New Jersey Full Market Report (1Q2021)8 Apr 2021
Availability rates rise as rental rates drop
Office availability rates have risen 400 basis points since the first quarter of 2020 from 17.6 percent to 21.6 percent. Market rents dropped $.27 year over year to $29.38/sf. Absorption was negative for the third straight quarter.
Topic Spotlight- Medical office: Just what the doctor ordered in an uncertain office market
As the pandemic took hold during the first quarter of 2020, most people began a lockdown and rarely left their homes. This started a revolution of people working from home, shopping from home and seeing their doctors from home. As a result, there was a boom in telemedicine. While telemedicine existed prior to the pandemic, it was rarely used by patients and their doctors. To illustrate the incredible growth of this service, data from the University of Michigan healthcare system shows that in the months before the pandemic, they conducted around 400 telemedicine visits a month. In April 2020, that number rose to around 30,000, and by the end of May, they conducted around 40,000 visits.
This unbelievable phenomenon was aided by some changes in federal regulation, including the relaxation of the state licensing requirements, the equipment used, privacy concerns and how healthcare services are charged and reimbursed. As this trend continued throughout the pandemic, many experts believed that telemedicine would be here to stay even after the pandemic and that medical office building owners were going to suffer as a result. But recent leasing activity in New Jersey seems to dispel that hypothesis, at least for the time being.
Over the past few months, numerous health systems have signed large leases to expand their presence in the Garden State. Summit Medical Group agreed to lease 40,000 square feet at Seymour Redevelopment at the Wellmont Theater. The mixed- development project owned by Ironstate Development Company will include 200 multifamily units as well as retail and office.
Atlantic Health also leased new space. The Morristown-based health system opened a 28,000-square-foot urgent care facility at 142 Central Avenue in Clark. The new facility was the result of a $6 million renovation.
Englewood Health also joined the fray by making their largest investment in Hudson County. The Bergen County-based health system leased 75,000 square feet at Journal Square. They are hoping to capitalize on the influx of residents to the area due to numerous multifamily projects taking place in the area. They are expecting their three-floor space to include urgent care and primary care as well as some specialty services.
As we mentioned earlier in the report, St. Joseph’s Health announced earlier in the first quarter that they will be leasing an additional 80,000 square feet at 169 Minnisink Road in Totowa. Once both phases of this project are complete, the Paterson- based health system will occupy around 140,000 square feet.
The final deal we will highlight displaying the strong push by medical systems to continue to occupy large blocks of space is Cooper University Health Care’s lease of 165,000 square feet in the Moorestown Mall. The southern New Jersey/Philadelphia health system will take over space formally occupied by Sears and will open a specialty care facility. While this deal did not occur in northern New Jersey, we thought it was important to highlight as this might be the beginning of a trend that we see throughout the state, with many malls struggling and health systems need for large blocks of space.
If these past few months have been an indication, even with changes occurring to the way healthcare can be provided, the medical office market will remain healthy.
The vacancy rate seemed to have bottomed out, as rent continues to rise
The industrial vacancy rate was 2.5 percent at the close of the first quarter this year. This is the same rate it was during the first quarter of 2020. While NNN rents have risen to $10.03 per square foot. The market has experienced its eighth straight quarter of positive absorption.
Topic Spotlight- Will the rising cost of steel trip up the industrial market?
It is well known that the industrial market is very tight and has produced extremely high rental rates both in the New Jersey market and the rest of the country. These high rents have made the industrial sector very popular with investors and have led to an incredible amount of new construction over the past few years. Since 2017 there have been 35.7 million square feet delivered to the northern New Jersey market, with 9.8 million of that since the beginning of 2020. This incredible amount of building is not just in the northern New Jersey market. Since 2017 there has been 1.6 billion square feet of industrial space built nationwide, with 502.2 million of that since the beginning of 2020 and it seems like the building is not done yet. There is still a tremendous amount of new construction in the pipeline, with 9.9 million square feet under construction and another 26.1 million square feet proposed in northern New Jersey alone.
This remarkable amount of building, along with shutdowns of factories and supply chains over the year due to the pandemic, has created a shortage of many of the critical materials needed such as lumber, concrete, and steel. These shortages combined with the high demand have driven up pricing on all these materials over the past few months, in some cases greater than 25 percent since December 2020.
For many contractors and developers of industrial properties, the steel shortage and price increases have been the most significant concern. Steel’s strength and versatility has made it an essential and in some case irreplaceable part of the construction of industrial properties. The demand for the current stock of steel has become so great that there are even reports of steel mills telling customers that they are no longer accepting orders for 2021 and that there is a waitlist for 2022 orders. This could have a devastating effect on the timing of construction for developers who have failed to secure their steel supply.
Many believe that the new increased price is here for the long-term as a result of the strong demand both within the industrial and other sectors and that consumers will become accustomed to the new pricing. There are even some who believe that due to the current federal administration and the push to “greener” building practices that the cost of steel will continue to increase.
The process of making steel requires a lot of energy and involves many chemical reactions that produce numerous carbon emissions. There are estimates that steel production produces between 7 and 10 percent of the total carbon emissions on the planet. While there has been some experimenting with new more environmentally friendly processes, it is still a work in progress, and the processes that work are estimated to be between 16 and 25 percent more expensive. It remains to be seen if the market for more “environmentally friendly” steel picks up.
With the price of many construction goods including steel rising, the question is, what impact will this have on the end-user of the industrial product? With industrial rents already extremely high, will this push rents higher, or will developers accept a smaller yield? Only time will tell.
New Jersey Economy
The unemployment rate stays at 7.8 percent
As of February 2021, New Jersey’s seasonally adjusted unemployment rate was 7.8 percent. Except for a jump to 10.2% in November 2020, the unemployment rate has stayed about the same since September 2020. New Jersey’s unemployment rate is 160 basis points higher than the national unemployment rate of 6.2 percent. Both the state and federal unemployment rate looks to be plateauing. As the vaccine continues to roll out, we will see its effect on people returning to work, entering the job force and the unemployment rate.
Congress passes a third COVID-19 relief bill
In March, Congress passed the American Rescue Plan Act of 2021. This bill included a third direct stimulus payment which includes an extension of expanded unemployment benefits of $300 through September 2021, more money for the Paycheck Protection Program, expansion of the child tax credit, aid to assist in the testing and vaccine efforts, aid to local and state governments (New Jersey received an estimated $9.3 billion, including approximately $6.4 billion for the state and $2.9 billion to counties and municipalities), funding to assist in reopening schools, as well as many other provisions. The bill’s total cost was $1.9 trillion, bringing a total of the three COVID-19 relief bills to around $4.8 trillion (for reference, total outlays for the 2019 fiscal year were $4.4 trillion). Opponents of the bill have argued that it is too large and may have a long-lasting negative effect on the economy. It remains to be seen what short-term as well as long-term impact these programs will have on the unemployment rate and the economy.
Governor Murphy announced his budget for the 2022 fiscal year
Governor Murphy announced his budget for the 2022 fiscal year which begins in June 2021. This is the final budget before all 120 seats in the state legislature and the role of Governor are up for election. The Governor’s proposed plan calls for $44.8 billion in spending, including tapping into $4.4 billion of the state’s $6.3 billion surplus from last year’s budget. The state looks like it is in a better financial situation largely due to the $4.3 billion of borrowing included in last year’s budget as well as an improved revenue outlook.
Two of the proposal highlights include no new proposed taxes and full payment to the state’s pension fund.
The Governor has decided not to pursue new tax increases to income, sales, cigarettes, corporations, and other items he has pushed for in the past. The administration has stated that due to higher than expected tax collection, the state will add an additional $4.2 billion to its surplus, while the state Treasury Department is forecasting a 2.4 percent jump in state revenues.
The Governor has also decided to make a record contribution to the state’s public worker pension fund. For the first time since 1996, the state would make a 100 percent contribution totaling $6.4 billion. This is part of a plan by the Governor to remedy years of skipped or shortened payments to the pension system. Officials at the State Treasury have estimated that making this full payment will save the state around $860 million over the next 30 years.
Opponents of the proposed budget argue this budget will cause significant fiscal damage in the long-term and lead to tax increases in the future. They have said that the budget is not doing enough to make the state more affordable and that this is just an “election-year budget” that will need to be paid back down the road. Some have suggested paying down some of the state’s outstanding debt would have been a better use of the surplus.
As the state moves forward past the pandemic, the state will need to solve the demographic shift that is occurring in the country. More companies and residents are leaving the northeast for more business and tax-friendly states in the south and west. This migration has only increased as remote work has become more acceptable. New Jersey was ranked one of the top states that people moved out of this year. It remains to be seen what the final budget looks like and if it will stem the tide of people and companies leaving the state.
© 2021 Avison Young – New York, LLC. All rights reserved. E&OE: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.