A Wave of Significant Transactions Energizes New Jersey s Office Market

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1 MARKETVIEW New Jersey Office, Q3 16 A Wave of Significant Transactions Energizes New Jersey s Office Market.4% Lease Rate $25.40 PSF Net Absorption 268,107 SF Leasing Velocity 2,782,513 SF Arrows indicate change from previous quarter. The prolonged economic recovery has forced a transformational change in New Jersey s office market, resulting in a modified new normal for leasing velocity that has persisted until this quarter. As the market transitions, year-to-date demand reflects a level of activity that hasn t been seen since the Great Recession of 07/08. Q3 16 marked the strongest quarter of leasing velocity since 07. The 2.78 million sq. ft. of leasing was driven by an anomalous number of large deals twelve new lease transactions of more than 50,000 sq. ft. each, totaling 1.90 million sq. ft. and accounting for 68.2% of overall velocity. Demand for Class A space drove much of the quarter s activity. Class A properties captured 85.0% of new leases completed during the quarter, which is notable given that Class A properties account for only 55.5% of total office inventory. Allergan committed to the entire building at 5 Giralda Farms in Madison (465,000 sq. ft.), icims signed a lease for a substantial portion of the available space at Bell Works/101 Crawford s Corner Road in Holmdel (342,375 sq. ft.) and Mallinckrodt Pharmaceuticals will build out a new campus at Route 6 in Bedminster (232,998 sq. ft.). While this healthy leasing should result in strong absorption, the quarter s 268,107 sq. ft. of absorption fell short of expectations, with new supply greatly offsetting the positive momentum in leasing velocity. This was led by Valeant Pharmaceuticals adding Figure 1: Historical Rates vs. Asking Lease Rates (%) 25 Asking Lease Rate ($/SF) Q3 16 Asking Lease Rate Source: CBRE Research, Q3 16. Q3 16 CBRE Research 16 CBRE, Inc. 1

2 310,000 sq. ft. of sublet space to the market at 300 Somerset Corporate Boulevard in Bridgewater. New Jersey has maintained a steady average asking lease rate; however, the market witnessed a slight falloff this quarter due to an uptick in sublease space and the removal of the premier 5 Giralda Farms from the market. The state s average asking lease rate is $25.40 per sq. ft. $0.16 less than that of the previous quarter, and just $0.41 below the peak rate set in 07. Submarkets with a higher concentration of top-quality product experienced the greatest rent growth this quarter. New Jersey s hottest submarket, the Waterfront, recorded a record $2.50-per-sq.-ft. increase. The Grow NJ Assistance Program continued to stimulate market activity this quarter. Tax incentives were awarded to 68.8% of transactions greater than 50,000 sq. ft., driving a total of 1.65 million sq. ft. of activity. With this incentive program sunsetting in July 19, occupiers will be increasingly pressured to evaluate their real estate strategy before eligibility ends. CBRE is currently tracking more than 4.80 million sq. ft. of active requirements set to land in Q4 16. As 16 winds down, leasing velocity is poised to maintain momentum, with real potential to break the eight-million-sq.-ft. mark a velocity not seen since 07. Figure 2: Q3 16 Notable Transactions Size Tenant Address City Type 465,000 Allergan, Inc. 5 Giralda Farms Madison Lease 339,327 icims 101 Crawfords Corner Road Holmdel Lease 232,998 Mallinckrodt, Inc Route 6 Bedminster Lease 168,156 Ernst & Young LLP 121 River Street Hoboken Lease 153,000 Verizon Wireless 290 West Mount Pleasant Avenue Livingston Renewal Source: CBRE Research, Q3 16. LEASING VELOCITY Q3 16 marked New Jersey s strongest quarter of leasing velocity since the beginning of 07, with 2.78 million sq. ft. of leasing outpacing the previous quarter s by 28.6%. Three submarkets surpassed the 450,000-sq.-ft. velocity mark this quarter: the Waterfront (563,472 sq. ft.), Morristown (510,886 sq. ft.) and Route 287/78 Interchange (451,300 sq. ft.). Velocity was driven by numerous large deals, including Allergan s fullbuilding lease at 5 Giralda Farms in Madison (465,000 sq. ft.), icims s market-making deal at Bell Works in Holmdel (342,375 sq. ft.) and Mallinckrodt s commitment to Route 6 in Bedminster (232,998 sq. ft.). Figure 3: Historical Leasing Velocity MSF Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Source: CBRE Research, Q3 16. Q2 16 CBRE Research 16 CBRE, Inc. 2

3 NET ABSORPTION As the result of strong leasing activity, New Jersey recorded 268,107 sq. ft. of absorption marking the second consecutive quarter of positive growth. Morristown led the way, recording a significant 460,230 sq. ft. of absorption. Momentum was slightly suppressed by the abundance of sublet space that hit the market this quarter. Valeant Pharmaceuticals put on 310,000 sq. ft. of sublease space at 300 Somerset Corporate Boulevard, while Greater Monmouth County saw more than 250,000 sq. ft. of sublease space come to market. Figure 4: Historical Net Absorption MSF Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Source: CBRE Research, Q3 16. AVAILABILITY The state s availability rate improved slightly this quarter, down basis points (bps) to.4% the lowest level since the beginning of 09. Morristown recorded a 500-bps decrease in the availability rate as a result of Allergan s lease, while Montvale/Woodcliff Lake s availability rate declined by 430 bps, with the help of Sharp Corporation and its new lease at 100 Paragon Drive in Montvale (84,667 sq. ft.). The Waterfront and Chatham/Millburn/Short Hills recorded a slight increase in availability rates, now 14.5% and 11.8%, respectively. Figure 5: Historical % Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Source: CBRE Research, Q3 16. AVERAGE ASKING LEASE RATE The average asking lease rate in New Jersey fell off slightly in Q3 16 for the first time in three years, edging down to $25.40 per sq. ft. largely a result of an increase in lower-priced sublet space. The Waterfront submarket once again topped the list of the most expensive submarkets, with a record rate of $37.83 per sq. ft. up $2.50 quarter-over-quarter. Chatham/Millburn/Short Hills ($31.52 per sq. ft.) and Montvale/Woodcliff Lake ($27.15 per sq. ft.) were also among New Jersey s most expensive submarkets. Figure 6: Historical Average Asking Lease Rate $/SF Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Source: CBRE Research, Q3 16. Q2 16 CBRE Research 16 CBRE, Inc. 3

4 Figure 7: Q3 16 Market Statistics Submarket Market Rentable Area Rate (%) Avg. Asking Lease Rate ($/SF/Yr) Leasing Velocity Net Absorption Orange/Rockland 2,553, , ,067 3,578 Palisades 4,950, , ,9 41,838 Montvale/Woodcliff Lake 3,802, , , ,397 Route 17 Corridor 3,317, , ,527 (2,574) Central Bergen 5,929,728 1,590, ,658 (30,234) Route 23/Paterson/Wayne 5,054,795 1,155, ,241 75,607 Waterfront 19,285,592 2,788, ,472 (322,905) Meadowlands 5,327,778 1,126, ,439 47,214 Urban Essex 12,539,297 2,546, ,476 (11,597) Suburban Essex/Eastern Morris 8,155,012 1,439, ,541 (7,817) Parsippany 14,685,314 4,224, ,302 (126,293) Morristown 9,319,549 2,276, , ,230 Western I-80 Corridor 1,711,865 1,224, (9,216) Chatham/Millburn/Short Hills 899, , (11,242) Northern New Jersey Total 97,533,366 21,553, ,599, ,986 Parkway Corridor 9,442,034 1,672, ,789 (10,439) Route 287/78 Interchange 19,521,369 2,732, ,300 (53,793) Western Route 78 2,434, , Route 287/Piscataway/Brunswicks 8,795,640 2,384, ,490 62,671 Greater Monmouth County 4,821,370 1,248, ,071 (18,993) Princeton 14,231,068 2,277, ,880 15,675 Central New Jersey Total 59,245,831 10,504, ,182,530 (4,879) New Jersey Total 156,779,197 32,057, ,782, ,107 Source: CBRE Research, Q3 16. Q2 16 CBRE Research 16 CBRE, Inc. 4

5 CONTACTS William Forcello Research Manager william.forcello@cbre.com William Bender Researcher william.bender@cbre.com 18 CBRE OFFICES 19 Saddle Brook Park 80 West, Plaza Two 250 Pehle Avenue, Suite 600 Saddle Brook, NJ Orange/Rockland 2. Palisades 3. Montvale/Woodcliff Lake 4. Route 17 Corridor 5. Central Bergen 6. Route 23/Paterson/Wayne 7. Waterfront 8. Meadowlands 9. Urban Essex 10. Suburban Essex/Eastern Morris 11. Parsippany 12. Morristown 13. Western I-80 Corridor 14. Parkway Corridor 15. Chatham/Millburn/ Short Hills 16. Route 287/78 Interchange 17. Western Route Route 287/Piscataway/ Brunswicks 19. Greater Monmouth County. Princeton East Brunswick Two Tower Center Boulevard, th Floor East Brunswick, NJ Florham Park 100 Campus Drive Florham Park, NJ To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at: 16 CBRE, Inc. Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.