Hartz Mountain Industries examines three issues concerning why New Jersey markets hold up

The latest numbers show a decline in real rents in New Jersey of 2.7% over last year and an office space occupancy rate of nearly 84%. Retail and industrial space are off of historic highs, and while reduced rents and occupancy are unpleasant, on an historic basis we are better set than we were in 2003. Given the economic climate, and our region's proximity to Wall Street, which is the epicenter of the banking crisis, those are spectacularly strong numbers. The question is, why? And more important, will it last? Based on Hartz's recent activity, we see three issues emerging: 1) New Jersey missed the New York upturn, and it is missing the New York downturn. We did not ride the wave of value appreciation and rent inflation that Manhattan enjoyed, and now that the market is coming back, we don't have as far to fall, either. In fact we are having a very strong office leasing year in 2009 because Manhattan continues to be relatively expensive. Hartz had five of the largest deals in New Jersey this year, and a review of them offers insight into the New Jersey commercial market: a) Broadridge Financial Solutions, Inc., a Fortune-500 full-service outsourcing provider to the global financial industry, signed a 320,282 s/f long term lease for the entire building at 2 Journal Square Plaza in Jersey City; b) Savvis, Inc., a global leader in outsourced Internet infrastructure services, signed a 20-year lease for a 209,000 s/f data center at Lincoln Harbor in Weehawken, New Jersey; c) Eisai Medical Research., a subsidiary of the Tokyo-based pharmaceutical company Eisai Co. Ltd. of Japan, leased a newly-renovated, three-story, 118,000 s/f office building at 155 Tice Blvd. in Woodcliff Lake, and 41,000 s/f at adjacent 300 Tice Blvd. d) The Children's Place moved 120,000 s/f to 500 Plaza Dr. in Secaucus. e) Sam's Club became the first major tenant for their Edison Towne Square project, our 98-acre, one million s/f pedestrian-friendly project on Rte. 1 that was home to a Ford Plant. The Sam's Club in Harmon Meadow is one of the top five performing units in the Wal-Mart-owned chain, as are five other stores in our Harmon Meadow Development. We are taking three themes from our recent leasing: Every big office deal we've done this year was in a different industry and took place in a different submarket, speaking to the vitality and options New Jersey office space offers to tenants looking for skilled labor. Big retail loves New Jersey for its avid shoppers. Distribution will forever be strong in our region and it will continue to entice office migration from Manhattan. 2) New Jersey is surprisingly innovative. New Jersey utility companies and municipalities have worked together to generate appealing programs that utilize state and federal incentives to create solar energy. Hartz will generate as much as 10 megawatts of electricity based on generation we have in place or contracted for our vast industrial and retail roof-tops-including the 2.2 megawatt facility on our Meadowlands Exposition Center that was the first to install a solar array under PSEG's groundbreaking program. While that is a nice way to "go green" in the environmental sense, it also goes green another important way: a 12% return on the investment. Such innovations happen in several areas that allow existing businesses to grow revenue despite being the least business-friendly state in the nation. 3) The pain comes from 2004 to 2007. Hartz strives to buffer its portfolio against market cycles. While we buy and sell opportunistically, we presume to operate a large portfolio within our strategic plan. As a result, we accept, as all businesses should, that the value of our property and the performance of our property will vary with changes in the economic climate, and the key for us is to manage the highs and the lows. In 2004 we saw low interest, low-equity requirement financing, rather than performance or rents, pushing commercial property values higher. In conference after conference we observed that occupancy and rents were flat while values were improving. During this period we upgraded our asset mix and conservatively refinance with long-term debt. Others jumped in and bought, taking advantage of attractive lending standards, but their basis was on irrationally inflated values that existing cash flow would strain to sustain. As soon as the downturn came, buyers from 2004 through 2007, especially those who also used 2nd and 3rd mortgages, were substantially under water. The good news is for the market, but perhaps not the current ownership: there are tenants in place, there is capital and now even a trickle of debt available to buy assets with the promise of a strong performance. Especially once the overhang of space available for sublet-which increases the vacancy rate from 16% to 23%-is absorbed, New Jersey remains well positioned to draw data centers and other support space users from New York City. Emanuel Stern is president and COO of Hartz Mountain Industries Inc, Secaucus, N.J.