Appetite for large space fuels recycling of old buildings
For three years, two corporate campuses in Bergen County sat mostly empty, stark examples of the commercial real estate market's white elephants. But in October one was sold and another was leased to a single tenant.The transactions underscore how the steady appetite of tenants for large spaces in an improving office environment has helped to speed the recycling of older buildings. They also reflect just how much corporate expansions and consolidations, which created the vacancies in the first place, continue to influence today's market. One of the Bergen County corporate campuses was leased by Citibank, which signed on for the 29-acre, 410,000-square-foot former Prentice-Hall complex on Sylvan Avenue (Route 9W) in Englewood Cliffs. The bank plans to move several of its computer operations into the building, which will be reshaped by the end of next year into a technical administration centre. Though Citibank, the banking arm of Citicorp, which is based in Manhattan, would not disclose which offices
would be relocated, it said that most of the 1,500 employees who will work at the complex would be new hires or transferees from outside the metropolitan area. The second corporate campus, IBM's former 575,000-square-foot, 200-acre complex on Old Mill Road, near the intersection of Interstate 278 and Route 208 in Franklin Lakes, has been purchased by Merck-Medco Managed Care, LLC, a wholly-owned subsidiary of Merck & Company, the pharmaceutical giant. It will consolidate its headquarters from leased space in five buildings elsewhere in the county -- together totalling 445,000 square feet of space -- to the new site, which will be renovated next year, says a report in the Financial Times. The company plans to relocate 1,700 workers there by mid-1999. The seller was MSGW-I, a partnership of Gale & Wentworth, a real estate services and investment firm in Florham Park, and Morgan Stanley, the Manhattan-based investment banking firm. The partners, who owned the complex for the last year before sellingit to Merck-Medco for $41 million, are also the new owners of the Prentice-Hall site, which they bought last month from Viacom, the publishing company's parent, for a reported $12 million. In the 18 months since MSGW-I began buying office buildings in the state they have acquired 2 million square feet in 18 buildings. And a month ago the partners, together with Paine Webber, bought the bulk of the commercial portfolio of the Bellemead Development Corporation, a subsidiary of the Chubb Insurance Company. It contained 8 million square feet of space, 5.5 million of it in 40 buildings in New Jersey. "If you're comfortable that the demand side is there, which we are, then you continue to look for supply," said Mark R. Yeager president of the Commercial Group at Gale & Wentworth. Most brokers agree that demand for space outpaces supply. As a result, vacancy rates are decreasing, average asking rents are increasing and large blocks of space are disappearing. At the same time there has been limited new
construction and the space that has been or is being built -- some 1.2 million square feet in nine buildings -- has been substantially leased. But while Citibank and Merck-Medco decided to move to or stay in Bergen County, another big-name company has announced plans to leave. Mercedes-Benz of North America, which has occupied its three-building US headquarters complex on 37 acres in Montvale for 25 years, said this fall that it would consolidate operations just across the state line in Pearl River in Rockland County, NY. Mercedes initially intends to build a $50-million, 440,000-square-foot complex on a 91-acre site on Veterans Memorial Drive, relocating 750 workers there by the fall of 1999 and adding 400 more over the next five years. The company could ultimately build an additional 800,000 square feet of space. The deal is expected to close this month. All this pushing and pulling, however, is not expected to have a serious impact on Bergen County in particular and the 11-county northern and centralNew Jersey market in general, said John J Garibaldi, executive vice president of the Garibaldi Group, a Chatham-based brokerage that marketed the Prentice-Hall site, since more space is being taken by Citibank and Merck-Medco than Mercedes is leaving behind. Other brokers agree. If, they say, the market stays strong and new construction remains limited, which is expected, the space abandoned by Merck-Medco and Mercedes will find tenants. As of the third quarter the vacancy rate for the overall northern and central New Jersey market was 14.2 percent, down from 17.2 percent a year earlier; the rate for Class A space was 8.3 percent. The Class A vacancy rate in Bergen County, the largest office market in northern New Jersey, was 16.7 percent, says Cushman & Wakefield, the national commercial brokerage. The third-quarter rate in 1996 was 18.4 percent. Average asking rents rose, with Class A space in the entire market at $24.43 a square foot, up from $22.74 a year earlier. In Bergen County they rose to $24.39
from $23.43. But buildings generally need to get average rents of $27 to $30 a square foot to justify new construction, brokers said, adding that other barriers include lengthy approval processes and high building costs. Also tempering such construction is financing, which continues to be tight as lenders, hurt by bad real estate loans in the mid-80's building boom, remain hesitant to return to the market, said Donald P Eisen, senior managing director, New York area, at Cushman & Wakefield's East Rutherford office. "In the Bergen County office market, like others, developable land is scarce," said Eisen. "So the supply of new space is in existing buildings and with the cupboard virtually bare the ones left take some imagination." Yeager agreed. The market may have viewed the Prentice-Hall and IBM properties as white elephants, he said, but "everything is conditioned on supply and demand and there was nothing left in the county". Because he and his partners, as they have before, purchased the properties
for a fraction of replacement cost and because of the large space squeeze, Yeager added, "they could deliver the buildings faster and at a lower cost than new construction". He said the former Prentice-Hall site, once home to the publisher's administrative and editing operations, would undergo a $48-million redesign for Citibank, with the new owners and the bank sharing the cost. The bank has signed a 12-year lease with options to renew valued at $80 million. Saving for a rainy day City investment house employees are receiving whacking bonuses as a wave of consolidation is adding to the insecurity of a career in finance, reports the Financial Times. So, recipients should heed the dreary but sensible advice of financial advisers and set aside some of their bonuses for a rainy day. Priority should be the boosting of contributions to a pension, according to Simon Philip of accountants Arthur Andersen. Members of employer-run schemes can pay in up to 15 per cent of their salary during theyear. Mobile workers may however be caught by something called the "earnings cap," which in effect restricts the total contribution to around -- 12,000. If you are caught, your employer may be willing to pay extra contributions on your behalf, provided you accept a lower bonus. It also makes sense to repay a chunk of your mortgage, to reduce future interest charges. But check that this will not trigger costly early repayment penalty.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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