Office: Conditions Ripe for Flight To Quality

The faint light at the end of the tunnel during the first half of 2007 dimmed in the third quarter, as diminished leasing momentum combined with additional blocks of available space to impact the Northern and Central New Jersey office market. The end result was less than 15,000 sf being absorbed in the 151.3-million-sf sector. This represented the lowest volume of positive absorption recorded in a single quarter since Q2 of 2006, and it was in sharp contrast to the nearly 1.2 million sf absorbed during the second quarter of 2007. Approximately 13 of the 22 Northern and Central New Jersey submarkets reported negative absorption figures during the third quarter. The overall availability rate, which includes direct and sublet space, ticked upward from 19.5% at mid-year to 19.6%.

The absence of sustained demand by companies needing additional space, spanning several consecutive quarters, has been a recurring theme during the past year. Since eclipsing 21% at year-end 2004, the New Jersey overall availability rate fluctuated just below this level during subsequent quarters in response to the ongoing battle being waged between supply and demand. These transitional conditions are expected to persist until demand can outpace the additional space generated by consolidations.

Despite the low volume of absorption witnessed in the office market, a closer look at recent leasing trends indicates that the class A and B markets have been moving in divergent directions. More than 546,000 sf was absorbed in the A market during the third quarter compared to nearly 500,000 sf of negative absorption occurring in B. The class A availability rate subsequently slipped from 20.3% at mid-year to less than 20%, while the B availability increased from 20.2% to more than 21% during this timeframe. Just over two million sf has been absorbed in the class A market since the beginning of 2007, as many companies pursue flight-to-quality opportunities by relocating their operations from B to A space.

Demand for class A product is expected to remain a leading theme of the office market as companies take advantage of competitive rental rates to lock in favorable leasing packages. After trending higher from year-end 2006 and nearing $28.75 per sf (plus tenant electric) by mid-2007, the Northern and Central New Jersey average asking class A rental rate retreated to approximately $28 per foot by Q3. The average asking rental rate for A space is now at its lowest level in a year. Effective rents, reflecting free rent allocations in signed leases, are likely to be ranging lower, especially in submarkets impacted by significant A availabilities.

Stephen P. Jenco is client-services manager for Grubb & Ellis in Fairfield, NJ.