NE Real Estate Business: December 14, 2016
In the office segment there has been plenty of news regarding Class A assets. Companies have been flocking towards upgraded space. Landlords have made significant capital expenditures to their buildings to attract and retain these tenants. We have seen parking decks being built, investments to achieve LEED certification and the addition of upgraded amenities, such as cafés, fitness facilities, day care centers, and shuttles to mass transit.
In the midst of these discussions, the Class B building seems to be getting lost. Class B office buildings do not have all of the bells and whistles of their Class A counterparts. However, this has not stopped them from experiencing a resurgence over the last few years. Current vacancy of Class B office space in the Northern New Jersey market is 13.4 percent. The vacancy rate has seen a steady decline from 15 percent at the end of 2014. The asking rents in the market average around $21.50 based on a gross number. The absorption of space over the last two years has been the best we have seen in more than 10 years. According to CoStar, 1.1 million square feet of Class B office space was leased in Northern New Jersey during 2015, and 2016 is trending higher.
The sales market for Class B buildings has been robust as well. Per CoStar, the total sales volume in 2015 was $648 million dollars. In 2016, the Northern New Jersey market is on a pace to match or slightly exceed 2015 totals. With asking sale prices averaging $150 per square foot and buildings being sold in the $110-per-square-foot range, investors are achieving a lot of value. With the size of the buildings, usually between 20,000 to 80,000 square feet, and pricing at these levels, Class B office building assets are typically owned by private wealth or by owner-occupied users whereas institutional groups own most Class A assets. This leads to a deeper pool of buyers for Class B buildings.
What is driving all of this growth? What we are seeing is the growth of small business. As the job growth figures indicate, the private sector is growing again. Smaller businesses are growing out of their spaces and looking for value. Many of these tenants are not big enough to take space in Class A buildings or they don’t have the need for that type of presence. We are also seeing start-ups entering the market again. The Blau & Berg Company has done many deals in the 1,000- to 10,000-square-foot range over the last 12 months. This seems to be a trend that will continue into the future based on job growth predictions and limited availability of new space.
The Class B office market in Northern New Jersey is just like the rest of the office market. You will find pockets with higher vacancies and lower rental rates. When evaluating these assets it is important to look at submarket conditions, rental rates, age of the buildings and local vacancy rates. The Class B office market in Northern New Jersey is strong. We look forward to seeing what the upcoming year will bring, and we are cautiously optimistic.