Analysis

Virus Creates Opening For Office Market In NJ Suburbs

By Bill Wichert
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Law360 (August 14, 2020, 9:24 PM EDT) -- The dark clouds hovering over the economy have produced an unlikely glimmer of hope for New Jersey's struggling suburban office market as the health risks posed by the coronavirus encourage businesses to look beyond crowded New York City, experts say.

With workers fearful of taking mass transit and either riding in packed elevators or enduring long waits to reach top floors because of social distancing, companies may explore setting up offices in the Garden State suburbs, potentially boosting a struggling market that has seen tremendous vacancies while employers have gravitated toward urban areas.

"That sort of plain vanilla box in the suburbs, where you can drive to it in your automobile cocoon, get out and then walk up the stairs ... sounds a little bit more attractive today than it did just five months ago," said Rutgers University professor James W. Hughes, former dean of Rutgers' Edward J. Bloustein School of Planning and Public Policy.

The impact on suburban office complexes amid the pandemic "all depends on how companies are going to be restructured, redefining themselves, how they're going to set up their work templates and the like going forward," Hughes said.

Jeffrey L. Heller, New Jersey managing director at commercial real estate services firm Avison Young, cautioned that the idea of the outbreak spurring businesses to head to the state's suburbs is at this point only a "narrative." There's no trend or factual information that "would demonstrate this migration outward," Heller said.

Yet there are "building blocks out there which would lead into the narrative," he said.

Among those factors, companies are considering the "hub and spoke" model, which would involve a hub office in New York City, a smaller office in the New Jersey suburbs and similar outposts in other parts of the region, Heller said. Employees would be able to work from home and drop into those small offices on an occasional basis.

"Where there's smoke, there's fire. People are talking about the hub and spoke," Heller said. "That wasn't discussed previous to COVID. ... It's good to have at least the concept out there and people talking about it."

Having smaller hubs also could save on time spent commuting between New York City and New Jersey, Hughes said.

"It may be optimal in terms of total productivity if you do have hubs, smaller hubs in New Jersey where people can cluster together once or twice a week on a staggered basis," Hughes said.

Another positive sign for New Jersey's suburban office market is the robust amount of residential sales in the suburbs during the pandemic.

For millennials in the family-raising stages of their lives, "the pandemic is sort of this gasoline on the fire accelerant, pushing them out or accelerating their suburbanization," Hughes said. With more workers living in the suburbs, the market potential for suburban offices is greater, he said.

Casting a shadow over that possible market growth, however, is that the crisis also has led to more employees working from home.

Against that backdrop, companies that are already in the suburbs may look to cut their footprints, said Katharine A. Coffey, a real estate attorney at Day Pitney LLP.

"It's a conversation that's being had in a lot of businesses as they enter month six of most of their workforce at home and they're oftentimes still paying rent on full square footage somewhere," Coffey said.

Coffey added that working from home has become "much easier and more acceptable ... than ever before."

"The longer that that continues in place, the less likely you are going to have employees wanting to go back to their offices, companies wanting to pay for square footage for them to be working in their offices and ... the less a large office footprint makes sense economically for a company," Coffey said.

Her fellow real estate practitioner at Day Pitney, Christopher Stracco, said there's the chance for demand for suburban office space due to the "potential exodus from highly congested areas where the fear of COVID is high."

On the other hand, there are employers "who now have employees who are used to working at home and, frankly, many of them are working from home effectively, and employers who hadn't previously established platforms for working at home have since done so," Stracco said.

When leases expire, "if companies decide they're going to let their folks work from home more so than not, then they need less space," Stracco said.

Beyond those effects of working from home, the atmosphere of suburban office complexes in the Garden State — where there's "no sense of community" — will turn off workers on a long-term basis, according to Robert S. Goldsmith, chair of the redevelopment and land use department at Greenbaum Rowe Smith & Davis LLP.

The pandemic may lead to an "interim uptick" for such buildings, with businesses attracted to the cheap space where their employees can spread out and avoid mass transit, but the revitalization of suburban office parks seems unlikely, Goldsmith said. Going forward, downtown areas will remain more appealing to workers than suburban offices, he said.

Goldsmith noted that the crisis is "diminishing social interaction."

"At some point, when we get out of this, I think people will appreciate ... working in a downtown Montclair, Morristown, New Brunswick, Newark, Jersey City, Hoboken, to have that social interaction, because we still crave that," he said.

--Editing by Aaron Pelc and Jill Coffey.

For a reprint of this article, please contact reprints@law360.com.

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