States Office Market Is Not Drawing Manhattan TransfersYet

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Industry Report – Office Lease DealsWhile Manhattan’s red-hot office market is seeing tightening vacancy rates and rents of more than $100 a square foot, for the most part, the brisk leasing activity in the Big Apple hasn’t carried over into the Garden State. This has gone against the expectations of local commercial real estate players, who had anticipated that many New York City companies would look to New Jersey for more affordable office space.

“When you see the rent growth that’s taken place in Manhattan, and the shortage of supply that’s in the city, there are a lot of questions why New Jersey hasn’t been the beneficiary of that,” says Mark Yeager, president of Gale Real Estate Services Co. in Roseland.

With the exception of the Hudson Waterfront and possibly the Newark submarkets, the spillover of companies from Manhattan into New Jersey hasn’t happened, he says. One reason is that the city’s office rents, particularly in midtown Manhattan, began sharply rising only relatively recently—within the past year or 18 months —so the price hikes haven’t yet affected many tenants, he explains. But as more office leases come up for renewal, larger numbers of tenants will get hit with new rental rates that could be double what they’re currently paying.

The labor force is another issue. Highly sought-after young professionals are drawn to big cities for work, Yeager says. “Irrespective of how expensive it gets to do business in New York City, I’m not sure that employers are convinced just yet that they’ll be able to attract the labor they want by moving out into the suburbs,” he says. Many Manhattan companies will need to see other firms relocate to suburban New Jersey and still be able to attract and retain top-notch employees before they will consider a move. For now, “they’re biting the bullet and paying the higher rents,” says Yeager.

Without the expected boost from Manhattan, New Jersey’s office market has largely remained stagnant in 2007, says Matt Dolly, director of research and marketing at GVA Williams in Parsippany. The overall vacancy rate for the state has hovered around 18 percent for the past three years, while average office rents, which are currently about $24 per square foot, have also stayed flat, he says.

“We see a lot of renewals, a lot of extensions,” Dolly says, noting leasing activity was dominated by small and midsized tenants this year. “We’re not seeing too many expansions and a lot of tenants are staying in place.” The lack of job growth in the state has made some companies hesitant to commit to larger blocks of space, he explains. But Dolly notes that other tenants—including some New York City companies—are currently looking for office space in New Jersey, which could lead to major leases being signed in the coming months. “We’re looking for some of the very large deals to be done,” he says.

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