which is undergoing a tremendous revitalization, is just one example of a burgeoning downtown market where we have seen significant interest among national fast-food chains looking to re-establish a presence.

Michael G. McGuinness

NAIOP NJ CEO

McGuinness, 

The sentiment of the commercial real estate industry for 2019 remains favorable due to plentiful capital, rising rents and motivated investors. Market fundamentals are strong and likely to remain so throughout the year. Some of this optimism is also due to the 2017 federal tax reform that provides several business-friendly changes including a reduced corporate tax rate of 21percent, a doubling of the estate tax exemption, and a lower tax rate for many pass-through businesses. A significant number of developers and investors may also find meaningful opportunities in New Jersey thanks to the Federal Opportunity Zone program designed to spur development, job creation and infrastructure improvements in distressed communities. Other developers and investors can take advantage of the recently enacted Public-Private Partnership (P3) law by financing and overseeing infrastructure improvements and the development of government-related projects. Nevertheless, the rising costs for construction materials and labor, and severe shortages of skilled workers and industrial land near the port, challenge the industry to find creative solutions like converting office to industrial and expanding industrial facilities vertically.

Bob Antonicello

Grid Real Estate LLC Brokers Advisors president

In 2019, Jersey City, Newark, New Brunswick, Hoboken, Bayonne, Elizabeth and other cities that are tethered to a good reliable mass transit system with connections to New York will benefit as millennials — and to some extent baby boomers — move back to cities. Additionally, as Generation Z [generally defined as people born from the mid-1990s to the early 2000s] completes their education, they’re moving back to cities, too.

Even if these individuals don’t work in New York, they tend to want easy access to the city; in their own neighborhoods they want walkable communities with shopping and entertainment. We are seeing some older millennials returning to the suburbs, but they tend to be well-located and connected to the New York City halo, like Montclair, Glen Ridge, Morristown and others. Millennials in these suburbs are also driving a remake of suburban towns to the urban model, where they’re walkable, with lots of entertainment.

I’m also seeing some traditionally [single family] suburban areas like Park Ridge, Hackensack, Westfield, Chatham and others finally embracing multifamily housing, though it’s primarily luxury housing where the rent is extremely high.

Normally, with the perfect storm of higher interest rates, and the federal SALT cap, we would expect to be seeing a [downward] market correction. But with about 80 million millennials, and some 65 million Gen Zs driving demand, rents are still holding their own. It used to be boom and bust generation cycles — we had the baby boomers and then a sharp drop with the Generation X population — but the wave of millennials was followed by another wave of Gen Zs. So the demand cycle has changed.

George Vallone

Hoboken Brownstone Co. co-founder

I anticipate a continuation of the trends we saw in 2018. Demand for residential housing, especially in northern New Jersey, will continue to be driven in part by job creation on the west side of Manhattan. Projects like Hudson Yards are projected to result in more than 50,000 jobs, while the continued buildout of the World Trade Center complex is expected to generate another 100,000-plus jobs.

These are mostly middle-management jobs paying upwards of $100,000, but that’s still not enough to afford to live in Manhattan; North Jersey is a close, affordable alternative — even in comparison with Queens and Brooklyn — that offers an easy commute to New York.

On this side of the Hudson, the demand for housing in places like Hoboken, Bayonne, Harrison and Kearny will continue to focus on high-end buildings with outstanding amenities that also offer easy access to PATH, ferries and other mass transit. Baby boomers and millennials alike also want close-by shopping and entertainment, which is available in these urban locations.

Even though interest rates have increased a bit this year, I don’t see that as a threat to residential housing demand. Inflation remains relatively low, and I believe that the Federal Reserve is backing down from rate hikes for now — in fact 30-year mortgage rates recently fell a bit — and it doesn’t look like the economy is about to enter a recession.

Jonathan Schwartz

Partner, BNE Real Estate Group

Schwartz

We’re still bullish on the New Jersey rental market. We’ve got three in-progress projects in Jersey City, Harrison, and Teaneck that will start lease-up in 2019; and we’re breaking ground on additional phases in Jersey City and Harrison, and awaiting final approval in a few more towns.

Interest rates are likely to rise in 2019, and construction costs are going up because of the trade war with China. But rents will probably stay relatively flat since there’s a lot of supply coming on line, so we’re staying conservative in our underwriting. Still, demand is so strong that multiple projects can still lease up.

For the past decade or so, the market been driven by millennials, but now we’re seeing more baby boomer empty nesters returning to rentals. Both generations want walkability and proximity to shopping, although the empty nesters tend to want larger units.

But everyone wants luxury product with amenities like a great fitness center that has lots of equipment, a pool, and private workspaces outside of their apartment. The multiple generations also want a sense of community, with expanded spaces where they can meet others. So, many of these projects have on-site movie theaters, lounges, coffee areas and other spaces that help deliver a community environment.

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