Are you safely back in the office? That is the icebreaker question of the year that we pose to all of our clients and potential clients.

What we see, at this point are three distinct categories:

1. Work-from-home- is here to stay, and that means that around 25-50 percent of employees are now working from home with maybe just a skeleton crew working in an office.
2. We see that around 25 percent of companies have gone to a hybrid work schedule, with the hope that someday the employees may want to come back.
3. Around 25 percent of our clients are back in the office and growing. That’s right, we see companies that are growing.

So, what are the impacts of the new normal having on operating overhead and how should business owners be planning for the future? The answers here may surprise you.

To begin with, when 25-50 percent of tenants disappear, it would normally mean that there would be a hell of a lot of vacant space out there and the rents would be in a downward death spiral. I am here to let you know that the opposite is happening. How can this be?

It turns out that at the very time the office market is experiencing its great upheaval, the industrial market here in New Jersey is on fire. Warehouse space is at almost zero vacancy, and rents have been skyrocketing by almost 50 cents per square foot every six months. Class A industrial space is renting for over $14 per square foot and rising. For every vacant warehouse space there are a half dozen tenants competing for the space, driving the prices even higher.

To visualize this, let’s use the office market on Davidson Avenue in Somerset as an example. The office towers on Davidson Avenue were all constructed in the early 1980’s. These were mostly Class B three story buildings which were built to handle the new service business boom. The history of this street is a mixed one as vacancy rates have gone up and down over the years, and there were many bankruptcies by undercapitalized Landlords along the way. Today, we find that many of these buildings are now obsolete, particularly the older single user properties. Rather than try to upgrade the infrastructure, almost 50 percent of the developers on Davidson are planning to demolish them to repurpose the sites as distribution warehouse. Can you imagine that it is today more economical to raze a building than to retrofit the building? This is clearly something that I would never have predicted.

So, what are the results? In a recent survey for an office tenant that I conducted, I found there is almost zero space available in his size range, and the asking rents are starting to move up. Flat rents are gone. Base rents are increasing with annual bumps of 2-3% compounded.

The effect of all this, combined with new inflationary projections means that operating overhead is going higher, much higher as the older infrastructure gets slowly repurposed.

We are advising our clients to begin to focus on the new normal by evaluating their space needs early. For a confidential lease review, give us a call and find out why, at Dickstein Real Estate Services, OUR DIFFERENCE IS YOUR ADVANTAGE®.

Regards,
Lawrence Dickstein