Readers of this newsletter know how, over the last three years, we have chronicled the traumatic events affecting commercial real estate in the State of New Jersey. As the dark cloud of Covid has lifted, we are now observing the full scope of the tremendous wreckage in its wake, the effects of which are just coming into focus. What do we see?
Class A Office Space.
Commercial office space has traditionally been defined as Class A, top of the line space, and Class B more efficient space without the frills. Pre-pandemic, Class A office space was at or near full occupancy. Class A tenants consist mostly of the large well capitalized Fortune 500 companies. When Covid hit, these companies were able to quickly adjust to work from home, many without missing a beat.
The first thing we noticed after Covid hit was how these large Class A multi-story office towers became ghost towns and the offices inside were manned and operated by a handful of essential employees. Once the Virus had subsided, company executives began to cautiously encourage a return to the office, only to find that a majority of their younger employees preferred working from home. and some even refused to come back.
The effects of all this have been twofold. In order to encourage younger workers to return, companies have created a Hybrid model where some employees need only come into the office one, two or three days a week, and still others deemed non-essential can continue to work from home.
As the leases for Class A office space expire, we are finding that many large space users are downsizing, leaving large vacancies in the Class A market.
Class B Office Space
Class B tenants traditionally consisted of smaller companies in smaller office properties consisting of smaller tenants under 5,000 square feet. While many of these companies have also decided to work from home, the majority of them have decided to come back to the office. Some industries groups such as medical offices, accountants and financial firms have never left the office, and some are even continuing to grow keeping Class B office properties financially viable.
WINNERS AND LOSERS
We are now seeing clear results. Many Landlords of vacant single and multi-tenant occupied office properties have determined that their best option is to demolish these obsolete properties and are currently seeking municipal variances to redevelop the property for the on-fire industrial market. The clash between desperate developers and angry residents who don’t want this type of use in their towns is just beginning.
Another factor hitting Landlords is how the rapid rise in interest rates for variable rate commercial mortgages is resulting in rising carrying costs. There are many economists that are predicting that 2024 will be a year of real crisis as regional banks are forced by regulators to foreclose on non-performing assets.
The winners are those property owners that have low leverage, having paid down their mortgages over the years, so that they are well capitalized and able to retain their tenants and even attract new tenants through diligently maintaining their properties. As always, with commercial real estate, it is all about location. We find that some markets are thriving, like Jersey City due to the flight from Manhattan, or Metro Park which has one stop train access to New York City.
Over the years New Jersey has seen many cycles in commercial real estate and after each one after all the dust has settled, we have still come out stronger than before. We expect that we are going to see some real turmoil as the number of distressed properties increases in 2024, but in the end, I expect that we will see a strong future. We in the Garden State are survivors.
If you have questions about your future, why not give us a call, and find out why, at Dickstein Real Estate Services, “OUR DIFFERENCE IS YOUR ADVANTAGE®”.
Categorised in: Real Estate Markets