Commercial real estate is on the upswing in N.J.

Good return on investment, low cost of borrowing help trend

April 01, 2002|By Antoinette Martin | Antoinette Martin,NEW YORK TIMES NEWS SERVICE

NEW YORK - Twenty years ago, when I was a banker," recalled David Csontos, a managing director at Insignia/ESG, "real estate was a bad sector. Everybody was scrambling to get out."

Now - in New Jersey, at least - said Csontos, who specializes in advising those thinking of investing in commercial real estate, it is the opposite. Investors are elbowing each other to get in.

With the rate of return on stock market investment somewhere between rotten and "recovering," and bonds generating 3 percent to 5 percent, commercial real estate has taken on luster as a stable, advantageous investment, according to people in the field.

Recently, Lincoln Equities Group made one of the largest investment purchases of 2002 to date, acquiring two buildings with 236,961 of Class A space at One Centennial Plaza in Piscataway for $26 million. Both buildings are fully leased for 10 years to the Great West Life and Annuity Insurance Co. and American Standard.

"We purchased one of the most desirable office buildings in Middlesex County," said Joel Bergstein, a partner at Lincoln Equities. "After looking carefully and hard at an unstable marketplace, we bought a high-quality asset with a stable cash flow."

Criteria change

Bergstein said that his company's investment criteria have completely changed from a year ago, when the emphasis was on "opportunity." Then, Lincoln Equities focused on finding buildings with some vacancies, but with potential for an increasing rate of return.

"In today's market," Bergstein said, "you are not able to say when a vacant property will be leased, so we liked the fact that One Centennial has long-term tenants."

Bergstein said Lincoln Equities expected the economy to improve over the next year or two. The company plans to build a mixed portfolio - adding additional stable real-estate investments and others that are riskier. But Bergstein said the portfolio would continue to grow.

Growth is the trend in the market for commercial spaces, said Csontos, both in the New Jersey investment market and nationally. He recently attended an annual conference staged by the Mortgage Bankers Association, at which more than 20 lenders met with capital advisers.

More money invested

"Without exception, every lender was putting more money into real estate for 2002 than in 2001," Csontos said, "with growth of between 5 and 25 percent."

"Notwithstanding a slowdown in the general marketplace, investors are committed to our sector."

Why are they committed? Csontos and other real estate market professionals offered a bouquet of reasons.

David Simson, the president of GVA Williams of New Jersey, said: "The whole image and persona of the state has elevated, changing from warehouse-industrial to service provider. We've come to a point where New Jersey is perceived by investors as a place where they should do business."

Rental rates are holding up, and vacancy rates are staying down in the state, he noted. The Grubb & Ellis/Frank Knight year-end report, among others, documented that trend. It said that while some U.S. cities - especially high-tech centers such as San Francisco - reported steep declines in rent at the end of last year, rent for prime office space was up 1.3 percent in north and central New Jersey for the last quarter of 2001 compared with 2000.

In the course of 2001, the vacancy rate for commercial office space here rose only 1 percentage point, to 12.8 percent, the report said.

In addition, a great deal of capital became available for investment. A group of factors, including the Sept. 11 devastation of New York's financial district, the decline of technology stocks and the downsizing of corporate America, pushed a great deal of money "to the sidelines," Simson said.

Low interst rates

"And interest rates are the lowest they have been in 40 years," he said. "People have the ability to leverage their assets with real estate investment - getting returns that provide a stabilized income."

Information Age technology has also greatly increased lenders' confidence in real estate as an investment, Simson added.

Csontos put it this way: "It used to be scratch and dig, to find out what was going on. You had to talk to five different real estate companies like us to find out about the situation on the commercial market. Now, we have all kinds of databases available instantly."

Jon Mikula, senior director of Holliday Fenoglio Fowler of New Jersey, said: "Lenders now know right away when a market is getting out of hand. Anybody can go online right now and pull up the vacancy rate in Parsippany, if they want to."

When overbuilding is avoided, the vacancy rate remains reasonable, and the market holds steady.

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