Office-Market Downturn
Weighs on New Jersey

A deal that would have breathed new life into an iconic New Jersey office complex has unraveled, coinciding with a steep drop in north-central New Jersey's commercial real-estate sales late last year.

Preferred Unlimited Inc., a Conshohocken, Pa., real-estate investment company, in November terminated an agreement to buy the two-million-square-foot former Bell Labs complex in Holmdel, N.J., which includes offices and lab space designed by Eero Saarinen, the architect of St. Louis's Gateway Arch.

The matter is in litigation. A spokeswoman for Alcatel-Lucent, which owns the property, says Preferred said it couldn't obtain as much financing as it wanted. Preferred denies that and says the French telecom giant failed to meet certain conditions of the closing, which Alcatel denies.

Preferred acknowledges that changes in the credit markets and the increasingly troubled housing market have soured any future interest it might have in the nearly 500-acre property. "It's the markets changing that ultimately makes us not want to go back and work on it," says Michael O'Neill, chief executive of Preferred.

Sales of large commercial buildings have dropped nationally, but the downswing in north-central New Jersey has been particularly chilly. In the fourth quarter, the region's overall sales of office, retail, warehouse and apartment properties valued at $5 million or more fell 75% from the year-earlier quarter to $811 million. The region tied with the metropolitan areas of Sacramento, Calif., and Kansas City, Mo., for the largest percentage drop of 50 major U.S. markets, according to Real Capital Analytics Inc., New York, a real-estate research firm.

Some investors' appetites for the market may have soured because area rents haven't risen as much as expected in recent years even as nearby Manhattan rents have soared, according to Patrick Murphy, executive managing director in the tri-state suburban region for real-estate brokerage firm CB Richard Ellis.

And even as the area's average office rents are ticking up, the region also is facing the headwinds of a potential national recession, difficulties among the state's financial-services companies and the contraction of the pharmaceutical industry, one of the area's key employers. Last month, drug maker Wyeth of Madison, N.J., said it expects to cut 4% to 6% of its 50,000-employee work force by midyear, though it hasn't specified where the jobs will be trimmed.

Of course, drug companies are only one piece of the state's relatively diversified economy.Northern and central New Jersey is a dense patchwork of suburbs, wealthy enclaves like Princeton and older cities like Newark. The state's overall annual job rate rose 0.7% in December from a year earlier, nearly matching the 0.9% national rate, according to the Bureau of Labor Statistics. However, employment grew at just 0.3% in a three-county region comprising Bergen, Hudson and Passaic counties and 0.4% in a six-county area anchored by Newark.

One bright spot is New Jersey's waterfront, with its views of Manhattan from Jersey City and Hoboken; third-quarter average rents in Hudson County are up 9.1% from the year-earlier quarter to about $32 a square foot, according to Property & Portfolio Research Inc., a Boston real-estate services firm. SJP Properties, a Parsippany, N.J., developer, says it would like to prelease some of its planned 14-story Waterfront Corporate Center III office building before starting construction, according to David Welch, chief financial officer of SJP Properties.

But there is no doubt that there's a heightened concern in the region from the recent drumbeat of corporate-layoff announcements. "There's a sense of cautionary dread," says James Schroeder, corporate managing director in the Iselin, N.J., office of Studley, a real-estate services company that exclusively represents tenants.

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