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What are the Ripest Opportunities in New Jersey for Re-Positioning Office Buildings Into Other Uses?

Feb 12, 2018
by Josh Anderson

JERSEY CITY, NJ – Earlier this month, we welcomed a pair of long-time New Jersey insiders to CapRE’s 2018 New Jersey Forecast to discuss New Jersey’s office leasing, investment & development sector. Jose Cruz, Senior Managing Director at HFF and Michael J. DeMarco, Chief Executive Officer at Mack-Cali Realty Corporation each provided distinct perspective when answering question about investment sales. We asked them, what are some ripe development opportunities in New Jersey for for re-positioning office buildings into other uses?

Michael DeMarco, Chief Executive Officer, Mack-Cali Realty Corporation

First, DeMarco provided his perspective. “Well, I think the question comes up about – if you buy a building for $30 a square foot – you’re at a demarcation point. You can say, okay, I’m going to find an office tenant, or you have the dirt at a relatively cheap price. A lot of stuff that’s built, the office that’s in industrial properties, if I owned it today, I’d tear it down today and just build industrial,” he advised.

“Looking at what the industrial rates are in the state, you’d be well-placed to build industrial. Multi-family is going to be a bigger issue because you have issues across the state,” continued DeMarco. “We have a typical game where when we go into a town, I play this very simple math game.  I say, the office building is empty. I’ve been winning my cases year after year, so the tax rates have gone down. If the building’s worth $10 million, and you tax me at $6 a foot, then maybe I’ll pay you $800,000 or $900,000 a year. And I’m going to tear the building down. Then you can’t tax me on the building. Conversely, if we build a multi-family project, which you may not love, the building is going to cost $40 million. You’re going to tax me on $40 million vs $10 million, which is four times as many in taxes.”

DeMarco said that, with a hard cap, which still exists other than on police and fire, you can’t raise property taxes more than 2%. “And every municipality is revenue-constrained, so it’s a perfect time for developments to come in,” he explained. “But the only problem is that there are only two things you can do it with – a possible hotel site, which they love because they get the room tax – and get it locally – and multi-family, which actually makes economic sense. You can’t do retail because retail is really not having a good year because of the internet and change in shopping patterns. So you’re hard pressed to go and find a retailer that’s willing to pay the rent for a new deal that you absolutely have to have.”

Jose Cruz, Senior Managing Director, HFF

Next, Cruz chimed in, pointing to problematic sub-markets and office developments in far-flung office campuses. “If you go out to Mt. Olive or the Merck Headquarters in Whitehouse Station, some of those deals just have to get redeveloped,” he said. “The question becomes, what are you going to build out there? Also, when you look at other projects, and we’ve talked about those $30/foot buildings, which we’re seeing a lot of those traits happen, what are you doing? Are you keeping them or not?”

“We worked on two in 2017 where one was a four-building complex and one was a six-building complex,” recalled Cruz. “At least half of those assets are coming down. And rightfully so. Those are being developed as multi-family. The town seems relatively receptive to doing multi-family in those buildings. But we’re doing one in the Meadowlands, an office building, that’s being re-positioned as an industrial building.  The Meadowlands is becoming a, give or take, 1 million square foot industrial market in a 6 million square foot office market.”

Check out previous CapRE Insider Reports covering this discussion:

Mr. Michael DeMarco is a veteran real estate investment professional with more than 30 years of industry experience. Mr. DeMarco is responsible for the strategic direction of the Mack-Cali. Prior to joining the Company in 2015, Mr. DeMarco was most recently the chief investment officer of CCRE, a non-bank finance company and one the largest originators of CMBS. Mr. DeMarco was also an executive vice president with Vornado Realty Trust. Prior to that, Mr. DeMarco was a partner at Fortress Investment and additionally was a senior managing director with Lehman Brothers in the company’s real estate investment banking unit.

Mr. Jose Cruz is a Senior Managing Director in the New Jersey office of HFF (Holliday Fenoglio Fowler) with over 20 years of experience in commercial real estate. He specializes in investment sales in New Jersey, New York State and Connecticut. Over the course of his career, Mr. Cruz has been involved in over $17 billion of office, industrial, retail, multihousing and land sales. Mr. Cruz joined the firm in March 2010. Prior to HFF, he was the Executive Director of Cushman & Wakefield’s New York Area Investment Sales Group where he spent more than 17 years.

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