Office market continues to struggle, but industrial real estate remains hot, Colliers reports

Real estate firm Colliers has released a pair of reports looking at New Jersey’s real estate market for the second quarter, and the results were what you might expect:

While the office sector is still struggling with the aftereffects of the pandemic, the industrial sector stayed hot in Q2.

Office market

Colliers said leasing activity reached 2.28 million square feet in the quarter, up from the first quarter’s 1.96 million square feet and Q2 of 2020’s 1.23 million square feet.

“As New Jersey starts to reemerge from the pandemic, and with employees slowly returning to the office, the amount of newly available blocks of space slowed during the last month of the second quarter,” the report said. “Still, the uncertainty has resulted in a glut of sublease space returning to the market.”

However, Colliers did note some underlying issues, as renewal activity made up more than half of the demand, at 50.1% of total activity during the quarter, compared with 22.9% during the second quarter of 2019.

“New Jersey’s office market has started to show early signs of a recovery during Q2 2021,” Colliers New Jersey head of research John Obeid told ROI-NJ. “However, the market is currently weighed down by several large blocks of vacant space, a trend which was accelerated by the pandemic. The trajectory of the recovery will depend on the recovery of stranded assets as well as the decisions major tenants will make regarding their office space needs moving forward. Large occupiers such as Atlantic Health System and WebMD inked significant leases this quarter, underscoring the trend that many office tenants have reengaged the market, with more poised to do so in the coming months.”

Sublease space now accounts for 17.2% of total available space, Colliers said, the highest mark since the global financial crisis in 2009. However, space available on a direct basis held steady at 18.8%, which Colliers said signals that the oversupply added to the market since the pandemic has peaked.

Availability came in at 22.7%, up from 22.2% in Q1 and 19.3% in Q2 of 2020. Colliers said the increase resulted from 8.5 million square feet of occupancy losses over the past 18 months, and represented a jump from the 18.6% rate in the first quarter of 2020, before the pandemic.

Meanwhile, asking rents reached $28.90 per square foot, up from $28.86 in Q1 and $28.59 in Q2 of 2020.

Industrial market

Leasing activity came in at 13.37 million square feet for the quarter, down from 15.71 million square feet in the first quarter, but up from 10.19 million square feet in Q2 of 2020.

Activity was driven by demand for Class A product, Colliers noted, with nine of the Top 10 transactions occurring in those types of properties.

“At 7.2 million square feet, Class A leasing accounted for 53.7% of the overall activity, which is notable considering the Class A property group accounts for only 20% of the total inventory,” Colliers said in its report. “E-commerce and logistics users drove demand, accounting for 51.3% of the total leasing volume. … With consumer behavior shifting toward increased e-commerce purchases, the race to find industrial space to store and deliver products intensified during the first half of 2021 and is anticipated to remain strong throughout the rest of the year.”

The availability rate shrunk to 3.4%, down from 4.1% in Q1 and 4.5% in Q2 of 2020. Net absorption remained positive for the 34th consecutive quarter, Colliers said, reaching a five-year high at 5.8 million square feet. That helped constrain the supply, the firm added, and spurred developers to break ground on new projects at a record pace.

“New Jersey’s industrial market has experienced relentless demand during the pandemic, resulting in record high levels of pricing and an all-time low availability rate,” Obeid said. “A wave of new construction deliveries coupled with strong tenant activity has the potential to push rental rates higher while keeping the availability rate at record lows.”

The average asking rent came in at $10.36 per square foot, up from $10.05 in the first quarter and $9.07 in Q2 of 2020.