Since we like to bring together panels of experts in their fields, we asked a half dozen of the region’s top commercial and industrial real estate gurus to share their thinking on a couple of subjects that we’ve been pondering.
  We asked them, among other things, to help us gauge the regional market, as well as the existence (or not) of a commercial real estate “bubble,” where new tenants are coming from, their predictions on new “hot spots,” the impact of the PATCO extension into Gloucester County, and the market for investor-owned properties here.
  Making up our panel were:
  • K.C. Isdaner, The Bloom Organization
  • Marc Isdaner, Colliers Lanard & Axilbund
  • Tony Ewing, Liberty Property Trust
  • Scott Mertz, NAI Mertz
  • Bill Pounds, WHPounds Commercial Real Estate
  • James Whitesell, Whitesell Construction Co.
  First, we asked each of our experts to describe his own organization.
  K.C. Isdaner describes The Bloom Organization as “a creative and flexible group of people with great strength, stability and expertise, is one of the region’s largest privately owned property owners.  With over 60 years of experience, our in-house architectural, engineering, construction, marketing and management personnel guarantee the fulfillment of all your real estate requirements.”
  Marc Isdaner describes Colliers International “as the world’s second largest commercial real estate firm employing over 15,000 people in 480 offices in 61 countries.  We provide a full compliment of real estate solutions to clients who buy, sell, lease, develop and invest in commercial real estate. With the strength and stability of a local market leader and the resources of real estate specialists worldwide, we bring service delivery to a new standard of excellence and accelerate the success of our clients.”
  Ewing describes Liberty Property Trust, which is headquartered in Malvern, PA “as the nation’s largest publicly-traded (NYSE: LRY) office and industrial real estate company with a market capitalization of over $6 billion, 740 office and industrial properties totaling 78 million square feet in 20 markets in the US and UK, and a leader in the development and management of sustainable real estate.”
Mertz describes NAI Mertz, which is headquartered in Mount Laurel, “as one of the largest brokerage firms in Southern New Jersey and consistently captures a large percentage of the market share.  With offices in Philadelphia and Bucks County, along with Wilkes-Barre, PA, we have earned a reputation for outstanding market knowledge, hard work, and proven results.”
  Pounds describes WHPounds, which is headquartered in Moorestown, as “a firm founded on the philosophy to service mid-size companies in the Southern New Jersey market using.  Our professionals can offer market expertise while engaging the services of valued partners in the architectural, law, construction and engineering fields to offer a complete cycle of commercial services. WHP prides itself as a boutique regional firm that has been providing a complete range of services for over 15 years:  tenant representation, asset leasing services, investment sales, development for over 20 years to a list of clients that amounts to over 5 million square feet.”
  Whitesell describes Whitesell Construction Co., Inc. “as southern New Jersey’s largest privately owned real estate development company. Whitesell owns and manages 8.7 million square feet of commercial office and industrial space, proudly provides real estate services to over 250 companies, and has participated in the southern New Jersey commercial real estate market for over a half- century.”
  Next, we offered each of our panelists an opportunity to respond to all or some of six questions. As usual, not everyone responded to every question. Here’s what our experts had to say:
  1. (a) How does the commercial and industrial real estate market in South Jersey differ from the overall Delaware Valley (3 SJ counties, 5 SE PA counties and New Castle County in Delaware) and national markets in stability, available space, sales volume, sales price, and rental price per square foot.
  • Marc Isdaner: Southern New Jersey, and the surrounding regional markets, had an increase in industrial vacancy over the last 12 to 18 months.  However, Southern New Jersey’s vacancy, at 9.5%, remained below the average of the Pennsylvania Counties (9.3%) and well below New Castle Delaware at 13.4%.  There was some large tenant instability, particularly from retailers. The investment market has remained stalled.   There was user activity in the market, but less than in previous years.  Sale prices have decreased by approximately $10.00 per square foot, but the limited number of sales has made it difficult to establish a clear pricing trend.  Modern, well-located, user buildings have held their value. Asking rents have decreased 10% to an average of $4.00.  Overall, tenants are looking to improve their bottom line by reducing costs, and have become more aggressive in negotiating for lease discounts and incentives.  Landlords such as Liberty Property Trust, Bloom, Whitesell and Korman have been working hard to maintain and attract tenants. 
  • Scott Mertz: South Jersey’s fortunes are tied inexorably to the regional economy.  Although there are subtle differences in metrics from one submarket to another there is general consistency across property types.  Industrial properties tend to be the strongest performers today, followed by office.  Retail has been hit hard by the recession.  Hospitality properties have suffered more adversity than others. If there is one factor I see on the industrial side it’s that leasing and sales activity has increased in the last several months for smaller units (below 50,000 SF). For unit sizes above that, inspections have just started to increase.  Hopefully this will lead to completed sales and leases in the near future.  Speculative development for all practical purposes has been curtailed, and thus companies with requirements that cannot be satisfied by existing market inventory will increasingly have to pursue a design/build solution.
  • Bill Pounds: Generally speaking, the Southern New Jersey market is the last to exhibit the effects of the economy, so it is during this downturn.  The current snapshot indicates Southern New Jersey has pretty much hit bottom with slow recovery over the next 24 months.  The other Delaware Valley markets are about 6 months ahead of Southern NJ.  Vacancy rates are rising, rental rates are falling and there is negative absorption in all markets, however SNJ maintains a greater spread.  Rental rates have fallen the most in the Class A office sector as institutional Landlords have dropped rates in order to compete for the few larger tenants in the market.  This has caused the Class B product to have the largest vacancy within the classes as Tenants have been able to upgrade to better buildings while being able to take advantage of better rental rates.  Of the three Delaware Valley markets, the Delaware office market has been the most stable; it is the only market that has had positive absorption through 2009.  The industrial trends are similar to the office trends in all markets except Delaware.
  • James Whitesell: When you look at the national market, enclaves of industry exist in different regions relative to state incentives offered, labor pool, proximity to supply chain, markets they serve, etc.  When a major blow to a specific industry occurs, regional markets can be affected due to the concentrations enabled by the determinants above rendering more available space, lower rent, etc. South Jersey differentiates itself from other regions due to its largely varied service industry base which tends to be self-supporting. Many of the companies we serve as a Landlord come from within our region. We do not see any one particular industry dominating our area and therefore, massive rental rate spikes or reductions are not the norm. Our stability is also relative to the educated labor pool produced by local colleges and universities and the fact that South Jersey is less than a day’s drive to ¼ of our country’s population.
  1. (b) Do your answers differ significantly if we look at Class A, B, and C space separately? Or if we look at commercial separately from industrial space?
  • K.C. Isdaner: No they do not.
  • Marc Isdaner: With fewer industrial tenants in the market, particularly those requiring 100,000 square feet and greater, there has been increased competition.  Rent discounts and incentives such as free rent have made it more difficult for owners of Class B and C buildings to compete, and have had to drop asking rents even further. 
  • Tony Ewing: One of the most attractive aspects of both the office and industrial markets in South Jersey is the relative stability when compared nationally.  Though South Jersey’s real estate market experiences cycles through highs and lows, many fundamental variables (occupancy levels, rental rates, sales prices, etc.) tend not to experience dramatic peak-to-trough disparities, suggesting a relatively stable environment.  Current data indicates that South Jersey, like the broader suburban Philadelphia market,  is currently experiencing vacancy levels in the 14% -15% for office and 8% - 9.5% for industrial.  Rent levels throughout the greater Delaware Valley have decreased substantially.  Both suburban office and industrial rents are down 20% - 25% from their highs throughout the region, but appear to be stabilizing since demand has begun to creep upward. The investor sales market is virtually nonexistent, and most recent sales are to owner-occupants of buildings.   The key factors to successful sales include a buyer’s ability to finance, and the ability to close the pricing gap between buyer and seller (distressed or not). Even with non-investor sales, prices are low by historical measure.
  2.  Is there a commercial real estate bubble...nationally, regionally, locally? If there is, what are the chances that it will burst?
  • K.C. Isdaner: I am not sure the “bubble” applies to the commercial real estate in the way it did with the residential market.  There are definitely negative pressures on commercial landlords due to economic conditions at that took hold over the last 18 months.  The big concern is when loans mature and value has been significantly decreased.
  • Marc Isdaner: The real estate bubble burst in late 2008.  The collapse of the residential market and subsequent drop in consumer spending had a negative impact on the retail, building products and automotive sectors, three significant demand drivers for industrial space in this region.  Regionally, the industrial market is better than other national markets because of limited speculative construction. 
  • Tony Ewing: Clearly there was a time of irrational exuberance in real estate and many of the financial products derived from the financing and trading of these assets.  In the wake of this activity, today’s real estate fundamentals are poor: rents are down, sales prices and volume are down, vacancy is up, and financing is difficult to secure.  If there was a bubble, it has deflated, and the market may begin to move in a more positive direction
  • Scott Mertz: To the extent there was a “bubble” it has already burst.  Transaction volume declined markedly in 2009 and has been slowly rebounding.  Values have adjusted relative to demand and supply.
  • Bill Pounds: There is no real estate bubble in any major market.  In fact, some markets have a long way to go.  Until the economy and employment improve, I do not expect any significant improvement.  Additionally, the questionable values in real estate assets are a major issue in conjunction with the billion + in mortgage debt coming due over the next 24 months.
  • James Whitesell: A parallel exists between commercial and resident markets: those who bought at the height of market and arranged financing on those valuations now contend with payments exceeding current valuations. For those looking to sell, refinance, or find lessees, the competitive landscape is filled with those not pressed to become loss leaders to stay alive. The bubble bursts when loss leaders go into default on their obligations.
  3. Is the tri-county region (or any other part of SJ) continuing to see an influx of tenants for whom North Jersey or even Exits 7, 8, and 8A are too expensive?
  • K.C. Isdaner: We have not seen the influx of tenants from North Jersey.  Our rents are lower!
  • Marc Isdaner: For bulk requirements, Southern New Jersey had historically been a lower cost alternative to Central New Jersey.   However, there is surplus of modern space and deep rental discounts in markets like Exit 8A and 7A.  With leases at $3.00 for new buildings in Central Jersey, it is hard  for second generation facilities in South Jersey to compete. 
  • Tony Ewing: We’ve not historically seen a great influx of tenants into South Jersey exclusively due to higher rental rates from Central or North Jersey.  In fact, at this time, industrial parks at Exits 7, 8, and 8A are suffering from sizeable vacancy due to considerable construction met by tepid demand.  Rental rates in these locations have decreased substantially as landlords endeavor to fill the spaces and lure tenants from all parts south, north, east, and west!
  • Bill Pounds: There is no influx of tenants from mid to north Jersey.  At this point, the dearth of tenant requirements is the problem not the cost.  Tied with the cost of doing business in NJ, we are seeing companies choosing less expensive areas when given a choice.
  4. What are the next hot spots for commercial and industrial growth in this region? Exits 10 or 4 of 295? Any of the tech parks? Motor Sports Park? Other?
  • K.C. Isdaner: My crystal ball is unclear at this time.
  • Bill Pounds: The next hot spots will be areas providing redevelopment opportunities of older environmentally tainted properties.  These would include inner city, obsolete warehouse, office parks and multi-family housing projects.  Access to major highways, tax abatements and favorable financing will be key factors.
  5. What will a PATCO or RiverLINE extension into Gloucester County mean for the commercial/industrial markets here?
  • K.C. Isdaner: Any expansion of commuter rail lines will provide greater access to employment in areas that potential employees had no access to before.  This will definitely have a positive impact.
  • Bill Pounds: I do not believe Patco or Riverline extensions will do much for commercial/industrial development, unfortunately.  Until a much more comprehensive and well planned system is devised as have been in other metropolitan areas, the public will continue its habit of using the automobile.
  • James Whitesell: A main criteria of site selection for commercial/industrial companies involves the availability of qualified labor. So essentially, this type of infrastructure investment would enable employers to have greater reach to a deeper labor pool. In addition to The Haines Center’s NJ/PA Turnpike accessibility, the RiverLine Park & Ride Station in Florence has acted as a catalyst in the growth and desirability of our corporate park. The companies we serve at the center have employees utilizing the RiverLine everyday.
  6. Is there any significant market in this region for investor-owned commercial or industrial real estate?
  • K.C. Isdaner: Yes, opportunities are available.  Buyers need to be creative and have cash while sellers need to be realistic.
  • Scott Mertz: Yes, investor-owned real estate by REITs, institutions and local entrepreneurs represent a significant portion of our market.  Although investor sales activity is virtually non-existent at the moment, we do anticipate that the market will return in the next 12-18 months.  Historically, investors have been attracted by the economic stability and population base of our region.  These drivers should continue to attract investment once the capital markets return.
  • Bill Pounds: There will not be a significant market for the traditional investor for some time.  There are spot opportunities for the sophisticated investor.