So, how’s the market in Southern New Jersey doing? Overall, I gave the commercial real estate market a “B”, and also rated each sector individually as follows: Office Sector: B-; Industrial Sector: A-; and the Retail Sector: C.

Before diving into each sector, it’s helpful to look at the commercial real estate markets at a macro level. At the risk of stating the obvious, we’re in the middle of seismic evolutionary shift driven largely by rapid and profound advances in technology and the way we respond to them. We don’t work the way we used to, we don’t shop the way we used to, we don’t get news the way we used to, we don’t communicate the way we used to and soon we won’t even commute the way we used to.

We don’t work the way we used to, we don’t shop the way we used to, we don’t get news the way we used to, we don’t communicate the way we used to and soon we won’t even commute the way we used to.

The change has been incremental…subtle enough that we take it for granted. But if we step back, it’s clear how dramatically things have actually changed. And all of this is having a significant impact on the commercial real estate market.

Office Market

In addition to the impact of technology, there are four principal factors shaping the Southern New Jersey Office Market. These factors are:

Transitioning Ownership

Coming out of the recession, the majority of Class A office space was owned by the REITs. In order to boost occupancy in their buildings, the REITs undercut rents, essentially purchasing occupancy. This made it difficult for other owners to compete for deals as tenants traded-up to nicer buildings in better locations. Class B buildings, and Class A and B buildings in second-tier submarkets like Voorhees stagnated.

Once their assets stabilized, the REITs began to sell. Forty-percent of the inventory has changed hands since 2012 as the REITs divested their suburban office portfolios. This has diversified ownership to regional investors and out of market private and institutional investors, including Somerset, Tequesta, Zamir, Endurance, Keystone Property Group.

Large Tenant Instability

As the market was starting to recover in 2013 and 2014, downsizing by companies such as Lockheed Martin and CB&I (Shaw Group) put over approximately 200,000 square feet of space back on the market. Fortunately, this vacancy hit the market when there were other companies expanding within and into South Jersey, and much of this space has been absorbed. Continued uncertainty driven by interest rates in the case of PHH Mortgage and government contracts in the case of Lockheed Martin have resulted in additional vacancy in the market.

Health Systems

The regional health systems have had significant impact on the office market. On the positive side, the health systems have purchased vacant office and retail buildings for renovation into medical office. For instance, Cooper University Health System purchased an 80,000-square-foot, former Lockheed Martin office building in Cherry Hill and is in the process of converting it into a state-of- the-art medical office building. University of Pennsylvania Health System converted the former Syms retail building in Cherry Hill, and Lourdes acquired and converted the site at Route 70 and Brace Road, to consolidate practices and expand their presence in the market. Kennedy Health System just completed a new 120,000-square-foot Medical Office and Ambulatory Care facility at their Cherry Hill site on Chapel Avenue.

The health systems have also been renovating and expanding existing hospital complexes, and building new hospitals and multiple urgent care facilities. In addition, hospitals have been purchasing physician practices and consolidating them into larger, hospital-controlled space, leaving landlords with functionally obsolete space. Even after investments in necessary upgrades these buildings will never achieve the rents their medical practice tenants were paying.

Grow New Jersey

The Grow New Jersey program has attracted new businesses to New Jersey and stimulated significant development and investment in Camden. At the same time, the anticipated, aggregated vacancy created by the large scale development underway at Knights Crossing and along the Camden waterfront will be significant and the market for office tenants in South Jersey is not strong enough to backfill this resulting vacancy in Cherry Hill, Mt. Laurel, Marlton and Voorhees. It will be interesting to see how the market, building owners, and investors respond as the new Camden projects including Subaru (250,000 SF) from Cherry Hill, Holtec (600,000 SF) from Marlton and American Water (222,000 SF) from Voorhees and NFI, Conner Strong and The Michaels Organization (375,000 SF) from Cherry Hill and Marlton reach completion and vacate their existing facilities.

Industrial Market

The Southern New Jersey Industrial Market has been one of the strongest in the region driven primarily by three factors:

Turnpike Impact

The widening of the NJ Turnpike, low vacancy and higher rents in Central and North Jersey has driven more requirements south between Exits 5 & 7, particularly Exit 6 in Florence and Burlington. This has significantly benefited Burlington County as companies such as Grainger Industrial Supplies, H&M and most recently B&H Photo occupied new buildings from 550,000 to 1.3 million square feet.

Retail Supply CHain / E-Commerce

Retail supply chain has always been a huge demand sector in South Jersey. Christmas Tree Shops, BJ’s, H&M, Nine West, Vince Camuto, Five Below, CVS, Ikea and Burlington Stores all occupy over 500,000 square feet.

E-commerce has also been a significant demand driver. In the last two years, Amazon, Radial, Wayfair.com, Jet.com and opened regional and last-mile distribution centers in Burlington, Gloucester and Salem counties.

Port Commerce

The widening of the Panama Canal has resulted in more cargo delivery to Ports on the East Coast. Bigger container ships and improvements to the Ports of NY/NJ, Philadelphia, Wilmington and Paulsboro will increase activity and demand for warehouse space in the South Jersey market.

Low vacancy, lack of quality space, an expanding manufacturing sector and growing e-commerce needs for new bulk warehouses, infill last mile delivery and pick and pack operations will continue to be drive demand for new quality warehouse space in 2017.

Retail Market

Brick and mortar retail is facing strong challenges from the overall shift to online shopping. This is a global phenomenon, but the wave of store closings is already hitting South Jersey.

Store Closings

There seems to be a weekly list of retailers shutting stores. Macy’s, JC Penney, hhgregg have closed multiple South Jersey stores, representing over a half-million square feet of vacancy just this year. In addition, many RadioShack, Payless and Dollar Express stores have been closing.

New Retailers

Future of Malls and Other Shopping Centers

Destination malls like Cherry Hill and off-price centers like the Gloucester Premium Outlets will continue to do well. The Moorestown Mall has already undergone changes to add more dining options and a Regal RMX theater. With Macy’s closing, the mall’s owner, PREIT, plans to buy the store from Macy’s and redevelop the building to accommodate different tenants, including a potential food store.

The combination of food, entertainment, recreation and fitness venues will be critical to the success of shopping centers in the future, providing a one stop destination for entertainment, personal care, meals and shopping. Alternatively, they are going to be redeveloped to be live-play with a combination of residential and retail.

For more insight and research from the Tri State market visit Colliers Research Library and our quarterly publication Insight magazine.

Follow Joseph Fetterman on Twitter: @josephfetterman