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Article – 04021990

Date: April 2, 1990

In the heady days of the early and mid-1980s Central New Jersey became the bullseye on the East Coast”s development dart board, and real estate firms went on a building spree in a rush to meet the explosive demand rural and suburban land was cheap, and development financing was readily available. As a result, builders threw their projects up as fast as they could before the development drawbridge fell and shut them out of the game

Such rural and suburban municipalities as West Windsor, South Brunswick, Franklin, Bridgewater and Montgomery fed the commercial development frenzy with easy zoning and building approvals Local planning officials, eager to sow tax ratables to pay for new schools, sewers and roads, gave over farmlands to new office parks. At the same time, local development firms expanded their staffs, plowed profits into land banks, acquired long-term debt and took on regional and national investment partners. Even architects, brokers and contractors were bitten by the development bug and the promise of big profits and began putting up their own office complexes throughout the region.

Overnight, the area”s real estate firms expanded their sales operations to meet the demand for tenant services, facilities, financing, leasing terms and amenities. The industry”s jargon machinery went into overdrive as well. Cubby hole offices turned into work station areas, warehouses became flex-space structures, and retail stores turned into power centers in addition, landlords became property managers, property managers became asset managers and asset managers became pension fund advisors.

But what is past is prologue, and that was the 1980s. The 1990s–or at least the beginning of the 1990s–will be very different. The tenant is now king in the region”s oversupplied office markets. Leases are being negotiated and renegotiated as firms consolidate, merge, acquire, expand and contract. Developers, brokers and landlords who want to stay in business will have to realize the need for creativity in fulfilling their customers” ever-changing requirements for workspace.

In order to survive as business organizations, development, brokerage and mortgage lending firms will have to consolidate their staffs and operations. Realty firms will be scaling back their operations in the 1990s. Without these cuts, development and brokerage firms will not survive. Commercial developments now will require more working capital, time and risk. That means that venture yields will be lower says one glum developer “A few years ago we looked for 14% to 15% yields, or we didn”t do the job. Today you can”t find double-digit yields “

Members of the real estate industry have begun acknowledging that they are partly responsible for the predicament that their industry now faces. Says Chuck Wisher, one of Coldwell Bankers resident managers. “Developers and brokers haven”t communicated with each other for years Brokers lied to developers about the quality of their buildings in order to get listings. Developers told brokers each new building was the right one in a market in order to fill the thing and look where it all got us “

A recession could thin the ranks of development, brokerage and lending firms. Real estate people now candidly–but privately–admit the field is overcrowded. Fortunately, as Central New Jersey”s property markets tighten, some of the seat-of-the-pants business practices that characterized the field in the past, will disappear as well. Says one realtor who has hired and fired many of the Garden State”s best and the brightest: “He who grew by leverage will suffer the most.”

Central New Jersey”s real estate industry in the new decade will be populated with fewer entrepreneurial operators and more institutional organizations, according to veteran developers, brokers and lenders. Larger development firms, those that are geographically diversified, heavily staffed and well capitalized, will not only survive but will prosper in the coming years. Smaller development firms, with less overhead but a surplus of street smarts, will survive, too, as long as they can respond quickly to the masticating gyre of shifting market conditions.

Mid-sized firms, though, stand to suffer the most, especially if they are stuck waiting for development approvals in out-of-town locations graded every 10 years.”

Coping with increased competition for fewer tenants in the coming decade will be a new experience for many developers. “We once put up an office building that research showed was needed in the area,” an officepark developer recalls. “Unfortunately, it was surrounded by eight similar office buildings, which slowed the lease up time for all of us. We learned that we”re only as smart as our dumbest competitor.”

What does this all mean for the company looking to lease 1,500 sq. ft., 15,000 sq. ft. or 150,000 sq. ft.? It means that you can negotiate like mad. There has perhaps never been a better time to be a tenant. Lots of space at all prices is available. Moreover, developers are ready to deal because new financial requirements place a premium on cash flow. In short, this is a buyer”s market. So go out and enjoy it.

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