NEWS

NEW RETAIL SUPPLY IS LIMITED, DRIVING DOWN VACANCIES

The dense markets of northern and central New Jersey are showing some encouraging signs of momentum. Over the past 18 months, retailers have flocked to places like Paramus, Millburn, Wayne, Totowa, Springfield/Union, Livingston, East Hanover and Jersey City/Secaucus, to name a few. They are well aware that the major malls and retail corridors of Northern New Jersey, in particular, draw lots of traffic from nearby New York City. The pace of new construction has been sluggish in part because lenders now demand equity stakes of around 40 percent on projects that used to be financed at 70 or 80 percent. Therefore new supply is limited, which is helping to push up rents and drive down vacancies.

In the northern and central parts of the state, in fact, the vacancy rate now stands at about 10 percent—a big improvement over the 20 percent average of 2010. Paramus, the state’s top retail market, has seen quite a nice recovery. Here, rents of smaller stores of less than 3,000 square feet now range from $35 to $60 per square foot. At stores of 5,000 to 10,000 square feet, space is leasing for between $30 and $40 per square foot. Paramus’ medium boxes, which range in size from 20,000 to 30,000 square feet, are seeing healthy numbers but quite a bit more rental-rate variability (while deals of $11 or $12 are not unheard of, most of these midrange spaces lease for a respectable $20 to $30 per square foot). Ground rents for the largest spaces in the market—the 100,000-square-foot behemoths—typically run between $8 and $12 per square foot.

Expanding tenants include New York-based supermarket chain Fairway Supermarket; Connecticut-based supermarket chain Stew Leonard’s, which is mulling whether to bring its 65,000-square-foot concept into New Jersey; and a host of QSR chains, including Five Guys Burgers and Fries, Smashburger, Chipotle, Qdoba—you name it. Zinburger, which now has a bustling location in Clifton, is a good example of what these chains offer to those who are tired of fast food. Health clubs are another fast-growing category. Equinox, a higher end example charging up to $125 a month, as well as its smaller, lower-priced concept called Blink, has been very active in this market. Retro Fitness, Planet Fitness, and mid-tier mainstays like LA Fitness continue to expand as well.

Despite this growth, however, there are challenges. Competition from online retailing, for example, clearly is part of the reason Best Buy, Staples and B.J.’s Wholesale Club are shrinking their footprints around New Jersey. Known for its 20,000-square-foot prototype, Staples is even squeezing into spaces half this size. B.J.’s still operates cavernous boxes, but in select markets it is considering opening 65,000-square-foot stores.

It seems likely that rents, vacancies and property values will continue to improve into 2013. It will be interesting to watch what happens with newer projects like 99 Hudson Street in Jersey City, Bergen Town Center in Paramus and Xanadu Meadowlands in East Rutherford, which just made a deal with DreamWorks to be part of the project. The latter project, a 3 million-square-foot giant by Mall of America’s Triple Five Group, is slated to open in 2014. The aim is to energize the defunct Xanadu albatross by building a ski dome, skydiving simulator and various other amusement park-type amenities, along with a robust retail lineup. Other developers, including Hartz Mountain Industries, Vornado Realty Trust, Pagano Development Co., Gabrellian Associates, TREECO, Key Properties, Ciancia Organization and National Realty, are also poring over freshly drawn plans in the market.

While these New Jersey markets have yet to return to their prior peaks, newfound activity is leading a greater sense of optimism—and some real opportunities.

— Jerry Welkis is an X-Team International partner and president of New Rochelle, N.Y. based Welco Realty.

January 14 2013