Suburban Office Markets Are Hanging On Post-Pandemic

Northern New Jersey offers examples of vast potential, especially for the buildings near mass transit

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The news coming out of the suburbs east of Los Angeles was good at the end of June, commercial real estate-wise.

The Eastern Los Angeles Regional Center, a nonprofit organization that helps the developmentally challenged find community-based services, had expanded at The Alhambra office campus, in Alhambra, Calif., less than six miles from Downtown L.A. The expansion made the organization the second-largest tenant in the 40-acre, nearly 1 million-square-foot campus owned by the L.A.-based Ratkovich Company. The center now rents nearly 150,000 square feet there.

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As markets globally struggle to get back on their feet following the pandemic, and landlords learn to live with a workforce determined to spend as little time as they can get away with commuting conventionally to the office, the deal highlighted lots of questions. One of them was: Why can’t the New York City suburbs, especially those in Northern New Jersey, attract deals like this?

The answer to that question, basically, is: Hold tight. It takes time. 

The latest statistics for commercial real estate in Northern New Jersey depict a market that is better than it was last year, but still has a long way to go. That’s the case for many suburban office markets nationwide, where, like with their urban core counterparts, vacancy and availability rates remain in double-digit percentages. A Newmark (NMRK) analysis to start 2023 pegged suburban office vacancy at 10.7 percent, for instance, while vacancy for central business districts (CBDs) stood at 18.3 percent. 

Northern New Jersey’s market is one where owners of offices have a choice: Either spend whatever it takes to upgrade their offices into places where workers choose to be — over their own kitchens, a coworking place or a Starbucks — or convert the building to another use for which there is demand, like housing, storage or warehouse space. After all, boxes don’t care if you serve good coffee or have a leafy, inspiring outdoor terrace.

“There’s still demand for office space,” said Timothy Greiner, executive managing director of brokerage JLL’s New Jersey office market. “Companies feel that in order to engage their workforce, train new hires, create a culture — the office environment helps with those things. Suburban space that is activated, energized and connected to the community somehow can survive if landlords activate their spaces. It used to be that you build your gym and your cafeteria below grade. Now you put those things right off the lobby.”

In a follow-up email, Greiner identified the most active sources of tenant demand as coming from the financial, media, technology and life sciences industries. 

The message from Greiner and others familiar with the New Jersey office market is that there’s a “flight to quality” going on there just like there is in the CBDs, including in Manhattan, with corporate tenants favoring Class A space with attractive features. What’s in demand now are spaces with abundant light, tall ceilings, and lots of prominent amenities and concierge-like service that makes workers feel welcome and inspired, and that the time taken to commute to the workplace is worth it. That’s not that easy to do. It requires money and often reconstruction of spaces, and those whose spaces might not be conducive to upgrades need to consider alternative uses. They might even have to tear down the existing building and replace it with one that is conducive.

An example might be the Helix, a 1.5 million-square-foot, three-building complex, where SJP Properties is building Phase 2 in Downtown New Brunswick. SJP’s previous works include the 11 Times Square skyscraper in New York; The Modern, a pair of glassy residential high-rises overlooking Fort Lee, N.J.;  the Waterfront Corporate Center in Hoboken, a succession of mid-scale office buildings overlooking the Hudson River; and the newer of the two Prudential towers on Broad Street in Newark.

When completed in 2025, the Helix is to be home to the medical school of nearby Rutgers University. It will feature 220 units of housing over 37 stories in Phase 3 as well as more than 300 dry labs and more than 900 wet labs just in the first building to open. The complex is an example of transit-oriented development — development meant to feed off nearby mass transit hubs, such as the station along the Northeast Corridor commuter rail line across the street —  that had become popular in New Jersey in the years leading up to the pandemic.

Public transit lost a lot of its momentum with the pandemic as riders were made to wear masks and tolerate uncertainties about the health of strangers commuting next to them, driving people back to their personal cars. 

And commuting itself lost momentum as folks discovered they could be just as productive on their laptops either at home or in their own neighborhoods. Ridership on New Jersey Transit buses and trains, for instance, remains below pre-pandemic levels, according to the transit agency’s chief, though those shares were as high as 80 percent of pre-pandemic levels for buses in the spring, and as high as 75 percent for trains. 

Alex Erdos, SJP’s senior vice president for leasing and marketing, said the attraction of transit-oriented development has returned.

“Most employees and most companies will utilize multi-modal commuting,” he said. “It will be a mix of public transit, driving and walking. Being transit-adjacent is a huge benefit. We see a mix of drivers, ride-share, probably Uber and Lyft, people walking and utilizing public transit as well. We’re seeing a shift back toward mass transit. Driving is always a default in New Jersey, but more and more public transit is back in a big way.”

There’s a “gravitational pull” toward New Jersey’s downtowns, said Erdos, with a rise in interest in walkable satellite cities like Newark, New Brunswick and Morristown that have convenient public transit links. That pull makes developing in those downtowns more attractive than redoing old office parks out by the state’s suburban highways.

Erdos also pointed to SJP’s project in Morristown, a heretofore sleepy small town that has been energized by young people who find it provides urbanity on a small scale. M Station, which is under construction, is a 380,000-square-foot, two-building complex in the downtown that will offer walkability and proximity to the city’s NJ Transit station. Its first building is completed, and is  totally occupied by Deloitte, a Big Four accounting company. Sanofi, a French pharmaceutical company, plans to occupy the second building. 

Andrew Merin, a Cushman & Wakefield executive vice chairman stationed in New Jersey, labeled Morristown a “hot area” and one of the state’s best places for attracting talent. He called M Station “a great example of the flight to quality.” (Cushman is the project’s broker.) 

The numbers don’t look that promising, at least for now. Northern New Jersey’s vacancy rate at the end of the second quarter was 26.9 percent, according to JLL. That number barely budged from the first quarter. In a selection of Northern New Jersey submarkets, the office vacancy rate was 30.4 percent in Parsippany, 23 percent in the Meadowlands, 15.9 percent in central Bergen County, and 30.1 percent on the Hudson waterfront.

In close-to-Manhattan Bergen County, numbers from Colliers show a tiny upturn in office availability, to 16.7 percent from 16.4 percent a quarter ago. It is down from a year ago, when it was 17.5 percent.

Bergen County enjoys “significantly” more demand than New Jersey overall, which had an availability rate of 24.1 percent in the second quarter. Following two years of little demand in 2020 and 2021, leasing ticked upward in 2022 and that continues, according to a Colliers report, led by life sciences. Bergen, home to the hospital system Hackensack Meridian Health, led the way, leasing 100,000 square feet in last year’s third quarter. Hospital for Special Surgery took 40,000 square feet in last year’s fourth quarter, and Valley Medical Group took 22,000 square feet in this year’s first quarter, all three in Bergen’s Paramus.

“It’s actually one of the strongest submarkets in the state right now,” said Jim Bailey, an executive vice president based in Colliers’s Bergen County office. “Vacancy rates typically over the last 10 years trended about 14 to 18 percent, and, right now, end of the second quarter, we were at 16.7, which is higher than pre-COVID. But comparatively speaking, it’s held up fairly well, particularly the trophy Class A buildings.”

Regarding the wave of leasing by health services, “Bergen County has probably been a little underserved,” Bailey said. “It’s a very affluent area. Once you have a medical tenant in a building, typically they’re a very, very strong long-term tenant. They add a lot of stability.”