Princeton Real Estate Part 2: Commercial

A new report on local commercial real estate activity provides a mostly upbeat assessment for the first half of 2011, with many commercial realty professionals--in submarkets as diverse as office, warehouse, and boutique space -- agreeing with the report’s conclusion:  the economy has put the worst behind. 

“It feels better in a lot of sectors,” says Jerry Fennelly of NAI/Fennelly, Commercial Real Estate Services, the author of the study.  “Companies are making leasing and buying decisions again.  There’s positive growth.”    

The Greater Princeton area office market has tightened slightly in recent months, the vacancy rate dipping to 19.46% from 21% one year ago.  An influx of new companies and jobs in the medical and biopharma sectors has more than offset the loss of government jobs and downsizing in the financial/insurance sector, producing net numbers that offer more proof of a fundamental shift taking place in the U.S. economy.

Fennelly just compiled his semi-annual report of the Greater Princeton commercial real estate market.  One bittersweet takeaway of the 2011 report is that many companies that have cut salaries and jobs deep enough over the past three years—that have “right-sized,” in euphemistic parlance -- are now sitting on a pile of money.  Those generous cash balances are big enough for some corporations to consider buying their own office buildings.    

“Companies that reduced their operating expenses are using this cash and other reserves to buy buildings, instead of leasing them.  This is what is establishing a floor for future appreciation,” Fennelly says.

Helping matters is the fact that there have been no new big construction projects in a couple of years.  One of the last new buildings, 902 Carnegie Center, a speculative property, is now fully occupied.  But while leasing activity is picking up, brokers are possibly more excited about the sales activity.

“Sales went away during the recession,” says Fennelly.  “The sale of buildings is picking up and the people that are buying them are using them to house their companies.”

Another incentive for corporate buying is a pending change in (FASB) accounting rules that makes leasing less attractive.  Fennelly asks:  “If you treat a lease like you own, why not own the building?”

The generally positive outlook in local commercial real estate extends from capacious Class A office space on Route 1 to the much smaller square footage requirements of downtown Princeton retail.  Not that prime Borough retail space ever suffered that much the past few years.  “There’s always activity in Princeton,” says Stephen Tallon of N.C. Callaway, one of the oldest privately held real estate companies in the area.  “We have a list of people waiting to get in.”

Rents for upstairs space along Nassau Street can fetch $25 to $35 per square foot, while ground level “prime,” where the foot traffic is, can command anywhere from $30 to $70 per square foot.  Tallon says:  “In most circumstances, if something comes up in Princeton, it moves quickly.”  Many space changes don’t even come into public view, he says, because actors behind the scenes move on information gained by inside contacts or word of mouth.

“There’s still plenty of retail space out on Route 206,” Tallon says.

A continuation of the upward trend out of the one of the darkest recessions anybody can remember in local real estate still largely depends on job creation and, more than ever, on the global economy.  With the state unemployment rate at 9.2% the ability of the U.S. economy to produce high-quality, high-income jobs weighs on the minds of realtors.  Recent employment indicators are mixed, with some pointing to anemic job growth and others to negative growth.

“The jobs are coming, though they are coming very slowly,” says Jerry Fennelly.  Companies that have restructured are making profits, which is an important precondition for further hiring and expansion.  But going to the next level will require a business confidence that apparently doesn’t exist yet.

Still, bright spots can be found in some industries and sectors, including health/medical, biopharma, electronics, energy, and software/internet.  In his report, Fennelly foresees potential future job growth for the Princeton market in the specialty of internet and mobile device security.  Government and private sector contracts will be lucrative, he says, for emerging companies that can help consumers, businesses and governments protect their systems from hackers.

Lastly, keeping the commercial real estate market vibrant depends not only on Princeton’s reputation to attract the industries and jobs of the future, but also the continued migration of existing companies looking for a central location, office space value, and high quality of life for employees.

“New York is still the number one choice,” says Fennelly, “but Princeton is getting looks.”  The University, the concentration of intellectual capital, and the reputation of the area for fine living, he says, contribute to making Greater Princeton a magnet for relocating companies.

Princeton’s reputation for diversity and cosmopolitanism also works in attracting business worldwide, with companies from Europe, the Middle East, and Asia preferring to settle near Route 1 and Greater Princeton.  Fennelly says while globalization may mean net job loss for some areas of the U.S., in Princeton it means job increases.  He notices companies from China are recently adding offices locally.

“Migrating companies from almost every country in Europe and Asia come here and plant a small flag,” he says, “and then they grow.”

About the Author

Marc Mooney

Marc Mooney is a longtime television reporter, anchor and writer/producer.  He has worked for Tribune, USA Broadcasting, CNN, NBC and numerous local stations around the country.  More recently Marc has been doing business in China, helping U.S. and Chinese companies do business together.