The commercial real estate market has been slowly improving across the nation, but when can we expect South Jersey to follow along?
Without a doubt, the biggest obstacle to the economic recovery of South Jersey is the credit crunch, and when that will ease enough to allow for an improved commercial real estate isn’t certain.
There was a time when the strength of a fluid economy kept things moving along, according to James Maley, mayor of Collingswood, chairman of the New Jersey League of Municipalities’ Economic Development Committee, and principal of Maley & Associates, a law firm that has represented a number of communities dealing with developmental issues.
But in the past few years, the swinging pendulum of the recession has so tightened up credit that it makes it very difficult to get financing for a commercial project that you don’t already have signed, sealed and delivered, he says.
“In the last 25 years, you needed to have 20 percent, 40, 60 signed leases” to get a building sold, Maley says. “Now you’ve got to have a large majority lined up, and there’s not the economic stability in enough businesses today that anybody is agreeing to be signed up to go into a building that’s not built yet.”
As the economy corrects, Maley says, creditors get into a position where they don’t have to lend money to anybody. That prevents another bubble economy, but it also freezes everything up, he says.
“The federal government is slowly revamping and rewriting rules to loosen that credit more,” Maley says. “I think local [and] state governments are all looking at ways to give incentives to help local businesses and commercial developers get over the hump.”
But even with those difficulties in mind, local real estate firms do believe—with some patience and perseverance—the next few years will bring significant improvements to the commercial landscape of the area.
For a clearer picture, look to the commercial real estate market
Commercial real estate encompasses three extremely balanced sectors in the region, says Marc Policarpo, senior vice president at the Binswanger realty group. They are: industrial, office and retail.
“You name the sector of the economy and there’s something going on,” Policarpo says. But Policarpo also notes that in South Jersey, the recovery of the commercial real estate market is lagging behind the national average in terms of its property vacancy.
At the end of 2012, the national property vacancy rate was about 9.2 percent; in South Jersey, that figure hit 10.1 percent (of about 142 million square feet of industrial space; the region has about a billion). Binswanger’s database tracks more than 19,000 industrial buildings in the greater Delaware Valley region; 3,300 of them are located in South Jersey.
On the office side, the national vacancy rate was 11.8 percent; in South Jersey, it’s 12.4 percent. In retail space, South Jersey comes in at about a 17-18 percent vacancy rate, lagging the national average of 11.9 percent.
“The trend for the last few years is that those rates are coming down by about a point a year since they peaked about three years ago,” Policarpo says, ”kind of like the way the economy is improving; not a lot, a little bit, but it’s improving.
“Until we started to grow jobs, our vacancy rate got worse,” he says. “The vacancy rates and the improvement on the industrial sector has been a little more dramatic, but that doesn’t always translate into jobs.”
In Camden County, where the majority of commercially viable land is already developed, recruiting new business can hinge on being able to redevelop an existing property, which Maley says is far more challenging than simply building on a parcel of land.
“There’s no magic wand to it, and every situation is different,” Maley says. “It’s much easier to build ...than retrofit an existing building. That ties into why you’ll see a lot of local governments offering a package of incentives to help it. Doing that redevelopment in the midst of other businesses, that’s much harder than taking the Garden State racetrack and converting all that. That’s a big risk too.”
Maley says municipalities have “always got to be hunting” for ways to repurpose antiquated, shuttered or otherwise vacant properties to improve conditions in their communities. Redeveloping big-box properties, like Walmarts, Home Depots and their predecessors, is “the next phase of the work we’re going to be doing,” he says. He points to a multimillion-dollar Robert Wood Johnson health system project in New Brunswick that is converting an old supermarket into a fitness center as an example of the ingenuity that will be needed.
A similar redevelopment project that Maley calls “a true mixed-use development” is taking hold in Glassboro across an area of roughly 20 blocks. Spurred on by the growth of Rowan University, the acreage includes a Barnes and Noble that has been built on the site, student housing, and a soon-to-be Marriott Courtyard hotel. Its next phase will be market-rate housing, all to help create a downtown atmosphere that combines the residential and commercial needs of the area.
A project of that scale not only gets shovels moving and puts people to work, Maley says, but it drives that intangible quality of public confidence that is so critical to economic recovery.
“Ninety-eight percent of what keeps this going on is the perception,” Maley says. “If people believe it’s going to be better, it is.”
Industrial up, offices down
Rick Whitesell is the president of Whitesell Construction in Delran, the largest South Jersey commercial real estate developer headquartered in the region.
He says the industrial side of the commercial real estate market has turned the corner, but that the market for office space is “still moving downward in sort of a recessionary trend.”
A couple of industries in South Jersey—namely companies like Lockheed Martin and Computer Science, and health care practices and billing centers—drive the office market in South Jersey, Whitesell says. Everything else is a spin-off or small-use site.
“Part of the problem we have is you take a large law firm in Philadelphia and 10 or 15 years ago, they might have made a commitment to South Jersey and actually grew the business in South Jersey,” Whitesell says. “When they start retracting, you know who goes first: the branches.
“Some may still have a presence in South Jersey, but they only have half the space and half the personnel as when times were more abundant,” he says. “We don’t tend to have the headquarter facilities that they do in Center City and suburban Philadelphia.”
Some of this urban shift is cultural, he says, as corporate centers like that of Comcast and the bigger headquarters downtown take root in Philadelphia. Although there’s some growth in educational campuses in South Jersey, the moves of schools like Rutgers and Rowan are nothing compared to the health care and university growth led by their counterparts across the river at Penn and Drexel.
“Would you rather work downtown and have access to the restaurants or work in South Jersey and drive someplace?” Whitesell says.
K.C. Isdaner, COO for The Bloom Organization, a Mount Laurel realty group, says that despite the suburban drawbacks, one of the benefits to maintaining office space in South Jersey is that “our market tends to never reach the highs of the best markets, but also we don’t experience the lows of the worst markets.”
Among the build-outs coming from the expansion of health care business in the region, Isdaner says, are projects like the Virtua Voorhees hospital campus and its wellness center in Moorestown, the new Lourdes outpatient Center in Cherry Hill, and Marlton’s Rothman Institute.
“There has been some good news in general with gains in employment in offices,” Isdaner says. “However, we are still waiting for these employment gains to create additional office demand.”
Scott Mertz, principal for NAI Mertz commercial realty, also of Mount Laurel, says where South Jersey can really take advantage is in warehousing and logistics. Its centralized location makes the region great for shipping and receiving from major eastern ports, and it’s what actually insulated the region from a lot of the downturn throughout the country.
“We didn’t hit the dramatic depths of some other regions, and then experienced a more gradual rebound,” Mertz says.
In 2012, he says, NAI Mertz did “a noticeable uptick in business,” bringing in its best single quarter of business in four years. That’s attributable to “a number of distressed assets coming available,” he says—a trend he expects to continue through 2018—as well as favorable economic policies from Trenton.
“The Christie administration has been proactive on attracting new business to New Jersey and retaining existing companies,” Mertz says. “The state offers a host of incentive packages that help to make it a desirable location for both corporations and small businesses. We’ve worked directly with several manufacturing firms that have benefited from these incentives.”
Growth in Burlington County
Some of the biggest industrial-use construction projects in the state are happening in Burlington County.
Among other projects underway is a half-million-square-foot distribution center Subaru is planning in Florence that Mertz says should be completed by June 2013.
“That’s a good sign, and that’s one of the first big projects to get underway in South Jersey,” Whitesell says, adding that “we’ve seen a couple customers come through the market looking for food-related buildings, which represents consumer distribution.”
“Even though manufacturing has diminished a great deal in New Jersey, distribution has expanded,” Whitesell says. “We’re through that warehousing recession and into recovery.”
Policarpo says that most of the build-out of the distribution and warehousing industry is trending toward bigger buildings of 500,000 square feet or more, and that there’s still available land along the 295 corridor where one can build these distribution buildings.
“To start going east away from the turnpike, you have a hard time getting zoning, water and sewer, and entitlements,” Policarpo says. “I don’t see the business industry moving east in New Jersey because of the Pinelands, open space, the road network to get from there.”
There’s big-box development in Gloucester County as well, Policarpo says, including the Pureland Industrial Complex and the LogistiCenter in Logan Township. Further south, he noted “significant industrial development along the Route 55 corridor in Vineland and Millville.”
But other than that, the farther away from the turnpike and 295 that you go, the harder it is to attract business, he says.
Whitesell agrees, adding that the use of existing space will be contingent upon brownfields redevelopment projects like those in Burlington Township and Cinnaminson, and sites that are “right in front of our noses,” like the former Pennsauken Mart.
“The new development will be in old places,” he says.
Policarpo foresees redevelopment as “absolutely a trend in the office sector,” particularly in places like Camden City, with projects like the Ferry Terminal Building, “the first privately funded office building built in Camden in four years.”
“The overall project that it sits in is called the Cooper’s Ferry, and that project can accommodate another 400,000 square feet of office space,” he says. “Campbell’s Soup has acquired the ability to build another 500,000 square feet of space around their headquarters [and] my understanding is they’re in the process of working with a planner to develop that site.”
No recovery without residential
According to Jeff Onofrio, director of renovation lending for AnnieMac Home Mortgage in Mount Laurel, the outlook for the 2013 South Jersey real estate market is in an upward trend, evidenced by the fact that area realtors saw a positive winter season. “With a warm winter and hopefully early spring, all our area needs is inventory and open minds to consider renovation lending into homebuyers’ and homeowners’ minds,” he adds.
Currently, Onofrio says the market has a lot of outdated but beautiful homes with great bones. “Good homes are on the market only for a short time and this is always a sign of the rising market," he notes.
Nancy Shumacher Stevens, broker-owner of Re/Max Power Central in Medford, says the credit crunch is still affecting the residential housing market, too; in many ways, that’s the indicator upon which all else hinges.
And like Onofrio, she agrees that positive signs are occurring, but more is needed. Despite “good, brisk activity”—as much as 20 percent more than a year ago by year’s end in 2012, she says—prices haven’t moved.
“We have a very large inventory, and because of that inventory, it’s taken a long time to get through it,” Stevens says. “Foreclosures and short sales in the rest of the country have been dumped on the market, and New Jersey has held them back. As long as we have a high inventory, our prices will remain flat.”
Stevens says the local residential market is expected to improve, but that the state has been affected by everything from Hurricane Sandy to foreclosures, short sales and uncooperative lending institutions.
“Even an apartment house that has four or five apartments in it, you have to have 30 percent, 25 percent down,” she says. ”People don’t have the down payment, but they have the income to support the purchase. They’re not looking at that.”
Stevens advises that homeowners who might be considering “foreclosures by design” should stick it out through the “glut of short sales and foreclosures” and watch for price improvements in the spring.
“Stay put, make your payments, and don’t ruin your credit for the next five years,” she says. “I feel that those signs are there that our values are going to come back maybe 2 percent a year, not 10 percent a year like they came down.”
Maley adds that when houses sell, it frees up the rest of the market, creating a domino effect.
“People buy that other house when they feel comfortable at their job,” he says. “They feel comfortable that they’ll be able to be employed, if not at this job, then another job. And all of them, as they’re buying their houses, they’re buying new things to go into their houses. It helps stimulate the economy, keep people working.
“It has a ripple effect,” Maley says. “Just like the recession, the dominos go the other way.”
Published (and copyrighted) in South Jersey Biz, Volume 2, Issue 2 (February, 2013).
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