NEW JERSEY OFFICE MARKETFOURTH QUARTER 2016

REAL ESTATE OUTLOOK

TRENDLINES

5-YEAR TREND CURRENT QUARTER

VAC A N C Y

15.5%Slow but steady finish

A BSO R P T I O N

-105,001 SFAnnual figure was 1.8 million SF

A S K I N G R E N T

$26.16 PSFStrong year-over-year increase

R BA D E LI V E R E D

43,000 SFObsolete buildings being demolished

AV E R AG E O F F I C E SA L E PR I C E

$211.95 PSFHeadquarters sales drive activity

J O B G ROW T H

-2,350 jobsIncreases in hiring anticipated

Office Market Shines for Fourth Consecutive YearAnnual net absorption exceeds 2015 level

Companies Drawn to State’s Attractive Incentives

ECO N O M Y

Businesses expect continued increases in hiringThe general consensus is that the presidential election of Donald Trump inspires business and investor confidence, as evidenced by the immediate post-election stock market rally. However, the uncertainty of policy changes as well as the ability of Congress to work as a bipartisanship will help determine the direction of the country. A strengthening economy provides encouragement for prosperity as the latest indicator for U.S. GDP growth indicated a 3.5% increases, the highest rate in two years. In addition, despite the recent interest rate increase, as well as uncertainty of future increases, real estate in the United States is still considered a strong investment.

Though lagging 2016 levels, slow and steady growth continues in New Jersey. While continuing to set record levels of employment, much of the growth has been in low-paying jobs. There is still limited growth in the professional and business services sector, which are the predominant jobs that fill office space. Companies do expect to see continued increases in hiring, according to the annual New Jersey Business & Industry Association (NJBIA) Business Outlook Survey. Also, the State is addressing the issues related to the outward migration of baby boomers and millennials, as the former strengthens the economy with consumer spending while the latter will help grow business.

VAC A N C Y

Slow but steady finish to yearWhile the total number of lease transactions increased quarter-over-quarter, the market’s vacancy rate remained steady at 15.5%. Occupancy levels, while at the same level as the previous quarter, have improved steadily when compared to 15.9% year-over-year as 14 of 21 submarkets tightened during 2016. The market has also improved because outdated office buildings are being demolished to clear the way for higher and better use. Most recently, a +/- 500,000 SF office complex was demolished in Plainsboro to make way for +/- 800,000 SF of industrial product, the demand for which is much higher in that area of the state.

2 REAL ESTATE OUTLOOK NEW JERSEY OFFICE MARKET Q4 2016

NEW JERSEY OFFICE MARKETFOURTH QUARTER 2016

New Jersey Office Market Indicators by Class

PROPERTY CLASS INVENTORYRENTABLE AREA

DELIVEREDQUARTER NET ABSORPTION

ANNUAL NET ABSORPTION

DIRECT VACANCY

SUBLEASE VACANCY

TOTAL VACANCY

AVERAGERATE PSF

Class A 153,466,373 43,000 -594,569 888,793 15.2% 1.4% 16.6% $28.69

Class B 99,386,746 0 489,568 994,659 13.5% 0.2% 13.7% $22.25

New Jersey Total 252,853,119 43,000 -105,001 1,883,452 14.5% 1.0% 15.5% $26.16

A BSO R P T I O N

Tenants benefiting from available talent, incentives With tax incentives attracting companies from Manhattan, and top industries taking advantage of the state’s large talent pool and newly repositioned suburban assets, the office market experienced its fourth consecutive year of positive net absorption in 2016. Since the start of 2013, there has been approximately 8.0 million SF of positive net absorption in the market, with 2016 accounting for 1.8 million SF.

Companies continue to consider relocating operations to Jersey City in the Hudson Waterfront submarket from New York City. For example, a British financial services firm, Fidessa signed a 77,998 SF lease to relocate after being awarded a $31 million Grow New Jersey tax incentive. Meanwhile, women’s fashion retailer Tory Burch, which already occupies a large distribution facility in central New Jersey, has been offered an $11 million Grow New Jersey incentive package to relocate its back-office operations from Manhattan to the Hudson Waterfront.

A diverse cross-section of companies leased space in the suburbs during the quarter. Synchronoss Technologies Inc. expanded its footprint in Bridgewater to 118,691 SF. Also in Bridgewater, Allstate Insurance Company leased +/-63,000 SF at CenterPointe, an office park that has recently undergone a major capital improvement program. Electric utility company JCP&L is moving its regional headquarters from Red Bank to nearby Bell Works, the flourishing mixed-use redevelopment in Holmdel. Connell Foley decided to remain in Roseland, as the law firm is relocating to the recently modernized 56 at Roseland property.

Notable Lease TransactionsCOMPANY ADDRESS SQUARE FEET LEASE TYPE

Synchronoss Technologies 200 Crossing Boulevard, Bridgewater 118,691 Renewal/Expansion

Fidessa 70 Hudson Street, Jersey City 77,998 New

Connell Foley 56 Livingston Avenue, Roseland 71,000 New

UNEMPLOYMENT RATE

PAYROLL JOB GROWTH

11 14 15 16131207 08 09 10

NEW JERSEY UNITED STATES

-2%

0%

2%

-4%

4%

CAP RATES

NEW JERSEY UNITED STATES

11 14 151312 1607 08 09 10

8%

4%

10%

6%

SOURCE Real Capital Analytics

SOURCE Bureau of Labor Statistics

SOURCE Bureau of Labor Statistics

NEW JERSEY UNITED STATES

11 14 151312 1607 08 09 10

4%

0%

10%

2%

6%

8%

REAL ESTATE OUTLOOK NEW JERSEY OFFICE MARKET Q4 2016 3

RENTAL RATES

Higher asking rates in most submarketsAsking rents rebounded during the quarter, increasing to $26.16 PSF, compared to $25.97 during Q3 2016. The average is also the highest level since Q3 2008 and represents a strong increase when compared year-over-year to $25.56 PSF. The Hudson Waterfront, Parsippany, Short Hills/Millburn and Woodbridge/Metro Park submarkets highlight increases in rent averages. Overall, rents are higher both quarterly and year-over-year in two-thirds of the submarkets. Steady rent increases have turned the market to the landlord’s favor, somewhat. Concessions are still being offered but have been reduced in some situations. For example, when properties are redeveloped, the landlord has already made the upgrades and added the amenities needed to attract tenants, in many cases, therefore eliminating the need for additional concessions.

INVESTMENT MARKET

Investors flock to downtown markets Investment in high-quality, well-located assets with strong tenancy drove activity during Q4 2016. The largest acquisition occurred in Newark when the 973,000 SF PSE&G headquarters sold to New York-based Nightingale Properties for $174.5 million. Additionally in Newark, Panasonic’s new 337,000 SF headquarters, sold for $489 PSF. Both Fortune 500 firms have been mainstays in New Jersey, as PSE&G remained in Newark while Panasonic relocated from Secaucus to its newly constructed home in 2013. In Hoboken, one of the region’s hottest downtowns, Japanese investor Mitsui Fudosan America Inc. obtained a majority interest in Waterfront Corporate Center III. This property was developed by SJP Properties in 2014 and is already fully leased by multiple tenants. In the suburbs, Griffin Capital paid $350 PSF for 10 Sylvan Way, Parsippany, a 125,735 SF property fully-occupied by global animal health company Zoetis.

NEW JERSEY NET ABSORPTION AND VACANCY

NEW JERSEY AVERAGE ASKING RENTAL RATES

0

1

3

2

-3

-4

-2

-1

5

4

10%

8%

6%

4%

2%

0%

18%

16%

14%

12%

NET ABSORPTION MILLION SF VACANCY

1607 08 09 10 11 12 13 14 15

$20

$26

$28

$24

$22

$30

NORTHERN NEW JERSEY CENTRAL NEW JERSEY OVERALL NEW JERSEY

07 08 09 10 11 12 13 14 15 16

SOURCE: Costar

SOURCE: Costar

OUTLOOK

Job, wage growth needed to retain residents, businessesNew Jersey continues to experience job growth, but lags the nation’s pace of economic expansion. It remains somewhat of a financial struggle for some companies and residents to remain in the state, in large part due to cost of healthcare, property taxes and cost of doing business. In fact, New Jersey led the nation in move-outs in 2016, according to the recent National Movers Study by United Van Lines. On a more positive note, businesses anticipate rises in hiring, profits and sales, which spurs optimism for increased wages. Growth could be tempered in the short term, however, as while the next president has been decided, New Jersey still has to contend with an upcoming gubernatorial election in 2017, as well as state senate and general assembly elections. n

Copyright © 2016 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar, New Jersey Department of Labor and Workforce Development, Real Capital Analytics, U.S. Bureau of Labor Statistics (BLS) and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.

NEW JERSEY OFFICE MARKETFOURTH QUARTER 2016

New Jersey Office Market Indicators by Submarket

SUBMARKET INVENTORYRENTABLE AREA

DELIVEREDQUARTER NET ABSORPTION

ANNUAL NET ABSORPTION

DIRECT VACANCY

SUBLEASE VACANCY

TOTAL VACANCY

AVERAGERATE PSF

Bergen Central 8,276,126 - 27,566 -26,438 13.3% 1.8% 15.1% $26.93

Bergen East 10,655,161 - 17,209 33,767 11.0% 0.9% 11.9% $25.80

Bergen North 11,628,463 - 157,434 668,978 9.9% 1.2% 11.1% $26.91

Brunswick 4,677,320 - -25,879 59,034 13.5% 0.3% 13.8% $27.35

Edison South 3,930,922 - -12,665 21,986 12.9% 0.8% 13.7% $22.26

Hudson Waterfront 23,942,734 - -59,845 -69,497 9.8% 1.9% 11.7% $37.63

Meadowlands 7,016,900 - 20,918 -18,825 16.2% 0.8% 17.0% $24.84

Monmouth East 13,814,505 - 146,599 251,592 18.5% 0.4% 18.8% $24.15

Monmouth West 3,003,208 - 60,390 63,843 9.0% 0.0% 9.0% $23.05

Morris West 3,750,303 - 19,394 -20,776 33.6% 0.1% 33.7% $21.70

Morristown Region 13,299,741 - -126,186 125,928 16.8% 1.0% 16.8% $27.82

Newark/Urban Essex 19,258,986 - 22,885 -58,811 14.9% 0.4% 15.3% $29.06

Parsippany Region 20,011,114 - 196,766 304,724 19.0% 1.9% 20.9% $26.14

Princeton Area 34,623,117 - -582,439 -603,211 14.8% 0.7% 15.6% $26.49

Route 280/Suburban Essex 10,408,702 - -32,379 13,478 14.6% 0.1% 14.7% $27.38

Route 287 South 11,903,916 - 56,294 266,046 15.6% 0.3% 16.0% $19.64

Short Hills/Millburn 4,655,750 -25,014 781,287 3.8% 0.4% 4.2% $34.55

Somerset/I-78 East 22,824,863 - -13,329 54,705 10.0% 2.1% 12.2% $27.11

Union/Parkway 5,914,539 - 56,390 -55,780 15.1% 0.1% 15.2% $23.05

Wayne/Paterson 12,490,417 - -8,379 8,077 22.4% 0.2% 22.6% $21.61

Woodbridge/Metro Park 6,766,332 43,000 -731 83,345 15.7% 0.8% 16.5% $31.61

TOTAL 252,853,119 43,000 -105,001 1,883,452 14.5% 1.0% 15.5% $26.16

METHODOLOGY

The information in this report is the result of a compilation of information on office properties located in northern and central New Jersey. This report includes single-tenant, multi-tenant and owner-user Class A & B office properties 10,000 SF and larger.

CONTACT

Matthew DollyDirector of Research973.947.9244matthew.dolly@transwestern.com

T 973.947.9200 F 973.947.9199www.transwestern.com/northeast

300 Kimball Drive, 1st FloorParsippany, NJ 07054