Thursday, October 24, 2007

By Alton Gary Simpson

HACKENSACK, NJ-During the Industrial and Office Real Estate Brokers Association of the New York Metropolitan Area meeting and cruise in early October, Andrew Merrin, vice chairman of Cushman & Wakefield Inc., talked about how and why the residential subprime crisis and other factors are creating waves in the New Jersey commercial real estate industry. As the Spirit of New York cruised between Weehawken, NJ and Port Elizabeth, NJ, he told the assembled attendees from IOREBA that the liberal underwriting of the past few years and the resultant overleveraged investments have created a backup of debt in the market. Combined with the fallout from the subprime finance meltdown, this has caused a considerable slowing in investment dealmaking as stricter lending standards have come into play.

Nationally, Cushman & Wakefield’s Metropolitan Area Capital Markets Group professionals have some $10.9 billion in property on the market for sale. Based in East Rutherford, N.J., the group has orchestrated more than 373 transactions with a total value of $14.9 billion since 1995. Mr. Merrin, who is head of the group, noted that in the current market environment pricing has become a challenge for sellers. "Value is down 5%-10% since summer," he said. "Sellers for the most part are accepting 5% reductions. At 10%, they are backing off from selling until the capital markets correct themselves."

He added that buyers are quoting deals 50 to 100 basis points higher than at the beginning of the summer. "Once we get the debt situation under control, we will see that settle down to 25 to 50 basis points," said Mr. Merrin. "The question is how quickly that will happen. During the most recent slowdowns-in 1998 and in 2001 after September 11-the markets came back quickly. In the current case, I expect things to correct during the first quarter of 2008. However, some are saying that this could drag out over the next 12 months."

While commending the Federal Reserve’s interest rate cuts, he noted that further action is needed. "Consumer confidence has forged the positive real estate environment we have enjoyed in recent years. I believe the Fed needs to cut rates by another 50 points to keep the consumer going," said Mr. Merrin, who also cited the need to focus on New Jersey’s business policy and a lack of affordable housing in the state as factors that need to be addressed to keep the state competitive.

On a positive note, he discussed the improvement in leasing fundamentals in the Garden State, where vacancy rates are slowly shrinking. He also applauded the development community’s discipline in adding limited new construction during the past several years, which has helped keep inventory down.