Commercial market going strong, especially in Mercer County, real estate agents say

Commercial market going strong, especially in Mercer County, real estate agents say

Just before the economy plunged into a recession and began a sluggish recovery, Hilton Realty bought an undeveloped lot in the Carnegie Center office complex on Route 1 in West Windsor.

Four years later, as the local market for office space began to show signs of strength, Hilton broke ground on an 88,000-square-foot, high-end office building at the 300 Carnegie Center tract. No tenants were signed up in advance, but Hilton was confident they would materialize.

“We started to see increased velocity, increased activity in the market,” Hilton assistant leasing director Matthew Malatich said. “We decided to start building the building and everything started to fall in place.”

Last year, well before the building was finished, Hilton announced its first tenant, Heartland Payment Systems, which now occupies more than 22,000 square feet in the building. VMS Fund Administration, Peapack Gladstone Bank, Advisors Asset Management, Moofwd and JP Morgan Chase Bank have all followed Heartland, filling up about 55 percent of the building. Malatich said he expects the building will be full by the end of this year.

Such performance has real estate developers and owners confident that robust times are ahead for the area’s commercial space and warehouse market, which also benefits from a well-educated work force and regional metropolitan areas. The vacancy rate in Mercer County for high-end, or Class A, office spaces dropped 1.1 percentage points last year to sit at an even 10 percent, based on a market report by Cushman & Wakefield, a commercial real estate company.

Hilton’s new building is commanding a premium rent, about $36 per square foot, a few dollars above the average rental rate for higher end commercial office space in the area.

The three-story office building features a modern granite and glass interior with sleek metal trim and a wall of windows that let light flood into the lobby. Hilton also included a fitness room with lockers and showers, and built the structure according to high environmental standards, Malatich said.

Despite the success of the building and the current strength of the market, local development of large commercial office buildings has been slow to pick up coming out of the recession. There has been little new construction of this type in the area other than the 300 Carnegie Center building, said Aubrey Haines, CEO at Mercer Oak Realty. And that slowness on the part of developers has contributed to a growing shortage of space.

“When you’re looking for smaller spaces you have a wide range of choices,” Haines said. “If you’re at 50,000 or 100,000 square feet, options are limited.”

While the recession pushed down demand for a few years, it also suppressed development.

“That creates more pent-up demand so when the market comes back they need a lot of space in a hurry,” Haines said. “There’s almost no new supply expected to come online.”

Demand is outpacing supply in the market, Haines said, but until rental rates for high quality office space increase it will be difficult to convince large banks to finance the development of new buildings. The suburban nature of the local market leads financiers to be hesitant to lend despite growing demand, he said.

As a result 300 Carnegie Center is the only newly constructed Class A office space to open in the area since 2009, he said. From concept to completion, it will take an average developer about 2½ to three years to produce a new building, Haines said, and with none currently under development it is unlikely that new space will be put on the market in the next two years.

Even large commercial tenants already in the area are going to be affected as many large leases expire in the next three years, Haines said. These tenants need to start thinking about where they will be in a few years and the effect this market will have on rental rates, he said.

“They have nowhere to go but up,” Haines said.

After remaining stable around the $30-31 per square foot mark over the past decade, Haines projects that the shortage of new space will push rates up toward $40 per square foot by 2020.

The market for industrial space in the area faces a similar dynamic of rising demand and limited supply, said Marc Petrella, a senior analyst with Cushman & Wakefield.

As the midpoint between New York and Philadelphia, and on a larger scale between Boston and Washington, D.C., the local industrial real estate market is in a promising position, he said.

The market, consisting largely of warehouses and manufacturing sites, is concentrated along the Turnpike in two submarkets surrounding exits 7A and 8A, Petrella said, and the area has seen a lot of growth and is primed for further expansion.

The 8A submarket, consisting of south Middlesex towns including Plainsboro and Monroe, has one new industrial development under way; a 450,000-square-foot building in South Brunswick. While this is a significant addition, it enters a submarket that has 68-million-square feet of warehouse space which already has 92 percent occupancy.

The 7A submarket is highly concentrated in Robbinsville, and while it is smaller than 8A it has seen high demand recently, as it has exceeded 1 million square feet in new industrial leases in each of the last three years.

“You keep hearing about all the companies bringing their operations back toward population centers,” Petrella said. New Jersey, with its dense population and surrounding metropolitan areas, is one of those centers, he said.

The market for industrial space in the area was weak through 2009 and 2010, but has recovered since 2011, he said. Vacancy in the warehouse market is about 8 percent currently, he said. The 1.2 million-square-foot Amazon warehouse under construction in Robbinsville is a promising sign for future industrial development in the area, Petrella said.

“The continued growth in ecommerce for traditional retailers is good for New Jersey just based on where New Jersey sits,” Petrella said.

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