Rail Stations Drive Demand

[longhaul]

http://online.wsj.com/article/SB10001424052702303848104576381873749553788.html

Rail Stations Drive Demand

By DANA RUBINSTEIN

As New Jersey slowly emerges from the economic downturn, its office market is beginning to transform into one concentrated around train stations.

Businesses have been leasing space in areas served by train stations at a higher rate than those only accessible by car, according to real-estate firms. The trend reflects demographic shifts and higher gasoline prices as well as changes in worker priorities.

For example, businesses are beginning to recognize that many employees care less about living in sprawling estates and more about living in diverse areas with restaurants and entertainment within walking distance, notes Robert Puentes, a senior fellow at the Brookings Institution Metropolitan Policy Program. "All these things are starting to add up and companies are very attuned to it," he says.

In the meantime, government policies are encouraging development near rail hubs. While the economic downturn has rendered development moribund throughout much of the state, 10 projects near train stations have been approved the state's Urban Transit Hub Tax Credit Program. The program has generated criticism, though, of Gov. Chris Christie.

The average vacancy rate in so-called transit hubs in New Jersey was 14.7% in the first quarter of this year, compared with 29.7% in areas not considered transit hubs, according to real-estate brokerage Jones Lang LaSalle. The report defines transit hubs as the 40 million square feet comprising office space in Newark, Elizabeth, Jersey City, Hoboken, Paterson, East Orange, New Brunswick, Trenton and Camden, Morristown and Metropark, all cities with rail service.

At the same time, asking rents in transit hubs were higher, averaging $27.43 compared with the rest of the suburban market's $23.51, according to the Jones Lang LaSalle report. Since 2009, more than 20% of all leasing has occurred in the transit hubs, compared with 15 percent before 2009.

Further, of the 52 leases larger than 100,000 square feet signed in New Jersey since 2008, 22 of them were in transit hubs.

Consider one of the biggest leases of the past year: the decision in April by electronics giant Panasonic to move its North American headquarters from Secaucus to Newark. The move, which is taking advantage of the state tax-credit program, is driven partly by Panasonic's desire to be near mass transit.

"We have literally 1,000 people driving cars every day," says Peter Fannon, Panasonic's vice president for technology policy. "The key element for us, which really brought the focus back to Newark, were the environmental benefits, specifically the ability to be in an urban center where there are housing, restaurants, hotels, and most importantly, mass transit facilities, all within a three- or four-block radius of our new location."

Office markets throughout the country are seeing similar changes as jobs slowly accrue. While most American office workers continue to work in the suburbs, statistics show that the recession hit suburban office markets harder than their urban counterparts and that suburbia is recovering more slowly.

New Jersey is different in that its entire office market is relatively suburban. But in this environment, there's a still growing demand for space in "mini downtowns" that are emerging around rail hubs and commuter train stops, says Bruce Katz, director of Brookings Institution Metropolitan Policy Program. "In New Jersey, it's not city versus suburban," he says. "It's more about density and compactness."

The changing office demand patterns come during a particularly bleak time for the New Jersey office market, still feeling the pain from the state's anemic economy. While the state finally began adding jobs in February, its recovery is taking longer than in most other states, according to Ken McCarthy, senior economist at Cushman & Wakefield.

New Jersey's poor performance contrasts sharply with the relatively strong growth of New York City, which is adding jobs much faster and seen its office vacancy rate drop to 10%, compared with 17.1% in northern New Jersey, according to Cushman & Wakefield. "New York has been on a roll for about a year and a half," says Andrew Merin, a New Jersey-based vice chairman for Cushman & Wakefield. "That's not the case in New Jersey.

If anything, the tenants out here are playing musical chairs."

But as the game is played in the New Jersey market, there are winners and losers emerging. The Hudson River waterfront is benefiting greatly from its proximity to Manhattan, as evidenced by Citigroup's expansion within the LeFrak Organization's Newport Office Center, bringing its total presence there to more than 400,000 square feet.

On the other hand the areas suffering the highest vacancy rates are those like Parsippany and Passaic County. Alcatel-Lucent's old 2-million-square-foot office campus in Holmdel, Monmouth County, has sat empty for close to five years.

Mr. Katz, of the Brookings Institution, said that the extensive rail network in parts of New Jersey will serve them well as the economy recovers further. "Transit will be one of the most competitive parts of the infrastructure for the next century," he says.