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OTTEAU Valuation Group, Inc.

OTTEAU Valuation Group, Inc. Administrative Offices

15 Brunswick Woods Drive East Brunswick, NJ 08816

Tel: 800-458-7161 Fax: 800-273-3295

www.otteau.com

January 6, 2012 Mr. Jack Kocsis, Jr. Chief Executive Officer Building Contractors Association of New Jersey Raritan Center Plaza II, Fieldcrest Avenue Edison, New Jersey 08837 RE: New Jersey Construction Forecast Dear Mr. Kocsis:

In accordance with your request, we submit our construction forecast. The purpose of this study is to provide a projection of how recent economic events will affect future spending and pricing levels for selected categories of construction in the State of New Jersey. The intended use of this study is to provide guidance to a Coalition of the General Building Construction Industry for strategic planning purposes. The specific projections set forth herein have been based upon analyses of relevant economic, demographic and real estate market factors. This summary report explains the various methodologies employed in developing our forecast as well as the relevant data upon which our opinions have been based. We hereby certify that we possess the knowledge and experience necessary to perform this study competently and have no present nor contemplate any future interest or bias with respect to the subject matter of this study report and the parties involved. Respectfully submitted,

Jeffrey G. Otteau, President–Otteau Valuation Group, Inc.

Richard B. Reading, Principal-Richard B. Reading Associates. JGO, RBR/nm


NEW JERSEY CONSTRUCTION FORECAST

A Summary Study Report

PREPARED FOR

A Coalition of the General Building Construction Industry

AUTHORED BY

Jeffrey G. Otteau, President Otteau Valuation Group, Inc. Brunswick Woods Office Park

15 Brunswick Woods Drive East Brunswick, NJ 08816

Richard B. Reading, Principal

Richard B. Reading Associates 759 State Road

Princeton, NJ 08540


TABLE OF CONTENTS Letter of Transmittal ....................................................................................................................... I Title Page ..................................................................................................................................... .ii Table of Contents .......................................................................................................................... iii I. INTRODUCTION Executive Summary ...................................................................................................................... 1 Intended Users of the Study ......................................................................................................... 4 Purpose & Intended Use of the Study ........................................................................................... 4 Date of the Study .......................................................................................................................... 6 Scope of Work .............................................................................................................................. 6 II. ECONOMIC, DEMOGRAPHIC & MARKET ANALYSIS Economics & Demographics ......................................................................................................... 8 For Sale Housing Market ............................................................................................................ 29 Multi-Family Rental Housing ....................................................................................................... 40 Office Market Analysis ................................................................................................................ 44 Retail Market Analysis ................................................................................................................ 47 Industrial Market Analysis ........................................................................................................... 52 Hospitality Market Analysis ......................................................................................................... 56 Healthcare Market Analysis ........................................................................................................ 57 III.IMPLICATIONS FOR CONSTRUCTION COSTS Cost Containment as a Construction Pricing Model ................................................................... 61 Historical Components of Price Change ..................................................................................... 62 Construction Industry Employment ............................................................................................. 62 Diminished Construction Volume ................................................................................................ 68 Components of Price Decline ..................................................................................................... 79 Implications for Labor .................................................................................................................. 82 Adjusting Construction Pricing to the Market .............................................................................. 87 IV. CONSTRUCTION SPENDING FORECAST Historical Construction Spending ................................................................................................ 91 Forecast Methodology ................................................................................................................ 94 Construction Spending Forecast Conclusions ............................................................................ 97 Certification of the Authors ........................................................................................................ 108 Qualifications of the Authors ..................................................................................................... 109 V. ADDENDUM Limiting Conditions, Assumptions & Hypothetical Conditions ................................................... 115 Definitions & Terms ................................................................................................................... 116

1


PART I – INTRODUCTION

EXECUTIVE SUMMARY

Date of Study Report: January 6, 2012 Effective Date of Study: September 1, 2011 Client: A Coalition of the General Building Construction Industry Geographic Study Area: State of New Jersey Intended Use: To provide guidance to the construction industry regarding future

construction activity for strategic planning purposes Synopsis: The intended use of this study is to provide guidance to the construction industry for strategic planning purposes. The purpose of this study is to provide a projection of how recent economic events will affect future construction spending and pricing in the State of New Jersey for the following market sectors:

Multi-Family Construction Office Construction Retail Construction Industrial Construction Hospitality Construction (hotels & motels) Healthcare Construction Miscellaneous Non-Residential Construction Government Construction Education Construction Aggregate Construction (limited to the above sectors only)

From a historical perspective, New Jersey has long been a top economic performer due to a combination of factors including its strategic geographic location between New York City and Philadelphia, a diverse and highly educated workforce, the present of Newark International Airport and the Port Newark-Elizabeth shipping port, and its high concentration of technology based jobs. In 2010, the US Census Bureau reported that New Jersey had a total estimated population of 8,791,894 reflecting 4.5% growth from 2000. The State of New Jersey is comprised of 21 counties and 566 municipalities situated on 7,417.34 square miles of land area. The state’s population density of approximately 1,168 people per square mile is more than 10 times greater than for the US as a whole (86 / sq. mile) and exceeds that of the more crowded places around the world including India (992), Belgium (917), Japan (907), Israel (875) and the Philippines (785). Similarly, the state is also highly urbanized with 94 percent of its residing in urban areas which are defined as places with a population density of 1,000 people per square mile or greater. New Jersey also has the highest percentage of millionaire households in the

2


United States and has 3 counties which rank in Forbes Magazine list of “America's 25 Richest Counties. Despite this historic strength however the state has experienced significant loss of its economic base during the prior decade from 2000 - 2010 as evidenced by a range of indicators including stagnant long-term private sector job growth, the replacement of lost high-paying jobs with ones paying lower salaries, a steeper decline in household income than for the rest of the nation, elevated domestic outmigration whereby residents are leaving the state, elevated unemployment which exceeds the regional and national rate, and a slower pace of job recovery since the recession ended than is being experienced elsewhere. In addition to these economic challenges there are a number of demographic shifts occurring which have the potential to redirect future construction activity toward more urban locations in the state, particularly those that are nearest to New York City. This study has been based upon an econometric analysis of historic and current key drivers of construction activity to include economic, demographic, real estate and governmental factors. The results of our analysis indicate that the restructuring of the Statewide and National economies as a result of the “Great Recession”, coupled with the long term structural economic challenges facing New Jersey have had a disproportionate impact on the construction industry. These effects are evidenced by dramatic reductions in construction spending, construction employment and market price levels for real estate. We expect these challenges to continue for the foreseeable future as lower market price levels for commercial real estate require a corresponding reduction in construction costs to achieve financial feasibility. In other words, new construction projects will need to achieve a reasonableness of finished cost or they simply won’t be built. More specifically, we have found that real estate values in the specific construction sectors analyzed in this study declined statewide from 2005 - 2010 by an average of 20.6%. These price declines have a direct and necessary compressive effect on construction pricing since finished costs must correlate to finished market values. As a result of these effects, construction costs need to decline by a statewide average of 27.4% to offset the market pricing declines in the real estate market sectors analyzed in this report. While this ‘top down’ compression creates downward pressure on overall construction costs, two of the major components of that cost have recently been increasing as evidenced by rising construction material costs and higher proportional land values. These dynamics point to long term downward pressure and compression of costs associated with construction management services and labor. The study has also analyzed historical construction spending in New Jersey at the sector and geographic levels. Further, the continuing economic challenges affecting the state and the national overall suggest that the steep decline in construction spending in recent years is not expected to return to prior levels in the near future. Based upon our analyses, our forecast for the dollar volume of construction starts in New Jersey from 2011 – 2015 is summarized in the following chart:

3


$5,492

$6,394

$5,076

$5,814

$4,498 $6,280

$3,329

$3,569

$3,214

$3,358

$3,511

$3,615

$3,720

$0

$2,000

$4,000

$6,000

$8,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ M

illions

New Jersey Construction ForecastAggregate of Sectors

4


INTENDED USERS OF THE STUDY

The intended user of the report is the client, a coalition of the general building construction

industry, which includes the following organizations:

Bricklayers & Allied Craftworkers Labor-Management Council of NJ Building Contractors Association of New Jersey Building Contractors Association of Atlantic County Building Contractors Association of South Jersey Drywall & Interior Systems Contractors Association Floor Covering Institute of New Jersey Ironworkers-Management Progressive Action Cooperative Trust Masonry Contractors of New Jersey NJ Laborers’ Employers’ Cooperation & Education Trust New Jersey Carpenter Contractor Trust Operating Engineers, Local No. 825

Any reliance upon this report by anyone other than the client is unintended.

PURPOSE & INTENDED USE OF THE STUDY

The purpose of this study is to provide a projection of how recent economic events will affect

future spending and pricing levels for the following categories of construction in the State of

New Jersey.

Multi-Family Construction – is defined as a building composed of three or more dwelling units, usually with common access, service systems, and land use.

Office Construction – is defined as a place in which business, clerical, or professional activities are conducted. For the purpose of this study, office includes the following subcategories: Office and Office Warehouse.

Retail Construction – is defined as being related to the sale of goods or commodities in small quantities directly to consumers. For the purpose of this study, retail includes the following subcategories: Automotive, Bank Branches, Food Stores, Funeral Homes, Individual Stores, Movies & Entertainment, Restaurants and Shopping Centers.

Industrial Construction - Industrial is defined as property (land and/or improvements) that can be adapted for industrial use; a combination of land, improvements and machinery integrated into a functioning unit to assemble, process, and manufacture products from raw materials or fabricated parts; factories that render service, e.g., laundries, dry cleaners, storage warehouses, or those that produce natural resources, e.g., oil wells. For the purpose of this study, industrial includes the following subcategories: Industrial Laboratories, Laboratories, School Laboratories, Manufacturing, Rental Warehouses & Warehouses.

Hospitality Construction (hotels & motels) - is defined as the industry consisting of a broad category of fields within the service industry that includes lodging, restaurants,

5


event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. The hospitality industry is a several billion dollar industry that mostly depends on the availability of leisure time and disposable income. A hospitality unit such as a restaurant, hotel, or even an amusement park consists of multiple groups such as facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources. For the purpose of this study, hospitality includes the following categories:

o Hotel is defined as a facility that offers lodging accommodations and a wide range of other services, e.g., restaurants, convention facilities, meeting rooms, recreational facilities, and commercial shops. Subcategories of lodging include budget, economy, luxury, mid-price, and upscale.

o Motel is defined as a building or group of buildings located on or near a highway and designed to serve the needs of travelers by offering lodging and parking; may also provide other services and amenities, e.g., telephones, food and beverages, meeting and banquet rooms, recreational areas, swimming pool, shops.

Healthcare Construction - is a composite category which includes the following subcategories:

o Hospitals/Clinics which for the purpose of this study includes the following subcategories: Hospitals and Clinics, Imaging Centers, Medical Offices, and Outpatient Surgery Centers.

o Nursing/Assisted Living which for the purpose of this study includes the following subcategories: Assisted Living Facilities, Independent Living Facilities and Nursing Homes.

Miscellaneous Non-Residential Construction – is defined as a composite category which includes the following construction subcategories:

o Amusement which for the purpose of this study includes the following subcategories: Arenas and Convention Centers, Auditoriums, Clubs and Community Centers, Golf Courses and Country Clubs.

o Miscellaneous Commercial which for the purpose of this study includes the following subcategories: Broadcast Studios and Transportation Terminals.

o Miscellaneous Other which for the purpose of this study includes the following subcategories: Demolition and Electrical Work Facilities.

o Parking Garages which for the purpose of this study includes the following subcategory: Parking facilities.

o Religious which for the purpose of this study includes the following subcategories: Religious Auditoriums and Religious Classrooms.

Government Construction – is defined as a is a composite category which includes the

following subcategories:

o Government Space which for the purpose of this study includes the following subcategories: Governmental Offices, Courthouses, Fire Stations, Jails, Juvenile Detention Facilities, Police Stations and Prisons.

o Miscellaneous Government which for the purpose of this study includes the following subcategories: Government - Miscellaneous Buildings, Park Buildings and Post Offices

6


Education Construction – is defined as a composite category which includes the following subcategories:

o Libraries/Museums which for the purpose of this study includes the following subcategories: Libraries and Museums.

o Schools/Colleges which for the purpose of this study includes the following subcategories: Cafeterias, Classrooms, College, University – Miscellaneous, Dormitories, Elementary & Pre- Schools, Gyms & Athletic Buildings, Junior High Schools, Senior High Schools, School Auditoriums, Special Schools and Vocational Training.

Aggregate Construction – is defined as being limited to the sum total of the construction sectors identified and is therefore not indicative of total construction spending. This aggregate therefore excludes the following sectors which are not analyzed in this report:

o Civil (including roads, highways & bridges) – EXCLUDED

o Military – EXCLUDED

o Single-Family Residential – EXCLUDED

The intended use of this study is to provide guidance to the construction industry for strategic

planning purposes.

DATE OF THE STUDY

The analyses, forecasts and opinions set forth herein have been based upon an analysis of

relevant data that was available during the time period immediately preceding the effective date

of this study, which is September 1, 2011. It should be understood by any intended users and

readers of this report that the rate of change, which is always occurring with regard to economic,

governmental, demographic, social and political dynamics; has accelerated substantially in

recent years with the onset of the economic recession and its related aftershocks. As a result of

this volatility, forecasts such as these are inherently less certain and therefore more useful in

predicting broader measures of change rather than specific pinpoint projections. Readers of

this report should therefore exercise appropriate caution in interpreting and applying the

conclusions set forth herein.

SCOPE OF WORK

In developing this analysis we have investigated factors that are relevant to the purpose and

intended use of the forecast. Specifically, the intended use of this report is to provide a

projection of future spending and pricing levels for selected categories of construction in the

7


State of New Jersey for strategic planning purposes. The scope of work employed in

developing this analysis included:

1. Identification of the purpose and intended use of the analysis.

2. Identification of relevant economic, demographic, construction and real estate market

data points that are relevant the purpose and intended use of the forecast.

3. Researched national, regional, statewide and county level data from reliable sources

including US Census Bureau, Comparable Sale Databases, Market Analysis Databases,

the Bureau of Labor Statistics (BLS), the Bureau of Economic Analysis (BEA), NJ Dept.

of Labor & Workforce Development, NJ Dept. of Health & Senior Services, Reed

Construction Data LLC, CoStar Realty Information Inc., Reis Inc., Smith Travel Report,

PKF Hospitality Research, Nielsen Site Reports, various national, local and regional

subscribed services and records developed and data collected by our team of

researchers and analysts.

4. The application of appropriate analysis techniques employed in developing our analyses.

5. A reconciliation of the data and analysis techniques employed to derive our forecast

conclusions.

After developing our analysis and forecast conclusions, the next step is to report our findings to

the intended user. The results of this forecast analysis are reported in a Summary Report

format with some additional research results and supporting documentation having been

retained in our work file. Therefore, this report is not intended to be a complete stand-alone

document encompassing all aspects of the study analysis but instead communicates the more

important and salient facts and conclusions which formed the foundation for analyses, forecasts

and conclusions set forth herein.

The following persons provided assistance in developing the analyses and conclusions set forth

in the report, as follows:

Jessica L. Curcio provided significant professional research, analysis and report writing

assistance to Jeffrey G. Otteau.

Eric G. Tazelaar provided significant professional research, analysis and report writing

assistance to Richard B. Reading.

8


PART II – ECONOMIC, DEMOGRAPHIC & MARKET ANALYSIS

ECONOMICS & DEMOGRAPHICS

Demand for real estate is directly affected at the macro and micro levels by a wide range of key

economic and demographic drivers. This section of the report will discuss the primary

determinants and their relationship to real estate demand.

Gross Domestic Product (GDP) - Beginning with the US economy, GDP first began to decline in

Q1 2008 coincident with the official start of the economic recession in December 2007. That

recession, which has since become known as ‘The Great Recession’ officially ended in June

2009 ranking its duration of 18 months as the longest period of modern-day economic

contraction since World War II.

Over the course of the recession GDP contracted in 5 out of 6 quarters with the deepest

declines occurring in late 2008 and early 2009 following the collapse of the financial markets

earlier in 2008.

9


Since the recession’s end in June 2009, GDP has increased for 8 consecutive quarters. It is

significant to note that the recent economic expansion was attributable in large part to $3.2

Trillion of economic stimulus enacted by Congress and orchestrated by the Federal Reserve. A

part of this stimulus was allocated to a series of 3 federal homebuyer tax credit offerings, the

most recent of which expired in April 2010. More recently in 2011, the pace of recovery has

slowed dramatically raising fears of an economic stall or the start of a new or recession. While

it’s presently unclear as to how the future will unfold in this regard, the consensus opinion

among economists is for the pace of economic recovery to remain weak for the foreseeable

future. Therefore, prospects for a speedy recovery in the construction industry remain dim.

Employment - Focusing next on job growth, total US non-farm employment declined

precipitously during the recession with net job losses occurring for 25 consecutive months

beginning in February 2008 until February 2010.

10


‐0.1

‐0.1

‐0.3‐0.6

‐0.7

‐1.0‐1.2

‐1.7 ‐2.2 ‐3

.0 ‐3.6‐4.4‐5.1‐5.9 ‐6

.6 ‐7.0 ‐7

.5 ‐7.8‐8.0‐8.3‐8.5

‐8.5

‐8.7

‐8.7

‐8.7

‐8.5

‐8.3

‐7.8‐8.0

‐8.1

‐8.1

‐8.1

‐8.0

‐7.9

‐7.7

‐7.7

‐7.4

‐7.2

‐7.0

‐7.0

‐6.9

‐6.9

‐6.9

‐9.5

‐8.5

‐7.5

‐6.5

‐5.5

‐4.5

‐3.5

‐2.5

‐1.5

‐0.5

Jan‐08

Feb‐08

Mar‐0

8Apr‐0

8May‐0

8Jun‐08

Jul‐0

8Aug‐0

8Sep‐08

Oct‐0

8Nov‐0

8Dec‐0

8Jan

‐09

Feb‐09

Mar‐0

9Apr‐0

9May‐0

9Jun‐09

Jul‐0

9Aug‐0

9Sep‐09

Oct‐0

9Nov‐0

9Dec‐0

9Jan

‐10

Feb‐10

Mar‐1

0Apr‐1

0May‐1

0Jun‐10

Jul‐1

0Aug‐1

0Sep‐10

Oct‐1

0Nov‐1

0Dec‐1

0Jan

‐11

Feb‐11

Mar‐1

1Apr‐1

1May‐1

1June‐11

July‐1

1Aug‐1

1

Job Loss ‐MIllions

Source: U.S. Dept. Labor, Bureau of Labor Statistics

US Cummulative Job Losses

Over that time period and through February 2010, US economy lost 7,490,000 non-farm jobs

representing a 5.4% decline.

Dec 2007 June 2009United States 137,983,000 130,493,000 (7,490,000) -5.4%

Job Loss

NON-FARM EMPLOYMENT

While the US economy has realized a net gain in Non-Farm jobs since then, the pace of job

creation has slowed significantly in 2011 ending with zero (0) net jobs being created in August.

(a preliminary estimate subject to revision). Based upon the pace of job recovery from March

2010 to date, the US economy is on pace to recover the remaining non-farm jobs lost during the

recession by February 2017 – approximately 5.5 years from now. The present US

unemployment rate stands at 9.1% down from its cyclical peak of 10.1% in October 2009 but

higher than the 8.8% rate in March 2011.

11


13,000

‐83,000

‐72,000

‐185,000

‐233,000

‐178,000

‐231,000

‐267,000

‐434,000

‐509,000 ‐8

02,000

‐619,000

‐820,000

‐726,000

‐796,000

‐660,000

‐386,000

‐502,000

‐300,000

‐231,000

‐236,000

‐221,000

‐55,000

‐130,000

‐39,000

‐35,000

192,000

277,000

458,000

‐192,000

‐49,000

‐59,000

‐29,000

171,000

93,000

152,000

68,000

235,000

194,000

217,000 53,000

20,000

85,000

0

‐1,200,000‐1,100,000

‐1,000,000‐900,000‐800,000‐700,000

‐600,000‐500,000‐400,000‐300,000‐200,000

‐100,0000

100,000200,000

300,000400,000500,000600,000700,000

Jan‐08

Feb‐08

Mar‐0

8Apr‐0

8May‐08

Jun‐08

Jul‐0

8Aug‐08

Sep‐08

Oct‐0

8Nov‐08

Dec‐08

Jan‐09

Feb‐09

Mar‐0

9Apr‐0

9May‐09

Jun‐09

Jul‐0

9Aug‐09

Sep‐09

Oct‐0

9Nov‐09

Dec‐09

Jan‐10

Feb‐10

Mar‐1

0Apr‐1

0May‐10

Jun‐10

Jul‐1

0Aug‐10

Sep‐10

Oct‐ 1

0Nov‐10

Dec‐10

Jan‐11

Feb‐11

Mar‐1

1Apr‐1

1May‐11

June‐11

July‐11

Aug‐11

Job Loss


US Non‐Farm Job ChangeJan 2008 ‐ Present

Shifting to New Jersey, the state has long been a top economic performer due to a combination

of factors including its strategic geographic location between New York City and Philadelphia, a

diverse and highly educated workforce, the presence of Newark International Airport and the

Port Newark-Elizabeth shipping port, and its high concentration of technology based jobs.

In 2010, the US Census Bureau reported that New Jersey had a total estimated population of

8,791,894 reflecting 4.5% growth from 2000, and is the most densely populated state within the

entire U.S. The state is comprised of 21 counties and 566 municipalities situated on 7,417.34

square miles of land area. New Jersey’s 21 counties are divided into seven Metropolitan

Statistical Areas (listed below), and is located at the center of the Northeast Megalopolis.

Allentown-Bethlehem-Easton, PA-NJ Atlantic City-Hammonton, NJ New York-Northern New Jersey-Long Island, NY-NJ-PA Ocean City, NJ Philadelphia-Camden-Wilmington, PA-NJ-DE-MD Trenton-Ewing, NJ Vineland-Millville-Bridgeton, NJ

The state’s population density of approximately 1,168 people per square mile which is more

than 10 times greater than for the US as a whole (86 / sq. mile) and exceeds that of the more

crowded places around the world including India (992), Belgium (917), Japan (907), Israel (875)

and the Philippines (785). Similarly, the state is highly urbanized with 94 percent of its residing

in urban areas which are defined as places with a population density of 1,000 people per square

mile or greater.

12


With regard to the state’s economy, New Jersey’s per-capita Gross State Income (as calculated

by Gross State Product) of approximately $58,000 exceeds the US figure of approximately

$48,000 and would rank the state as the 6th highest in the world if New Jersey was a country.

Evidence of the state’s economic strength is seen in its consistently high ranking for household

income which is a key driver for many construction sectors including housing (single & multi-

family), retail and warehousing. According to the US Census Bureau New Jersey had the 3rd

highest median household income in 2010 of $64,693 which was 23% above the national

income level of $50,022. As shown in the chart below, the highest ranking states of Connecticut

and New Hampshire have median incomes that are only 2% higher than New Jersey. By

contrast, the neighboring states of New York and Pennsylvania have significantly lower

household incomes ranging between 22%-25% lower than in New Jersey.

New Jersey also has the highest percentage of millionaire households in the United States. In

an article published in the March 2011 edition of Forbes Magazine entitled “America's 25

Richest Counties,” three of NJ’s counties were in the top 10 (Morris at Rank #7, Somerset at

Rank #5 & Hunterdon at Rank #4).

2009-2010

Median income

1 Connecticut 66,187 2%2 New Hampshire 65,949 2%3 New Jersey 64,693 0%4 Maryland 64,636 0%5 Virginia 60,932 -6%6 Massachusetts 60,843 -6%7 Alaska 60,410 -7%8 Washington 58,821 -9%9 Colorado 58,648 -9%10 Utah 58,122 -10%24 New York 50,436 -22%- United States 50,022 -23%

27 Pennsylvania 48,714 -25%

Rank

Delta to NJ

Median Household Income2-Yr Moving Average

State

SOURCE: US Census Bureau

The New Jersey economy suffered the loss of jobs during and immediately following the recent

economic recession. Non-farm employment began to decline in February 2008 with the largest

job losses occurring during the latter part of 2008 and 1st half of 2009, consistent with national

trends.

13


8,200

‐1,200

‐300

‐10,100

‐12,400

‐4,400

‐12,200

‐11,900

‐11,300

‐15,100 ‐2

2,200

‐18,300

‐15,200

‐15,500

‐20,700

‐18,400

‐900

‐13,100

‐15,700

‐4,100

‐1,700

‐7,100

100

‐1,200

‐9,100

‐9,700

6,000

18,300

6,700

‐4,600

‐11,300

‐6,700

‐8,900

3,800

5,700

‐7,200

‐15,800

13,700

4,300

12,500

2,900

8,800

1,800

‐35,000

‐25,000

‐15,000

‐5,000

5,000

15,000

Jan 08

Feb 08

Mar 0

8Apr 0

8May 0

8Jun 08

Jul 08

Aug 0

8Sep 08

Oct 0

8Nov 0

8Dec 0

8Jan

09

Feb 09

Mar 0

9Apr 0

9May 0

9Jun 09

Jul 09

Aug 0

9Sep 09

Oct 0

9Nov 0

9Dec 0

9Jan

10

Feb 10

Mar 1

0Apr 1

0May 1

0Jun 10

Jul 10

Aug 1

0Sep 10

Oct 1

0Nov 1

0Dec‐1

0Jan

‐11

Feb‐11

Mar‐1

1Apr‐1

1May‐1

1Jun‐11

Jul‐1

1


NJ Non‐Farm Job Change

Over the course of The Great Recession, New Jersey’s non-farm employment declined by

195,000 jobs through June 2009 reflecting a 4.8% loss, which was slightly less than the 5.4%

national decline.

Dec 2007 June 2009United States 137,983,000 130,493,000 (7,490,000) -5.4%New Jersey 4,086,400 3,891,400 (195,000) -4.8%

Job Loss

NON-FARM EMPLOYMENT

Those statistics only tell a part of the story however as they don’t account for New Jersey’s

subpar job growth in the years both before and after The Great Recession. By expanding the

above chart to reflect these additional time periods we find that non-farm job growth in New

Jersey during the 7 years preceding the recession increased by only 1.6% compared to a 4.1%

at the national level, equivalent to 38% of the national pace. Further, non-farm employment

growth since the recession’s end in June 2009 has reflected an additional loss of 0.5%

compared to a 0.5% increase for the US overall. As a result, New Jersey’s non-farm

employment now stands 5.2% below where it was at the start of the recession while the US is

down by 4.9%. In combination, these trends provide a clear indication that New Jersey’s

employment situation is, and has been, weaker than the US performance for more than a

decade. As a result, it is likely that the recovery of the construction market in the state will

progress at a slower pace than in other places.

14


Dec 2000 Dec 2007 June 2009 July 2011United States 132,485,000 137,983,000 5,498,000 4.1% 130,493,000 (7,490,000) -5.4% 131,190,000 697,000 0.5% (6,793,000) -4.9%New Jersey 4,023,500 4,086,400 62,900 1.6% 3,891,400 (195,000) -4.8% 3,872,900 (18,500) -0.5% (213,500) -5.2%

Change (pre-recession)

Change (recession)

Change (post-recession)

Change (12/2007 to date)

NON-FARM EMPLOYMENT

Based upon the recent pace of job recovery in New Jersey, which also began in March 2010,

the NJ economy is on pace to recover the remaining jobs lost during the recession by October

2021 - approximately 10 years, nearly twice as long as for the US economy.

An even closer look at employment gains 2000-2007 shows that the majority of that job creation

was concentrated in government employment. As shown in the chart below, private sector jobs

over that time period increased by only 7,700 representing a meager 0.2% gain over the entire 7

year period and equating to 0.03% (three hundredths of a percent) annually. During the same

time period however, public sector (government) employment increased by 55,200 jobs or 9.3%

and therefore accounted for 88% of all job growth in the state.

Dec 2000 Dec 2007Private Sector 3,429,400 3,437,100 7,700 0.2%Government 594,100 649,300 55,200 9.3%Total 4,023,500 4,086,400 62,900 1.6%

Change

NJ Nonfarm Jobs2000 - 2007

Given the current fiscal challenges facing all levels of government, and considering that 9 out of

10 jobs created in the state during the pre-recession years of 2000-2007 were in the public

sector, it is clear that future job growth in the state will need to come from the private sector.

The chart below shows the beginnings of private sector job growth in New Jersey. This chart

analyzes comparative trends in both the public (government) and private sectors since the start

of The Great Recession in December 2007. As shown below, job losses during that

recessionary period were concentrated entirely in the private sector.

15


1,700

‐300

0 ‐400 500 1,20

0‐2,800

‐2,000

600

‐300

‐900

‐200

5,20

030

002,200

400

‐300

‐2,000

600

‐400

‐800

‐200

‐800

‐1,400

‐2,300

‐300 2,70

011,40

0‐6,500

‐6,800

‐9,100

‐11,00

02,000

1,300

‐2,200

‐5,900 1,300

400

0 100

‐4,700

6,500

‐900

‐300

‐9,700

‐12,90

0 ‐5,600

‐9,400

‐9,900

‐11,900

‐14,80

0‐21,30

0‐18,100

‐20,400

‐15,800

‐20,700

‐20,600

‐1,300

‐12,800

‐ 13,700

‐4,700

‐1,300

‐6,300

300

‐400

‐7,700

‐7,400

6,300

15,600

‐4,700 1,

900

‐4,500

2,40

02,10

01,800 4,40

0‐5,000

‐9,900

12,400

3,900

12,500

2,800 6,40

0

‐40,000

‐30,000

‐20,000

‐10,000

0

10,000

20,000

Jan 08

Feb 08

Mar 08

Apr 08

May 08

Jun 08

Jul 08

Aug

08

Sep 08

Oct 08

Nov 08

Dec 08

Jan 09

Feb 09

Mar 09

Apr 09

May 09

Jun 09

Jul 09

Aug

09

Sep 09

Oct 09

Nov 09

Dec 09

Jan 10

Feb 10

Mar 10

Apr 10

May 10

Jun 10

Jul 10

Aug

10

Sep 10

Oct 10

No v

10

Dec

‐10

Jan‐11

Feb‐11

Mar‐11

Apr‐11

May‐11

Jun‐11

NJ Monthly Job Change

Government Private Sector

SOURCE: U.S. Dept of Labor Statistics

More recently however, private sector job creation has improved suggesting that some measure

of economic stabilization is occurring in the state. Over the past 6 months, private sector job

creation in the state has occurred at a pace equivalent to 150% the national pace (on a prorated

basis). As shown in the following chart, private sector employment increased in New Jersey for

6 consecutive months, and 10 of the last 12 months (through July 2011).


16


Based upon the pace of private-sector job recovery in New Jersey from March 2010 through

July 2011, the NJ economy is on pace to recover the remaining private sector jobs lost during

the recession by February 2016, approximately 5 years sooner than for non-farm jobs in the

state.

Despite these gains however, private sector employment in the state is still down by 182,900

jobs or 5.3% from the start of the recession in December 2007. Over that same period,

government employment is down by 30,600 reflecting a 4.7% decline.

Dec 2007 July 2011Private Sector 3,437,100 3,254,200 (182,900) -5.3%Government 649,300 618,700 (30,600) -4.7%Total 4,086,400 3,872,900 (213,500) -5.2%

2007 - 2011 Change

NJ Nonfarm Jobs

Shifting to unemployment indicators, New Jersey’s 9.4% rate is the highest of the tri-state region

and also exceeds the national rate.

9.4%

8.0%8.2%

9.1%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

New Jersey New York Pennsylvania US

Unemployment Rate


17


5,000

10,000

15,000

20,000

25,000

30,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Week #

Weekly Initial Unemployment ClaimsNew Jersey

2009

2010

2011

The preceding analyses demonstrate long term challenges facing New Jersey relating to job

retention and attraction, which are reinforced by the factors:

NJ Business has the 3rd highest business taxes in the US (following #1 New York and #2

California) as reported by Tax Foundation

NJ has the highest real estate taxes in the US

NJ has highest per-capita taxes and 4th highest median home prices (following Hawaii,

California, and District of Columbia) and 5th highest monthly housing costs (measured as

a percentage of income). These costs pass through into the need to pay higher salaries

in the state which can compromise employer competitiveness.

Another benchmark for economic conditions is the filing rate for initial unemployment claims

which had generally trended lower over the past 2 years. Recently however, claims filings have

been on par with 2009 providing further evidence that the pace of economic recovery has

slowed.

SOURCE: U.S. Dept of Labor Statistics, Office of Unemployment Insurance, Employment & Training Administration

Recent rankings of state competitiveness rank New Jersey in the bottom half of all states:

According to a Tenth Annual Competitiveness Report by the Beacon Hill Institute, which

purports to measure whether a state’s ability to “ensure and sustain a high level of per

capita income and continued growth”, New Jersey ranked 36th out of 50 states.

According to a 2010 survey by Chief Executive Magazine, CEO’s ranked New Jersey’s

business environment as 47th out of 50 states, making it 4th lowest ranking in the nation.

18


An analysis published by Site Selection Magazine in 2011 ranked New Jersey as the

weakest in the tri-state area in terms of the construction or expansion of corporate

employment facilities.

Tota l

4‐State

Share

4‐State

Share

US‐Average (per state) 92 n/a 268 n/a

Top State (TX) 424 n/a 1,295 n/a

Pennsylvania 337 63% 960 55%

New York 168 31% 595 34%

New Jersey 23 4% 182 10%

Delaware 8 1% 14 1%

Source: Conway Data Inc for Site Selection Magazine

2010 2008‐2010

New Corporate Facilities & Expansions

Household Income - The combined effects of the recent economic recession coupled with the

more systemic problems discussed above have a direct pass-through effect into both personal

income and construction demand. As discussed previously, New Jersey has consistently

ranked near the top of all states in terms of household income which is a key driver for many

construction sectors including housing (single & multi-family), retail and warehousing. However,

the erosion of the state’s private sector job base during the period from 2000-2007 coupled with

the recent economic recession has resulted in an erosion of household income at the 3rd fastest

pace in the US. During the 2 year period from 2005-2006, New Jersey had the highest

household income in the US which has currently slipped to the #3 position. As shown below,

household income declined by 10.4% from 2005-2006 to 2009-2010, which is 2.8 times the

national decline of 3.7%. By comparison, household income declined at a slower pace in the

neighboring states of Pennsylvania (-6.4%) and New York (-3.8%). The 10.4% decline in New

Jersey ranks as the 3rd largest in the US following Georgia (#1) and Hawaii (#2).

19


2005-2006

Median income

Median income Change

1 Georgia 44,082 52,326 -15.8%2 Hawaii 57,538 65,970 -12.8%3 New Jersey 64,693 72,186 -10.4%4 Michigan 46,597 51,954 -10.3%5 Minnesota 54,785 60,668 -9.7%6 Tennessee 39,936 44,008 -9.3%7 Rhode Island 52,200 56,688 -7.9%8 Arizona 46,887 50,493 -7.1%9 Florida 45,314 48,704 -7.0%10 Arkansas 37,856 40,507 -6.5%11 Pennsylvania 48,714 52,067 -6.4%24 New York 50,436 52,418 -3.8%

United States 50,022 51,932 -3.7%Note: Income in 2010 CPI-U-RS adjusted dollars

State

2009-2010

Rank

Median Household Income DeclineBased Upon 2-Yr Moving Average

SOURCE: U.S. Census Bureau

It is noted that nearly all of the decline in New Jersey occurred between 2005/2006 and

2007/2008 over which time period median household income declined by 10.1%, suggesting

that some measure of income stabilization occurred in 2009 and 2010.

Consumer Confidence - As discussed previously, economic conditions are directly relevant to

projecting future real estate demand and construction activity. In this regard, a weaker

economy results in lower levels of construction activity, and vice versa. The faster pace of

economic recovery in 2010, both in terms of GDP and job creation, had the effect of improving

consumer confidence heading into the 1st half of 2011. Recently however, that confidence has

begun to erode due to the ripple effects of the slowing pace of economic recovery. Still,

consumer confidence through June 2011 was at the highest level of the past 4 years, while

significantly lower than the time period from 2005-2007. It is likely however those lower

consumer confidence readings will emerge due to the recent financial turmoil following the

raising of the Federal debt ceiling and emerging information about the depth of the economic

crisis in Europe.

20


SOURCE: NJ Dept. of Labor & Workforce Development

Domestic Outmigration - Another noteworthy trend for New Jersey is that outmigration has been

occurring at an elevated pace in recent years. Net Domestic Migration represents the net flow

of residents moving into the state from another state versus those moving out of New Jersey to

another state. New Jersey now ranks among the highest in the US in this regard due in part to

older age residents relocating to other states offering lower housing costs and a lower overall

cost of living. Following is a recap of New Jersey’s recent Net Domestic Migration as reported

by the US Census Bureau:

2002 -23,759

2003 -33,225

2004 -45,045

2005 -56,989

2006 -72,547

2007 -69,160

2008 -56,208

2009 -31,690

NOTE 1: The decline in domestic outmigration in 2009 was part of a nationwide trend whereby the economic effects of the

recession resulted in diminished household mobility. Looking ahead, it is expected that New Jersey’s outmigration will

accelerate as the economic recovery progresses due to structural drivers which include high housing costs, high cost of living,

high tax rates and erosion of household income...

NOTE 2: 2010 Census data not yet released

21


These trends have resulted in a cumulative loss of 388,623 residents over the 8 year period of

2002 – 2009. Going back to 2000, the cumulative loss was 459,803, ranking New Jersey as

4th worst in the US. While net loss due to domestic outmigration has been recently declining,

this is likely due to reduced mobility in a weakened economy rather than any improvement in the

state’s high cost of living.

Another study conducted by United Van Lines ranked New Jersey as being the state with

highest percentage of outbound shipments followed by Michigan (#2) and Missouri (#3). Also

noteworthy in this regard is a 2007 study published by Monmouth University which found that

(50%) of all New Jersey residents want to leave the state and live somewhere else.

2010 United Van Lines Migration Study

These domestic outmigration trends are anticipated to adversely affect future demand for

housing, retail, warehousing and governmental construction.

Fewer Households With Children Living At Home & Declining School Enrollment - Since

peaking in the 1980’s, the percentage of New Jersey households with children living at home

has declined to 35% with future declines likely over the next decade. This trend, which is based

in the composition of New Jersey’s demographic cohorts, is anticipated to drive future housing

demand increasingly toward smaller homes including multi-family housing in more urban

22


locations. The table below shows that 65% of households within the state of New Jersey have

no children under the age of 18 living at home.

State of NJ %2011 Est. Households by Presence of People 3,220,564Households with 1 or more People under Age 18: 1,138,502 35.35 Married-Couple Family 796,958 70.00 Other Family, Male Householder 75,601 6.64 Other Family, Female Householder 258,685 22.72 Nonfamily, Male Householder 5,588 0.49 Nonfamily, Female Householder 1,670 0.15 Households no People under Age 18: 2,082,062 64.65 Married-Couple Family 862,721 41.44 Other Family, Male Householder 73,715 3.54 Other Family, Female Householder 156,262 7.51 Nonfamily, Male Householder 438,102 21.04 Nonfamily, Female Householder 551,262 26.48

Source: The Nielsen Company

These trends have already affected school enrollments in New Jersey which after decades of

increasing have recently begun to decline. According to data published by the New Jersey

Department of Education, statewide public school enrollment declined from a peak of 1,394,779

for the 2005-2006 school year to 1,349,092 for the 2010-2011 school year. This reflects a

decline of 48,687 (-3.3%) students statewide. Given the trend toward fewer households with

children living at home identified above, this pattern of declining school enrollment is likely to

expand in the future.

Declining Homeownership & Rising Rentership – Consistent with national trends, New Jersey

residents found it increasingly difficult to find affordable housing choices within their financial

means. This situation is exacerbated due to the state having the highest per capita taxation and

3rd highest home prices in the US. Considering these factors together with the state’s 3rd

largest decline in household income over the past 4 years and the large rate of domestic

outmigration provide evidence that New Jersey’s present range of housing alternatives do not

meet the needs of its residents. The ramifications of these trends, coupled with elevated

mortgage delinquency and foreclosure rates among existing homeowners have increased rental

demand in recent years due to the inverse relationship between rental and purchase demand as

shown below.

23



The inverse of this trend is that renter occupancy in New Jersey has been rising in recent years

and reached its highest point in Q3 of 2010. This implies long-term increases in rental demand

in the state in future years.


24


Given the slow pace of job creation, high rate of mortgage delinquency & foreclosure, tight

lending standards, declining household income and high home prices in the state, rentership is

anticipated to account for an increasing share of housing occupancy in future years.

Increasing Urban & Declining Rural Demand - A developing trend in New Jersey is an

increasing preference among home buyers toward locations that offer closer proximity to

employment centers and transportation corridors. This trend is evident across a range of

demographic and real estate market indicators. One of the reasons for this shift is the

previously discussed trend toward households without children living at home, which presently

account for 65% of all households in the state. This is because shrinking household size

translates into less demand for larger house sizes which become less expensive in

exurban/rural submarket areas. Another reason for this shift away from rural areas is the

increased cost of gasoline due to elevated oil prices which makes commuting from far removed

areas expensive. As a result, the ‘drive-till-you-qualify’ approach to home buying is no longer

viable because the savings in housing expense associated with rural areas is offset by the

increased cost of daily commuting to work each day.

Another factor influencing this trend is the emergence of a demographic cohort known as

Generation-Y (Gen-Y). This cohort, which is also referred to as the Millennial or Echo-Boomer

generation, includes those born between 1977 and 1994. Gen-Y consists of approximately 77-

Million people in the US and is of equal size to the Baby-Boom generation. The leading edge of

Gen-Y is currently turning age 33 at a rate of 11,000 per day across the US and is therefore a

powerful demographic group which will increasingly dominate the economy as their maturation

continues. Studies of Gen-Y have shown a high interest in living in downtown lifestyle locations

offering easy access to both mass transportation and retail services situated within walking

distance. The strongest indication of these trends is found in urban, semi-urban and inner-ring

suburban communities that are situated within close proximity to employment centers and

transportation facilities including rail, bus and convenient highway access.

An additional component for more urban-centric housing demand comes from older age empty-

nest households interested in the lifestyle amenities and/or the lower home prices associated

with higher density multi-family housing. A 2008 survey of homebuyers conducted by Coldwell

Banker Real Estate found that 80% of prospective home buyers indicated a preference for an

urban location, 75% want the ability to walk to work from their homes, and 55% indicated

proximity to public transportation to be a high priority in selecting a home to purchase. While

25


this cohort tends to prefer inner-ring suburbs to more urban downtown locations, they still

account for reduced housing demand in outlying rural locations.

Still another factor in the urbanization of housing demand is the increased importance of

employment opportunities in Manhattan to New Jersey households. Different from the

employment situation in New Jersey, New York City’s economic downturn resulting from the

recession began later, declined less, and began recovery sooner. Also, the pace of job

recovery in New York City is progressing at a faster pace than for New Jersey and the US

overall and is on pace to recover all of the jobs lost during the recession ahead of schedule.

Evidence of this shift can be found in the real estate market in a variety of indicators, most

notable of which is the rising share of building permits issued in towns with rail stations.

According to research by New Jersey Future, the share of New Jersey residential building

permits issued in towns with a rail station increased from 24% in the decade of the 1990’s to

43% in the combined years of 2008-2009.

Source: New Jersey Future

Still more evidence of this trend can be found in an analysis of home prices prepared by Otteau

Valuation Group (OVG) which found that home price increases in towns situated along the Mid-

Town Direct train line, which offers express service to New York’s Pennsylvania Station,

outpaced the rest of the state. This same analysis found that home prices in Emerging Markets,

which are defined as towns with an abundance of affordably priced small-lot homes situated

within walking distance of a downtown business district served by a rail station, and which have

not yet experienced significant redevelopment activity, also exceeded the state-wide trend. It is

26


noted however that the price premium in Emerging markets has not translated to towns on the

Riverline in the southern portion of the state.

Market Sector

Midtown Direct 6%

Emerging Markets 2%

Statewide 1%

Suburban ‐ North NJ ‐2%

Riverline ‐5%

Suburban ‐ South NJ ‐6%

Urban ‐6%

2010 NJ Median Home Prices% Change

SOURCE: Otteau Valuation Group, Inc.

Further evidence of this trend comes from the county population estimates from the Census

Bureau for 2009 which indicate a marked change from past patterns as summarized in the

following analysis by New Jersey Future (New Jersey Future Facts Blog; April 28, 2010; Tim

Evans):

“Pike and Monroe counties, in the Poconos, used to be the two fastest growing counties in the entire northeastern United States, but they have tailed off in the latter half of the 2000s. Monroe County had already been overtaken by several New Jersey counties (and by Northampton County, Pa., in the Lehigh Valley) a few years ago and now Pike’s annual growth has come back down to earth as well. For 2008-2009, two New Jersey counties (Somerset and, surprisingly, Hudson) actually had higher growth rates than Pike.”

“As a more concrete illustration, looking at all 21 New Jersey counties plus the four eastern Pennsylvania counties that border northern and central New Jersey, the top five fastest growing counties for 2004-2005 were: Pike (Pa.), Monroe (Pa.), Cumberland (N.J.), Northampton (Pa.) and Gloucester (N.J.). But for 2008-2009, the top five were much less dominated by Pennsylvania: Somerset (N.J.), Hudson (N.J.), Pike (Pa.), Union (N.J.) and Ocean (N.J.). Two additional New Jersey counties—Passaic and Middlesex—outpaced the next fastest-growing Pennsylvania county, Northampton. And three more— Cumberland, Gloucester and Bergen—grew faster than Monroe. All of this is a dramatic change from what has been happening since 1990.”

“For the single year 2008-2009, the previous year’s fastest-growing county, Cumberland, has fallen to seventh place, and Gloucester, which had taken top honors for several years earlier in the decade, is in eighth. Instead, the top spot has been reclaimed by Somerset, which had been the fastest-growing county in the 1990s. More remarkable are most of the other counties that grew faster than Cumberland and Gloucester over the last year— Hudson, Union, Ocean, Passaic and Middlesex. Of these, only Ocean has habitually been among New Jersey’s fastest-growing in the 2000s; the other four have not been among the state’s population growth leaders in many years.”

27


“The turnaround is especially notable for Hudson County, which had been losing population earlier in the decade. In fact, Hudson had been losing population every decade since 1930 before staging something of a recovery in the 1990s. After growing by 10 percent in the 1990s, its population began slipping again, decreasing by 1.5 percent between 2000 and 2004 and declining each year up to 2007 (in fact, its population is still lower in 2009 than it was in 2000). But it posted a 0.46 percent gain for 2007-2008 and an even bigger 0.98 percent gain for 2008-2009. Remarkably, Hudson actually grew faster over the last year than any of the eastern Pennsylvania counties that had previously eclipsed all of New Jersey's counties in terms of growth rates.”

“Only three New Jersey counties posted population losses for 2008-2009: Sussex, Warren and Cape May. Cape May has lost people every year since 2000, but the two northwestern counties are not accustomed to population loss (although Sussex lost population last year, too). Sussex grew by 4.3 percent in the early part of the decade (2000-2004), ranking it eighth among New Jersey’s 21 counties, and Warren scored the third-highest growth rate for that period at 6.2 percent. “

“Most New Jersey counties’ numerical growth between 2008 and 2009 was less than or equal to what they had averaged between 2000 and 2004. Only five counties experienced absolute population gains over the last year that appreciably exceeded their annual average increases early in the decade: Bergen, Passaic, Essex, Hudson and Union. Interestingly, these five counties of the northern New Jersey “urban core” are the state's five most built-out counties. While growth is cooling off in the rest of the state, relative to the early years of the 2000s, it is accelerating in these most urbanized counties.”

“Numerous aspects of the new 2009 county population estimates point toward an attenuation of the expansion of New Jersey’s exurban fringes—both in the north, where the frontier had already crossed the Delaware River into eastern Pennsylvania, and in the south, where Philadelphia-centered growth was pushing into southern Gloucester County and even into northern Salem and Cumberland—and a resurgence in the state’s already-built counties, particularly in the north.”

A series of reports are emerging which indicate that the flow of jobs to suburban corporate

campus settings may be heading back to its urban roots. The Chicago Crain’s Business Journal

reports that companies such as Allstate, Motorola, AT&T, GE Capital, Sara Lee and even Sears

are re-considering their fringe suburban locations, generally in stand-alone campuses, and

considering a move back to downtown Chicago. Such a move by Sears would be significant

since it abandoned the country’s tallest building for an equally huge, though horizontal, building

45 miles from the Loop over 20 years ago. These current companies follow moves into

downtown Chicago by United Airlines and Navteq Corp. in the last decade. Also, UBS, the

huge Swiss banking firm, is reportedly considering relocating their U.S. headquarters back to

New York City from Stamford, Connecticut citing both a desire to locate nearer to its clients as

well as challenges in recruiting young bankers who want to live in Manhattan or Brooklyn to

work for the firm. Even downtown Detroit has seen four major corporate moves into the city in

recent years including the recent corporate headquarters of the parent company of Quicken

Loans. Here in New Jersey, Panasonic Corp. is relocating from Secaucus to Newark in a move

28


that will occupy 250,000 ft2 and employ 1,000 people by 2013. Also, Manischewitz is moving

into a renovated 200,000 ft2 manufacturing and corporate facility in Newark. According to

demographer Christopher B. Leinberger, a visiting fellow at the Brookings Institution, “the

reason in nearly every case? The millennial generation is demanding it. Highly-educated young

workers, the life’s blood of many industries, have been flocking to center cities in recent years.

Trying to recruit this talent to Stamford, Conn., or Hoffman Estates, Ill. is exceedingly difficult.

They are voting with their feet for a hip, high-density walkable lifestyle and a reverse commute

to the ‘burbs is not in the cards for most of them. The companies moved out to the suburbs to

attract their baby boomer parents, raising their kids in suburban isolation. The millennials are

doing what many generations have done in the past; they have rejected how they were raised.

This once again shows that building a high quality residential base will lead to the attraction of

jobs…only this time it is back to the future.”

These trends suggest a renewed interest and growing vitality for urban, semi-urban and inner-

ring suburban areas which will increase construction demand in these submarkets. A side

effect of this dynamic is an expectation for more muted construction volume in outlying

suburban and rural submarkets due to slower growth in localized real estate demand.

Looking ahead, the strengths and weaknesses of the New Jersey economy will impact future

prosperity and construction demand. On the positive side, the state’s strategic geographic

location coupled with its high gross domestic product, top-tier household income and high

population density will continue to create demand for construction activity in the future. At the

same time however the erosion of the state’s private sector employment base coupled with its

high-cost profile and sweeping demographic changes suggest a less robust future than in the

past. Also to be considered in forecasting the future is the recent acceleration in private sector

job growth in the state which raises hopes of a more robust economic recovery going forward.

Finally, a recent ranking coauthored by the Ewing Marion Kaufman Foundation and the

Information Technology and Innovation Foundation (ITIF) ranked New Jersey as the 4th highest

state in terms of its ability to thrive in a global economy.

29


The 2010 State New Economy Index

SOURCE: Ewing Marion Kaufman Foundation and the Information Technology and Innovation Foundation (ITIF)

According to that report, “New Jersey’s strong pharmaceutical industry, coupled with a high-tech

agglomeration around Princeton, an advanced services sector in Northern New Jersey, and

high levels of inward foreign direct investment help drive it to fourth place (up from sixth in 2002,

and fifth in 2008).”

Further reason for optimism can be found in a renewed commitment by the current

gubernatorial administration and both parties of the state legislature to promote economic

growth and to adopt policies focuses on ‘retaining and attracting’ private sector jobs in the state.

There have been a string of recent announcements by existing New Jersey employers’

decisions to remain in the state, coupled with out-of-state employers planning to relocate into

New Jersey, which have the potential to brighten New Jersey’s future.

FOR SALE HOUSING MARKET

National Trends – At the national level, existing-home sales in July declined slightly from the

prior month but were higher than one year ago. On a regional basis, sales increased in the

Northeast and Midwest while declining in the West and South. Total existing-home sales

(closed transactions) declined by 3.5 percent in July to a seasonally adjusted annual rate of

4.67 million but were 21.0 percent higher than the 3.86 million unit pace in July 2010 which was

30


a cyclical low point following the expiration of the home buyer tax credits last year. Contract

cancellations, due primarily to declined mortgage applications or under-appraisals, were

unchanged in July. 13 percent of the members of the National Association of Realtors (NAR)

reported that a contract was renegotiated to a lower sales price because of an under-appraisal.

National average mortgage rates increased slightly from the previous week to 4.22% in the

latest Primary Mortgage Market Survey released weekly by Freddie Mac on August 25, 2011.

This follows is the three consecutive weeks of declines.

According to the Mortgage Bankers Association survey for the week ending September 9, 2011,

mortgage applications increased 6.3 percent for the previous week on a seasonally adjusted

basis, with purchase applications rising 7.0 percent and refinance applications increasing by 6.0

percent. Refinancing accounted for 77.3 percent of all applications during the week while

adjustable rate mortgages (ARM) share declined from 7.1% in prior week to 6.9% in the most

recent week. The average contract interest rate for 30-year fixed-rate mortgages decreased to

4.17 percent from 4.23 percent which is the lowest in the history of the survey, with the previous

low being 4.21 percent in the week ending October 8, 2010. The interest rate for the 15-year

fixed-rate mortgages decreased to 3.40 percent from 3.41 percent which is also the lowest in

the history of the survey.

SOURCE: Mortgage Banker’s Association

31


YearPer-Capita

IncomeMedian

Home Value2000 $37,734 $167,4002001 $38,625 2.4% 12.0% $187,4882002 $39,453 2.1% 12.0% $209,9872003 $40,427 2.5% 15.0% $241,4852004 $41,438 2.5% 13.0% $272,8782005 $43,771 3.0% 15.1% $314,082

16.0% 87.6%5 -Year Change

Comparison of NJ Income vs. House Prices

Change

New Jersey Trends - The dramatic increase in New Jersey home prices from 2000 through

2005 resulted in a disparity between income and home prices (see chart below). This trend was

most pronounced in the entry-level housing price range as restrictive rezoning of land to lower

development densities resulted in a disproportionate concentration of luxury priced home

construction.

SOURCE: US Census Bureau & Otteau Valuation Group, Inc.

These trends resulted in significant increases in the cost of homeownership with New Jersey

rising to 2nd highest in the US (as of 2006). Due to New Jersey’s relatively high household

income relative to the rest of the nation, a more effective measurement of housing affordability

is to calculate housing affordability in terms of the ratio of monthly expense to gross income.

The chart below indicates that in 2005, 45% of all New Jersey homeowners had a monthly

housing expense that exceeded 30% of their gross income.

32


This increased to 46.1% in 2008, ranking New Jersey as 4th highest housing costs as a

percentage of income in the US (see 2008 ranking chart below).

Rank State Percent1 California 53.02 Nevada 49.03 Florida 48.94 New Jersey 46.15 Hawaii 45.86 Rhode Island 42.37 New York 41.58 Massachusetts 41.39 Oregon 40.8

10 Washington 40.6Source: US Census Bureau

Percent of Mortgaged Owners Spending 30% or More of Household

Income on Mortgage Costs

Note: More recently NJ rank fell to 5th at 46.8% in 2009

As a result of these trends New Jersey residents found it increasingly difficult to find affordable

housing choices within their financial means due to the state having the 1st highest per capita

taxation in combination with its high housing costs. While these trends are problematic for all

sectors of housing demand, they were particularly challenging for lower income households

33


which include younger entry-level home buyers and older age households in their retirement

years.

The resulting effect on the housing market was sharply diminished home purchase activity

beginning in the 3rd quarter of 2005 and continuing through the end of 2008 (see charts below):

SOURCE: Otteau Valuation Group, Inc

Further evidence of deterioration in the housing market is found in the chart below depicting the

sharp rise in Unsold Inventory which increased from 30,000 homes in January 2005 to more

than 70,000 homes by May of 2008.


34


The ensuing decline in home prices from 2006 – 2008 combined with continued low mortgage

interest rates had the effect of partially restoring housing affordability in the state which had

been eroded during the preceding housing bubble (see chart below).


Coincident with the improvement in home purchase affordability, the US Congress enacted 2

separate homebuyer tax credit programs in an attempt to boost home sales for the benefit of the

overall economy. The first of these tax credits became available in 2008 which served as a

catalyst to increase home purchase activity beginning in 2009. The chart below demonstrates

that home purchase activity in New Jersey exceeded the same month in the prior year for 11

consecutive months through April 30, 2010, which corresponds to the contract-date expiry of the

final tax credit offering.

35



Following that expiry, home purchase activity in the state declined for 12 consecutive months.

More recently, purchase demand increased in May (+13%), June (+12%) and July (+4%)

suggesting that some stabilization in housing demand is occurring. Considering that these

recent gains followed 12 straight months of declining purchase activity should be good news for

the housing market. However, declining strength of the increases coupled with slowing job

growth, recent stock market losses, the debt ceiling crisis, the lowering of the US credit rating

and the economic uncertainty in Europe all point toward weakened purchase demand in the

near future.

And while full recovery of the housing market is still a long way off, stabilization is a necessary

first step in that direction.

36


‐23%‐25%

‐15%‐8%

0%

12%8%

21%

29%

55%

33%

20%21%

14%

35%

43%

‐23%‐27%‐27%‐25%

‐31%‐30%

‐10%‐10%

‐22%

‐13%

‐19%

‐38%

13%12%

4%

‐40%

‐20%

0%

20%

40%

60%

Jan 09

Feb 09

Mar 09

Apr 09

May 09

Jun 09

Jul 09

Aug 09

Sep 09

Oct 09

Nov 09

Dec 09

Jan 10

Feb 10

Mar 10

Apr 10

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Feb 11

Mar 11

Apr 11

May 11

June 11

July 11

Change

from Piror Year

NJ Contract Sales PerformanceMonthly Year‐on‐Year Delta


Shifting to the supply side of the equation, Unsold Inventory in New Jersey has been declining

for the past 2 months due primarily to the 3 straight months of sales gains. Over that period, the

number of homes being offered for sale dropped by 1,350, reflecting a 2% decline. Future

trends however are largely dependent on what happens next with the pace of sales and job

recovery in the months ahead.

50000

55000

60000

65000

70000

75000

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

UN

SO

LD

IN

VE

NT

OR

Y

MarketTRAC Monthly by OTTEAU.comNEW JERSEY INVENTORY OF UNSOLD HOMES

2009 Inventory 2010 Inventory 2011 Inventory


37


The overall New Jersey housing market now holds 13.2 months of housing supply compared to

16.8 months at the beginning of the year.

Jan '10 Feb '10 Mar '10 Apr '10 May '10 Jun '10 Jul '10v. v. v. v. v. v. v.

Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11

COUNTYContract

SalesUnsold

InventoryMarket Swing

Total Market <$400k

$400k-$599,999

$600k-$1mil

$1,000,001-$2.5mil

>$2.5 mil

Atlantic -24% -5% -10% 20.5 20 22 30 19 56 -33% -17% -32% -48% -12% -6% 8%Bergen -7% 1% -4% 10.4 9 10 10 14 60 -21% -7% -1% -35% 12% 6% 4%Burlington -8% -1% -4% 15.3 14 23 26 21 -30% -2% -23% -37% 42% 27% 12%Camden -21% 0% -11% 16.2 16 18 49 25 -18% -18% -34% -48% -6% 8% 0%Cape May 1% -6% 4% 20.5 18 23 23 37 28 -10% 34% -4% -28% 21% 16% 1%Cumberland -15% 5% -10% 29.2 28 n/a -45% -19% -44% -42% 54% 95% 0%Essex -8% 5% -7% 10.9 15 6 7 9 31 -3% -10% -20% -31% 13% 10% 0%Gloucester -1% 2% -2% 14.7 14 34 40 n/a -22% -1% -22% -37% 98% 41% 23%Hudson -7% -18% 6% 12.4 15 9 9 7 -27% 4% -6% -39% 28% 13% -2%Hunterdon -8% 1% -5% 12.9 11 13 18 32 -29% 13% -8% -34% 7% 0% 2%Mercer -13% 4% -9% 13.8 13 12 17 18 -30% -6% -21% -42% 22% -3% 19%Middlesex -33% 5% -19% 13.6 13 17 18 -46% -39% -39% -57% -7% -2% -17%Monmouth -6% 3% -5% 12.7 11 14 14 17 -21% -6% -14% -34% 20% 23% 11%Morris -8% -3% -3% 10.0 10 9 11 10 18 -1% -25% -16% -33% 12% 22% 2%Ocean -6% 2% -4% 12.4 11 22 25 28 15 -15% -1% -16% -32% 21% 11% 9%Passaic -17% 13% -15% 13.2 13 15 15 30 -20% -18% -31% -42% 0% 15% 2%Salem -24% 1% -13% 29.8 28 n/a -39% 18% -27% -57% 0% 10% -25%Somerset -14% 4% -9% 9.7 11 7 9 8 24 -16% -25% -13% -40% -6% 13% 5%Sussex -17% -2% -8% 20.1 17 36 147 -32% -32% -23% -40% 4% 22% -4%Union -7% 7% -7% 10.5 12 8 6 8 -19% -21% -15% -20% 18% 16% 0%Warren -14% 0% -7% 19.3 17 42 -16% -20% -23% -41% 4% 12% 11%Statewide -12% 1% -7% 13.3 13.2 12.6 13.3 15.1 43.8 -22% -13% -19% -38% 13% 12% 4%

Contract Sales

Contract Sales

Contract Sales

MarketTRAC Monthly by OTTEAU.com

KEY: positive percentages for Contract-Sales and Unsold-Inventory indicate an increase in the indicator, while negative percentages indicate a decrease. Market Swing indicates the combined market change with positive percentages reflecting a strengthening and negative percentages reflecting a weakening of the respective market.

Copyright: 2011 Otteau Valuation Group, Inc.

Contract Sales

Contract Sales

Contract Sales

2011 YTDJanuary-July

% change Months SupplyContract

Sales

NOTE – above projections of “Months Supply” of Unsold Inventory are non-seasonally adjusted

The graphic below shows that the

employment centers of Bergen, Essex,

Morris, Somerset and Union counties carry

the lowest levels of unsold housing inventory

(in relation to sales pace). The other areas

of the state however carry inventory levels

that exceed one year of sales pace. This

pattern, which is consistent with the earlier

discussion of housing demand concentrating

in employment centers and transportation

corridors, is likely to continue in the future.

As a result, the areas shaded in red in the

graphic below are likely to see less robust

construction demand as the economic recovery progresses.


38


Turning to New Jersey home prices, the sequential change in home prices (measured by the 4

Quarter Price Change) turned positive in 2010 for the first time since the housing slide began.

More recently however, home prices in New Jersey began to once again decline. The 2.9%

decline in Q2 2011 equates to a monthly rate of 0.7%, less than the half what occurred during

the 1st quarter of the year. Seasonal declines in purchase demand during the 2nd half of the

year together with a slowing economic recovery and the recent lifting of the foreclosure

moratoriums suggest however that downward price pressures will continue into 2012.

‐3.0%

‐2.6%

‐1.9%

‐1.5%

0.4%0.2%

0.3% 0.3%

‐1.7%

‐0.7%

‐3.5%

‐3.0%

‐2.5%

‐2.0%

‐1.5%

‐1.0%

‐0.5%

0.0%

0.5%

1.0%

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

New Jersey Median Home PricesQuarterly Price Change


Foreclosure filings in New Jersey remain at artificially low levels due to the effect of the

foreclosure moratorium, with July filings 83% below the year-ago level. In July, New Jersey

had the 11th lowest rate of foreclosure fillings in the nation with a 0.04% of all homeowner

households (unchanged from last month), compared to 0.17% nationally. The recent lifting of

that moratorium for Bank of America, Citibank, JPMorgan Chase, Wells Fargo and OneWest

Bank (formerly failed IndyMac Federal Bank) means that foreclosure actions should increase

significantly during the 2nd half of the year. Nationally, foreclosure filings also saw a slight

decline of 6% in July. Nevada, California, and Arizona continue to have the highest foreclosure

rates running 9 to 22 times greater than New Jersey.

39


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

NJ Foreclosure Filings

2006 2007 2008 2009 2010 2011

SOURCE: RealtyTRAC & Otteau Valuation Group, Inc.

A deeper analysis of foreclosure filings, in New

Jersey and nationwide, shows a correlation

between areas with lower household income being

experiencing higher foreclosure rates. The chart

below shows that the highest rates of foreclosure

filing, which are shaded in red, are occurring in the

states more urban and exurban-rural submarkets.

Conversely, the rate of foreclosure is lowest in the

state’s more primary suburban markets associated

with college educated white collar employment.

SOURCE: RealtyTRAC & Otteau Valuation Group, Inc.

40


This pattern is consistent with an analysis created from BLS data which shows that

unemployment is least among college educated individuals. Conversely, those without a high

school diploma have an unemployment rate that is more than triple that of college graduates.


MULTI-FAMILY RENTAL HOUSING

While the recovery in the multi-family apartment rental market that began in 2010 is continuing,

the pace of that recovery appears to be slowing. On a national basis, vacancies declined in

from 6.2% in the 1st quarter of 2011 to 5.9% in Q2, or about 30 basis points (bp). This

improvement is attributable to positive net absorption of approximately 41,000 apartments

compared to a vacancy decline of 40 basis points and net absorption of 45,000 units in Q1.

This slowdown, although only slight in magnitude, is attributable to the weakening pace of

economic recovery as previously discussed in terms of slowing GDP growth and hiring. That

slower pace of hiring translates directly into diminished household formation which in turn

passes through to apartment demand. Should the economic slowdown continue, or revert to

recession, rental apartment dynamics could weaken.

41


SOURCE: REIS

In New Jersey, vacancy rates continued to decline in Q2 to an average of 4.2%, or 200 bp less

than the national rate. The 4.2% vacancy reflects a decline of 110 bp since peaking at 5.3% in

Q2 2010 (see chart below).

3.8% 3.8% 3.9%

4.3%

5.0% 5.0% 5.1% 5.2% 5.3% 5.3%

4.9% 4.8%4.5%

4.2%

3.0%

5.0%

7.0%

NJ Multi‐Family Vacancy

SOURCE: REIS

42


At the regional level, the central part of the state has the lowest vacancy rate of 3.5%. This

compares to 4.4% in northern New Jersey and 5.7% in the Philadelphia/Southern New Jersey

submarket. By comparison, the lowest vacancy rate in the US is New York City @ 3.3%.

SOURCE: REIS

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Apartment Vacancy Rates

NJ‐South / Phila MSA

NJ‐North

NJ‐Central

NYC

SOURCE: REIS

Asking rents In New Jersey apartments have continued to increase for the past 5 quarters on

the strength of rising net positive absorption. Rental prices increased by 0.4% in Q2, the same

as for 2 prior quarters.

Market

Asking

Rent

Vacancy

Rate

Rent

Change

Vacancy

Change

(Basis Pts.)

Central NJ $1,167 3.50% 0.3% ‐20

Northern NJ $1,524 4.40% 0.5% ‐30

Southern NJ $1,050 4.70% 0.5% ‐30

US $1,053 5.90% 0.6% ‐30

Multi-Family Rental MarketAt-A-Glance

43


0.6

1.1

0.5

0.0

‐0.4

‐0.1 ‐0.1

‐0.7

‐0.1

0.5

0.7

0.4 0.4 0.4

‐1.0

‐0.5

0.0

0.5

1.0

1.5Percentage

NJ Multi‐Family Asking Rent Change

SOURCE: REIS

In addition to rising demand and increasing rental pricing, another factor that favors increased

construction activity in this sector is that the existing stock of apartments in the state are

relatively old with an average year-built of 1975. This indicates that newly constructed buildings

will be able to achieve rental price premiums and higher occupancy levels which are likely to

induce future construction activity.

Year Built PercentBefore 1970 52%1970 - 1979 25%1980 - 1989 7%1990 - 1999 5%

After 1999 11%All 100%

Avg Year Built 1975 SOURCE: REIS

These strong market dynamics for the multi-family apartment sector coupled with the economic

and demographic factors previously discussed, rising foreclosure rates and tightened mortgage

lending standards suggest a sharp increase in construction of multi-family rental apartments.

44


OFFICE MARKET ANALYSIS

Demand for office space is directly linked to job creation. As employment declines or stagnates

demand for office space is also affected. Conversely, the economic feasibility of constructing

new office space is largely dependent on significant long term job creation.

At the national level, net absorption of office space in the Q2 2011 was positive for the 3rd

consecutive quarter. The significance of this trend is easily understood against the background

of 11 consecutive quarters of negative absorption prior to the last 3. However, Q2 net

absorption of 3.9 million ft2 was less than the 5.5 million ft2 in Q1, suggesting a slowdown

coincident with the slower pace of recovery in the overall economy. Despite the positive

absorption the national vacancy rate was unchanged in Q2 at 17.5%.

SOURCE: REIS

Both asking and effective rents increased for the 3rd consecutive quarter rising in Q2 by 0.3 and

0.4 percent respectively. Here too however, the rate of increase slowed in Q2 compared to the

prior period.

45


SOURCE: REIS

Focusing on trends in the New Jersey office market, vacancy rates have continued to drift

higher across the state as the slow pace of economic recovery passes through into weak

demand for office space. Although vacancy in the state is slightly lower than the US rate, that it

is still rising confirms that stabilization has not yet occurred.

12.4%

12.6% 12.6%

12.9%13.1%

13.5% 13.5%

13.9% 13.9%13.9%

14.2%14.1%14.1%

14.3%14.4%

12.0%

13.0%

14.0%

15.0%NJ Office Vacancy

SOURCE: CoStar

Asking rents for NJ Office asking rents have seen declines over the past two quarters after a

slight increase at the beginning of this year.

46


$24.91$24.73 $24.72

$24.49

$24.10$23.91

$23.65

$23.32$23.19

$22.91$22.75$22.75

$22.92

$22.53$22.45

$22.00

$22.50

$23.00

$23.50

$24.00

$24.50

$25.00

$25.50NJ Office Asking Rents

SOURCE: CoStar

Also to be considered in this equation is that the loss of jobs during and immediately following

the recent economic recession has effectively reduced short term demand for office space.

Given the earlier straight-line projections for job recovery in the US in 2017, and for New Jersey

in 2021, aggregate demand for office space will be limited in the near term. To illustrate the

long-term structural weakness in the New Jersey office market, the chart below shows a sharp

rise in vacancy beginning in 2002 which was 7 years before the onset of the economic

recession in December 2007. The timing of this rising vacancy also coincides with the

economic expansion that occurred following March 2001 – November 2001, and therefore

occurred during a growth phase in the US economy. This weakening of office demand during

an economic expansion is attributable to the previously discussed stagnation in private-sector

job creation in New Jersey economy. Also noteworthy in the chart below is that the state

presently carries more than 55 Million ft2 of vacant space and that net absorption in 2011 has

been a negative 1.2 Million. Therefore, aggregate demand for office construction will be virtually

non-existent for the foreseeable future. Despite this structural weakness however, localized

market conditions vary from place to place which may create localized spot-demand for office

construction going forward. Also, the previously discussed evidence of employers opting to

move from suburban markets to urban centers is also likely to generate demand for construction

of office buildings on a localized level. For the most part however, these localized sources of

construction demand will largely occur at the expense of existing markets and have the effect of

lessening demand in many existing markets.

47


NJ OFFICE MARKET

SOURCE: CoStar

RETAIL MARKET ANALYSIS

Similar to office market, demand for retail space is directly linked to employment trends which

create the necessary income for consumer spending. Therefore, as employment declines,

stagnates or increases, demand for retail space is similarly affected. For this reason, US retail

sales have increased since the end of the recent economic recession and commencement of

net positive job creation in March 2010. As shown in the chart below, retail sales have

increased on a year-on-year basis since the 1st half of 2010. In the most recent month of

August, U.S. comparable‐chain‐store sales increased by 4.8% (year-on-year) as measured by

the International Council of Shopping Centers (ICSC) survey of 27 major retail chain stores.

48


SOURCE: ICSC

A closer look at the above chart however shows the same pattern of slowing growth as

previously identified for national GDP, non-farm job creation, apartment rental absorption and

office demand. This reinforces the direct linkage between employment, real estate demand and

construction demand discussed throughout this report.

Looking at national retail market dynamics, the weakening pace of economic recovery caused

the national vacancy rate to increase by 10 bp in Q2 2011 to 11.0% after holding at 10.9% for

four consecutive quarters. Net absorption also turned negative in the 2nd quarter for the first

time in a year. Also noteworthy is that new construction completions in Q2 were the lowest in

more than a decade suggesting that the rise in vacancy would have been greater if not for the

weak completion rate.

Rental pricing has been generally declining since the economic recession deepened following

the collapse of Lehman Brothers in the 3rd quarter of 2008. Rents held stable in Q2 however,

both in terms of asking and effective rents. However, tenants continue to hold the power in

price negotiations due to weak demand which is preventing rental price increases from taking

hold.

49


SOURCE: REIS

In the New Jersey retail market asking rents have been generally declining since peaking in Q1

2009 concurrent with the deepening job losses and GDP contraction at the worst point of the

recent economic recession. Once again, it is significant to note that the decline in rental pricing

in Q2 follows a brief rise in the prior quarter. Consistent with trend indicators throughout this

report, the slowing pace of economic recovery is having a direct effect on a wide range of real

estate sectors.

$19.42$19.59 $19.61

$19.88

$20.05

$19.74

$19.55

$19.16

$18.89$18.83

$18.54$18.56

$18.35

$18.53

$18.25

$18.00

$18.50

$19.00

$19.50

$20.00

$20.50NJ Retail Asking Rents

SOURCE: CoStar

50


Vacancy levels in the New Jersey retail market remain elevated reaching the highest point since

the start of the recession in Q2 2011 at 6.9%. While vacancies had declined slightly in 2010

consistent with last year’s more robust pace of job creation, they have reversed course recently

which suggests long term challenges for this commercial real estate sector.

6.2%

6.0%6.0%

6.2%

6.6%

6.5%

6.6%

6.8%6.8%

6.7%6.7% 6.7% 6.7%

6.8%6.9%

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

NJ Retail Vacancy

SOURCE: CoStar

A longer term analysis of the New Jersey retail market shows that the sharp rise in vacancy

began in 2004 – 2007 before the start of the economic recession in December 2007. This also

suggests a more structural oversupply of retail space due largely to the aggressive pace of new

construction prior to the recession. This suggests that a recovery in the pace of retail

construction will be delayed until this structural oversupply is absorbed by rising demand.

51


NJ RETAIL MARKET

SOURCE: CoStar

In addition to these issues, a range of demographic trends suggest that future long-term

demand for retail space will be muted, including:

Baby-Boomers began turning age 65 in January 2011 at a national pace of 10,000 daily

which suggests a significant reduction in spending from this critical demographic group

as they become more focused on retirement planning.

Recent studies have indicated that middle-class baby-boomers lost nearly half of their

personal wealth and that 60% of these households have underfunded retirement plans.

This too will likely contribute toward reduced retail spending by baby-boomers in the

future.

If the trend toward fewer households with children under the age of 18 living at home

continues it will also cause a reduction in average household. As a result, less

expenditure for child related goods such as clothing and ‘back-to-school’ supplies would

ensue.

The previously discussed demographic indicators which point toward more urban-centric

housing demand would create new construction demand in more urbanized locations

while reducing demand in exurban rural areas.

52


According to the US Dept. of Commerce, E-commerce sales increased 17.5% in Q1

2011 to $46-Billion, up 17.5% over a 1-year period. This trend will subtract from retail

sales at physical ‘brick & mortar’ stores in retail shopping centers.

Reduced access to consumer credit in the form of credit card spending limits and cash-

out refinancing of mortgage debt coupled with constrained personal income will reduce

consumer spending power in the future.

Increased personal savings rates that have developed over the last few years indicate

that households are spending less and saving more.

Overbuilding of the commercial retail real estate prior to the recent economic recession

resulted in a dramatic increase in the supply of retail space in many submarkets.

Emerging discussions about the need to reduce government employment which reduces

net job growth in future years and would have an adverse effect on consumer spending.

INDUSTRIAL MARKET ANALYSIS

Demand for industrial space typically moves in tandem with the economy but also has a global

component attributable to export activity. The US industrial market has strengthened over the

past year due primarily to the combined influence of rising retail sales, restocking of

manufacturer’s inventories and foreign trade which has benefited from the weak dollar. Also

helpful in stabilizing the industrial market was governmental fiscal stimulus for the Midwest

region which served to stabilize the area.

The overall vacancy rate for the U.S. Industrial market declined for the 4th consecutive quarter to

9.8% in the 2nd Quarter of 2011By subtype, vacancy for Flex buildings stood at 12.8% while

Warehouses recorded 9.4%. The drop was primarily attributable to net positive absorption of 33

Million ft2 during the quarter marking the 3rd consecutive quarterly period with more than 30

Million ft.

53


SOURCE: CoStar

Despite this improvement however average asking rental pricing declined to $5.14 per ft2 down

from $5.15. By subsector, asking rents for Flex space were $9.88 per ft2 while Warehouses

were $4.59.

SOURCE: CoStar

Construction completions during the 2nd quarter totaled 6.7 Million ft2 compared to 7.2 Million ft2

in Q1. There was an additional 37 Million ft2 under construction at the end of the second

quarter.

54


SOURCE: CoStar

In New Jersey, annualized net absorption has been negative for the past 3 years (2008 – 2010)

due to space being vacated exceeding rental pace. It is encouraging however that negative

absorption in 2010 (-2.7 Million ft2) was significantly less than in 2009 (-14.0 Million ft2)

suggesting that market stabilization is occurring. Also, ytd net absorption in 2011 has been

positive for the 1st time since the start of the economic recession.

4,407

‐3,176

1,434

‐3,222‐3,770

‐5,060

‐2,734 ‐2,549

‐5,749

1,730

‐2,144

3,424

‐1,187

109 1,396

‐8000

‐6000

‐4000

‐2000

0

2000

4000

6000

2008 1Q

2008 2Q

2008 3Q

2008 4Q

2009 1Q

2009 2Q

2009 3Q

2009 4Q

2010 1Q

2010 2Q

2010 3Q

2010 4Q

2011 1Q

2011 2Q

2011 3QTD

In Thousands of Sf

NJ Industrial Total Net Absorption

SOURCE: CoStar

55


As a result of the recent positive net absorption in 2011 vacancy in New Jersey industrial

properties has shown modest improvement. Since peaking at 9.8% in Q1 2010, the industrial

vacancy rate n New Jersey has slowly drifted downward to 8.9% reflecting a drop of 90 bp.

6.7%

7.3% 7.2%

7.7%

8.2%8.6%

8.9%9.2%

9.8%9.4% 9.5%

9.1% 9.2% 9.2%8.9%

5.0%

7.0%

9.0%

11.0%

NJ Industrial Vacancy

SOURCE: CoStar

The improvement in absorption and vacancy has been modest however as evidenced by the

continued decline in asking rental pricing. Asking rents, which averaged $5.82 per ft2 at the

start of the economic recession in Q1 2008 have fallen to $4.88, reflecting a 16.2% decline.

That rate of decline has been slowing recently however consistent with the above indicators of

stabilization in New Jersey.

$5.82$5.76 $5.74

$5.66$5.53

$5.47$5.41

$5.26$5.17

$5.09 $5.09$5.01

$4.93 $4.91 $4.88

$4.60

$4.80

$5.00

$5.20

$5.40

$5.60

$5.80

$6.00NJ Industrial Asking Rents

SOURCE: CoStar

56


Further support that the New Jersey industrial market may be stabilizing comes from Marcus &

Millichap Research Services which has forecasted that Northern New Jersey will have one of

the highest net absorptions in 2011.

SOURCE: Marcus & Millichap Research Services

HOSPITALITY MARKET ANALYSIS

The hotel sector is one of the more volatile in the economy and real estate market as it tends to

react quickly to changes in economic conditions. While the hotel market is also tied to

employment trends, the high level of corporate profits is a strong demand driver for hotels which

cater to the business traveler. It is therefore likely that any pullback in demand due to the

slowing pace of economic recovery will be primarily concentrated in consumer driven travel.

Hotel demand in 2011 is likely to be the highest since the start of the recession in 2008. In July,

hotel demand increased to 105 million room nights sold which was the largest number of rooms

sold in the hotel industry during a single month, according to data from Smith Travel Research

(STR). This is only the second time that monthly demand has exceeded 100 million room

nights, with the other being in July 2010 which recorded 102 million. Given the recent slowdown

in the pace of economic recovery a continuation of rising hotel metrics is in doubt however.

57


Occupancy increased to 69.9% in July, reflecting a 2.9% increase from the prior month. The

Average Daily Rate (ADR) also increased 3.9% in July to 103.09 (USD) while Revenue-Per-

Available-Room (REVPAR) rose 6.9 percent to $72.07 (USD)

SOURCE: Smith Travel Research, Inc.

Limited availability for construction financing should continue to restrict new completions which

will create fertile ground for hotel operators to increase ADR even if the economic slowdown

continues. As a result, the hotel sector is likely to continue improving in the near term.

‐10.0

‐8.0

‐6.0

‐4.0

‐2.0

0.0

2.0

4.0

6.0

8.0

10.0

2003 2004 2005 2006 2007 2008 2009 2010 2011

Percent Change

U.S. Hospitality Trends

Supply Change (%) Demand Change (%) Occupancy Change (%)

SOURCE: Smith Travel Research, Inc. & PKF Hospitality Research

The luxury segment continues to report strong metrics in September with RevPAR rising 26.6%

to $155.29, occupancy increasing 16.4% to 64.0%, and ADR rising 8.8% to $242.63.

HEALTHCARE MARKET ANALYSIS

Although construction in the health care sector is typically recession-proof, that has not been the

case this time around. While the dynamics of an aging population, technological advances and

the aging hospital facilities that led to the building boom in health care from 1998 – 2008 still

58


exist, the effect of the credit crisis coupled with uncertainty concerning the eventual impact of

President Obama’s landmark health care legislation have muted the industry’s building boom of

the prior decade. The effect has been for some projects to be put on hold as well as a move

toward repairs and renovation instead of new construction.

Despite these dynamics, a modest increase in construction is projected in 2011 at the national

level based upon a survey by Health Facilities Management (HFM) and the American Society

for Healthcare Engineering (ASHE). Still, US spending for new construction will likely remain

below the high-water mark in 2008. According to estimates by Reed Construction

Data/RSMeans Business Solutions, the $24.9 Billion of new US hospitals and clinics under

construction in Q4 2010 was down 10 percent from $27.8 billion a year earlier. However,

pipeline projects planned for the future increased to $27.7 billion compared to $26 billion one

year earlier due to projects that have been put on hold. Still, the $27.7 billion in planned

projects is 24 percent less than the $36.3 billion in 2008 as US hospitals nationwide have

allocated an average 37% of their capital budgets to construction this year.

Renovation or expansion account for the majority of spending, accounting for 73 percent of

construction projects at hospitals. The majority of those renovation projects have a cost of less

59


than $3 Million according to Reed Construction Data/RSMeans Business Solutions, accounting

for approximately two-thirds. Infrastructure improvements account for a large share of projects

including improvements to air handlers and ventilation systems and IT infrastructure upgrades

including data center upgrades.

Hospitals remain uncertain about the effect of the healthcare legislation with a projected

increase of 32 million additional people seeking healthcare in 2014. This landmark legislation

will bring significant opportunities and challenges to the healthcare industry in the form of

bundled payments, lower reimbursement, incentive-based pay and more patients. As a result,

cost savings are an industry-wide focus.

The largest share of construction activity is concentrated in specialty hospitals that will service

aging baby boomers and the revenues they produce including cancer treatment (21 percent),

heart (18 percent) and orthopedics (12 percent). Construction of new children's hospitals is

also up by 20 percent.

60


Hospitals continue to move in the direction of embracing sustainable ‘green’ construction in

search of long term operating efficiencies. Another continuing trend is to make patient rooms

more like hotel rooms with the more popular features being wireless technologies for patients,

individual room temperature control, larger room size, patient entertainment and educational

systems and in-room family areas. Wireless technologies are also being implemented for

hospital staff to facilitate electronic care processing and patient record keeping.

Here in New Jersey the construction of the new University Medical Center of Princeton at

Plainsboro is progressing with the facility anticipated to open in May 2012. The new hospital

has an estimated cost of $447 million and is a 630,000 ft2 facility that will include 231 single-

patient rooms set on a 171-acre health campus. The hospital will also include 10 surgical

suites, full-service diagnostics, cardiac labs, radiation oncology with linear accelerators and

related ancillary and support space. The hospital campus will also include medical offices,

nursing and rehabilitation services, and facilities for fitness, health education, assisted living and

independent living. The hospital is being constructed entirely of single-patient rooms to provide

greater comfort and privacy. The construction design also provides for the HVAC system

supplying the rooms and other patient areas to utilize outside air to help control the internal

spread of infections.

The existing hospital facility including nine individual homes along Harris Road is being

purchased by Avalon Bay Communities Inc. with plans to redevelop the site into luxury rental

housing.

Another major hospital project in the same region is Capital Health’s $530 million regional

medical center being constructed at the intersection of Scotch Road and Interstate 95 in

Hopewell. That facility is scheduled to open this year and comprises approximately 1 million ft2

and 237 beds.

61


PART III – IMPLICATIONS FOR CONSTRUCTION COSTS

COST CONTAINMENT AS A CONSTRUCTION PRICING MODEL

This section of the report will analyze the change in real estate prices from 2005 to 2010 to

provide a basis for quantifying the implications for construction costs. Given the numerous

economic constraints and challenges at the present time, as previously detailed in this report,

market pricing for completed new construction projects are subject to extraordinary constraints.

As a result, the finished cost of new construction must achieve price points conducive to

satisfying economic feasibility. In other words, the total cost of construction including land

acquisition, construction materials, labor, management and entrepreneurial profit must equate to

the finished value of the building. This essentially amounts to a ‘top-down’ approach whereby

construction cost is controlled by achievable market pricing for the finished product. This

approach is in some ways different from past experiences whereby finished market prices were

determined by cost. In that past model, which equates to a ‘bottom-up’ approach, construction

costs were largely passed through to the end user in the form of higher finished prices to the

end user either as higher selling prices or rental prices. In that bottom-up pricing model,

increases in construction costs were able to be easily passed-through to the end user. In

today’s challenging economic environment however that is no longer the case. Therefore, new

construction buildings will need to achieve a reasonableness of finished cost or they simply

won’t be constructed.

The construction industry is a vital component and contributor to the economy of New Jersey

and, in a growing economy, responds to the need for new housing, office, retail, and other

commercial and industrial facilities. Over the past 40 years, the construction activities in New

Jersey have typically accounted for four to six percent of the State’s total private sector

employment with changes that reflect broader economic conditions. The State of New Jersey,

through the New Jersey Department of Labor and Workforce Development, along with the U.S.

Bureau of the Census, Manufacturing and Construction Division and the U.S. Department of

Commerce, Bureau of Labor Statistics maintain records that chronicle economic trends,

employment, construction, development patterns, and the interlocking relationships between

economic growth and construction activities.

62


HISTORICAL COMPONENTS OF PRICE CHANGE

Studies and models have been developed by a variety of practitioners in order to assess and

measure the growth induced economic impacts, including primary and secondary impacts,

associated with new development and the “multiplier” effects of economic expansion. Input-

output analyses have been developed that utilize tables of coefficients to measure the ripple

effects of various types of development upon other sectors of the economy. The focus of these

techniques is typically structured to anticipate additional growth, directly or indirectly related to

economic expansion. The consequences of declining economic conditions that result in stable

or decreased levels of employment and/or population and the supply/demand factors influencing

reduced development are equally important in examining the “filter-down” impacts upon inter-

related sectors of the economy. Just as increases in economic growth resulting from

employment gains can be expected to yield increased demands for housing and commercial

space, diminished economic activity will exert a similar, but downward influence. The latter

trend of negative growth implications is of particular importance in an extended economic

downturn and restructuring that has been a persistent and ongoing concern in New Jersey and

the Nation for most of the past five years.

CONSTRUCTION INDUSTRY EMPLOYMENT

Employment in New Jersey reflects the economic cycles of the State and Nation, and the

presence and/or absence of job growth filters through the economy to the construction sector.

Total private sector employment in New Jersey increased from 2,095,708 jobs in 1970, to

2,530,556 jobs in 1980, and to 3,058,500 jobs in 1990. Between 1990 and 2000, New Jersey’s

total private sector employment grew by 347,300 jobs to a total of 3,405,700 jobs in 2000.

Statewide employment declined by 8,200 jobs between 2000 and 2005, decreasing further by

185,500 jobs in 2010:

63


New Jersey Total Private Sector Employment

Year Total Jobs Change 1970 2,095,798 --------- 1975 2,217,132 121,334 1980 2,530,556 313,424 1985 2,869,833 339,277 1990 3,058,400 188,567 1995 3,027,200 -31,200 2000 3,405,700 378,500 2005 3,397,500 -8,200 2010 3,212,000 -185,500 The most recent declines in employment have lasted longer (two five year intervals) and have

been more severe (total loss of 193,700 jobs) than the decreases observed in the prior

economic cycles. The private sector employment declines experienced in New Jersey since

2005 have occurred in virtually all of the State’s industrial sectors, with the greatest losses

experienced in the construction and manufacturing industries. As detailed in Table III-1,

declining employment in the construction and manufacturing industries accounted for over 60

percent, or 112,300 jobs of the 185,500 total jobs lost.

Declining employment in the construction industry between 2005 and 2010 amounted to a

decrease of 39,600 jobs, or 23.4 percent of total construction jobs, and represented one of

every five jobs lost in New Jersey since 2005. During this same 2005-2010 period, public sector

employment increased slightly with an overall gain of 0.1 percent and was represented by minor

losses in Federal and State jobs, offset by increases in local employment. As a result of these

changes, public sector employment increased from 18.9 percent of private sector jobs in 2005

to 20.0 percent of private sector jobs in 2010.

64


TABLE III-1

New Jersey Private Sector Employment Private Sector Jobs by Industry 2005 -2010

(In Thousands)

Change Percent of Total 2005 2010 Jobs Percent 2005 2010 Industry Mining 1.7 1.4 - 0.3 -17.6 0.05 0.04

Construction 169.1 129.5 -39.6 -23.4 4.98 4.03

Manufacturing 330.8 257.7 -72.7 -22.0 9.72 8.02

Wholesale Trade 233.8 210.0 -23.8 -10.2 6.88 6.54

Retail Trade 469.1 436.0 -33.1 - 7.1 13.81 13.57

Transportation 174.3 162.0 -12.3 - 7.1 5.13 5.04

Publishing 97.1 79.7 -12.4 -12.8 2.86 2.48

F.I.R.E. 279.7 253.5 -26.2 - 9.4 8.23 7.89

Prof./Bus. Svcs. 592.5 582.2 -10.3 - 1.7 17.44 18.13

Educ./Health 558.4 605.5 +47.1 + 8.4 16.44 18.85

Hospitality 333.4 334.6 + 1.2 - 0.3 9.81 10.42

Other 157.8 160.1 + 2.3 + 1.5 4.64 4.98

Total Private 3,397.5 3,212.0 -185.5 - 5.5 100.00 100.00

New Jersey Public Sector Employment

Public Sector Jobs by Industry 2005 -2010 (In Thousands)

Change Percent of Total Public Sector 2005 2010 Jobs Percent 2005 2010

Federal 61.6 61.5 -0.1 -0.2 9.60 9.57

State 151.2 150.9 -0.3 -0.2 23.57 23.49

Local 428.8 430.0 +1.2 + 0.3 66.83 66.93

Total Public 641.6 642.5 +0.9 + 0.1 100.00 100.00

Source: New Jersey Department of Labor and Workforce Development, Labor Market and

Demographic Research, Current Employment Statistics, Non-Farm Wage and Salary Employment by Industry, Annual Averages.

A review of the annual employment data available from the New Jersey Department of Labor

and Workforce Development for the period from 2005 through 2010 discloses that the greatest

65


Statewide employment declines were concentrated in the period from 2006 through 2010, with a

total loss of 211,700 jobs that was partially offset by the gain of 26,200 jobs between 2005 and

2006. Similarly, the losses in the construction industry amounted to 45,400 jobs between 2006

and 2010 and represented a 25.8 percent decrease in total construction employment. These

year-by-year employment trends are further detailed in Table III-2.

The U.S. Census Bureau provides detailed data, by industry sector (NAICS), regarding the

number of business establishments, employees, and payrolls in the annual reports of County

Business Patterns. These Census reports, through the most current year available (2009),

reflect similar trends to the New Jersey Department of Labor data. The number of construction

businesses (establishments) in New Jersey increased from 23,260 businesses in 2000 to

25,455 business in 2005, with a corresponding increase in construction employment from

164,099 jobs (2000) to 175,322 jobs (2005). The most recent Census reports (2009) reveal a

loss of 3,666 business establishments and 31,068 construction jobs between 2005 and 2009.

These employment losses were distributed throughout the construction industry, including

declines in employment associated with new residential and non-residential construction, heavy

construction, and in the specialty trades. Detailed construction sector information is provided in

Table III-3 and summarized below:

State of New Jersey Employment, Payroll, and Average Annual Wage 1

Year Established Employees ($000) Annual Wage 2000 Construction 23,260 164,099 $ 7,297,654 $44,471 All Industries 233,559 3,548,429 $147,082,234 $41,450 2005 Construction 25,455 175,322 2 $ 9,240,445 $52,706 All Industries 242,128 3,594,862 $166,018,238 $46,182 2009 Construction 21,789 144,254 $ 8,362,870 $57,973 All Industries 231,186 3,443,211 $177,070,691 $51,426

1 U.S. Census Bureau, County Business Patterns (NAICS), New Jersey, State Totals,

2000, 2005, 2009 2 Total Construction Jobs differ from Table III-1 due to source methodology differences

between NJDOL & U.S. Census Bureau

66


TABLE III-2

New Jersey Private Sector Employment 2005 through 2010

Total Private Sector Construction

Change Change Percent of Total Jobs Year Jobs Number Percent Jobs Number Percent Number Change

2005 3,397,500 ----- ----- 169,100 ------- ----- 5.0 ----

2006 3,423,700 26,200 0.8 174,900 5,800 3.4 5.1 14.5

2007 3,431,200 -7,500 -0.2 172,300 -2,600 -1.5 5.0 34.7

2008 3,401,000 -30,200 -0.9 164,500 -7,800 -4.5 4.8 25.8

2009 3,242,500 -158,500 -4.7 138,600 -25,900 -15.7 4.3 16.3

2010 3,212,000 -30,500 -0.9 129,500 -9,100 -6.6 4.0 29.8

2005-10 -185,500 -5.5 -39,600 -23.4 21.3 Source: New Jersey Department of Labor and Workforce Development, Labor Market and Demographic Research, Current

Employment Statistics, Non-Farm Wage and Salary Employment by Industry, Annual Averages.

67


TABLE III-3

Establishments Employees Payroll ($000)

Average Annual

Wage Establishments Employees Payroll ($000)

Average Annual

Wage Establishments Employees Payroll ($000)

Average Annual

WageBUILDINGS 6,375 39,153 1,691,686 43,054 7,516 45,448 2,569,528 52,706 6,356 32,016 1,819,174 57,973Residential 5,163 23,053 853,771 6,246 29,029 1,562,714 5,177 19,257 915,655 Single-Family 4,632 19,608 714,070 36,417 2,852 16,204 986,601 60,886 1,420 4,920 226,720 46,081 Multi-Family 228 1,840 69,751 37,908 191 1,114 52,176 46,837 147 1,047 63,093 60,264 Subdivision 303 1,605 69,950 43,583 330 2,862 189,995 66,385 442 4,502 318,176 70,674 Remodel 0 0 0 2,873 8,849 333,942 37,738 3,168 8,788 307,666 35,010Non-Residential 1,212 16,100 837,915 1,270 16,419 1,006,814 1,179 12,759 903,519 Commercial 1,020 13,658 705,624 51,664 1,219 15,535 934,445 60,151 1,076 11,882 849,631 71,506 Industrial 192 2,442 132,291 54,173 51 884 72,369 81,865 103 877 53,888 61,446

HEAVY CONSTRUCTION 1,010 17,080 923,052 54,043 1,242 17,780 1,165,212 65,535 1,055 16,947 1,371,093 80,905Civil Engineering 771 12,657 698,842 825 10,339 774,397 643 9,586 850,486 Highways, Streets, & Bridges 361 5,789 333,001 57,523 384 5,188 434,368 83,726 343 6,652 627,765 94,269 Other 410 6,868 365,841 53,267 441 5,151 340,029 66,012 300 2,934 222,721 75,910Utilities 239 4,423 224,210 417 7,441 390,815 412 7,361 520,607 Power & Communication 79 1,371 54,392 39,673 119 3,288 139,794 42,516 149 4,247 282,075 66,417 Water & Sewer 160 3,052 169,818 55,642 298 4,153 251,021 60,443 263 3,114 238,532 76,600

SPECIALTY TRADES 15,875 107,866 4,688,916 43,470 16,697 112,094 5,505,705 50,840 14,378 95,291 5,172,603 54,282Foundation 4,768 28,283 1,102,737 4,601 27,435 1,207,686 3,544 20,056 962,733 Carpentry & Framing 1,684 6,581 231,057 35,110 1,744 7,373 270,782 36,726 1,309 5,292 203,901 38,530 Concrete 641 5,257 205,247 39,043 539 4,762 250,117 52,524 443 3,364 202,289 60,133 Glass 191 1,278 55,190 43,185 163 1,042 50,657 48,615 155 1,224 59,223 48,385 Masonry 1,005 5,319 185,618 34,897 1,083 5,792 247,863 42,794 841 3,967 176,688 44,539 Roofing & Siding 1,057 6,838 269,460 39,406 947 5,651 258,292 45,707 671 3,742 180,938 48,353 Structural Steel 190 3,010 156,165 51,882 125 2,815 129,975 46,172 125 2,467 139,694 56,625Equipment 6,416 49,521 2,396,027 6,788 54,044 2,845,008 6,385 48,681 2,868,632 Building Equipment 179 2,702 155,226 57,449 251 3,628 241,454 66,553 253 3,806 266,178 69,936 Electrical 2,756 23,185 1,153,855 49,767 2,880 23,584 1,239,402 52,553 2,714 20,957 1,222,408 58,329 Plumbing & HVAC 3,481 23,634 1,086,946 45,991 3,657 26,832 1,364,152 50,840 3,418 23,918 1,380,046 57,699Finishing 2,623 15,317 620,204 2,803 14,887 644,028 2,298 11,606 546,248 Drywall 542 6,303 288,751 45,812 525 5,927 281,254 47,453 441 3,989 215,035 53,907 Flooring & Tiles 762 4,046 155,501 38,433 950 4,257 181,295 42,588 821 3,908 179,554 45,945 Painting 1,319 4,968 175,952 35,417 1,328 4,703 181,479 38,588 1,036 3,709 151,659 4,088Other 2,068 14,745 569,948 2,505 15,728 808,983 2,151 14,948 794,990 Demolition 65 1,285 51,112 39,776 150 1,339 72,071 53,824 154 1,367 75,896 55,520 Excavation 815 5,410 235,790 43,584 970 8,077 417,606 51,703 867 7,625 423,793 55,579 Other 1,188 8,050 283,046 35,161 1,385 6,312 319,306 50,587 1,130 5,956 295,301 49,580

TOTAL CONSTRUCTION 23,260 164,099 7,303,654 44,471 25,455 175,322 9,240,445 52,706 21,789 144,254 8,362,870 57,973

Source: U.S. Census Bureau, County Business Patterns (NAICS), New Jersey State Totals, 2000, 2005, & 2009

TABLE III-3

YEAR 2000 YEAR 2005 YEAR 2009

State of New JerseyConstruction Employment, Payroll, and Average Annual Wage

2000, 2005, & 2009

68


DIMINISHED CONSTRUCTION VOLUME

The decline in total Statewide employment and the decrease in construction jobs resulting from

a recessionary environment have been characterized by stable and/or declining economic

activities resulting from a seriously depressed housing market that has been exacerbated by an

excess supply and compounded by mortgage foreclosures, declining values, and diminished

demands for commercial (office and retail) space. New residential construction authorized by

building permits in New Jersey has experienced dramatic declines since 2000. During 2000, a

total of 34,585 new housing units were authorized in New Jersey and, between 2000 and 2005,

a total of 200,801 new housing units, or an average of 33,467 new housing units were

authorized each year. New housing construction has declined dramatically since 2006, when

34,323 new housing units were authorized, compared to 25,400 housing units in 2007, 18,369

housing units in 2008, 12,396 housing units in 2009, and 13,535 housing units in 2010. The

average number of new housing units authorized during the past two years (12,966 units per

year) is less than 40 percent of the average number of new housing units (33,467 units per

year) authorized between 2000 and 2005. These residential construction declines, as detailed

in Table III-4 occurred throughout the State, with declines reported in all 21 Counties.

Residential Construction - The declines in residential construction between 2005 and 2010 have

impacted all types of residential construction, including single-family detached homes, two-

family homes, 3-4 family homes, and multi-family (5+ units) homes. The overall decline in new

residential construction, which amounted to a 65.0 percent decrease in the total number of

residential units (from 38,588 to 13,526 units), was comprised of a 66.9 percent decrease in

single-family homes, a 79.0 percent decrease in two-family homes, a 81.0 percent decrease in

3-4 family homes, and a 58.1 percent decrease in multi-family homes. Although construction

spending for single-family detached homes is not the focus of this study, their dominant share

(51.8 percent) of overall residential construction in the state provides an important insight into

the State’s overall construction decline. These residential construction trends, by product type

and cost of construction, are presented in Table III-5.

69


TABLE III-4

COUNTY 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Atlantic 1,625 1,685 2,020 2,285 2,075 2,002 1,893 1,136 794 512 512Bergen 2,847 1,784 1,771 1,289 2,142 2,972 2,164 2,957 1,311 806 1,226Burlington 2,775 2,184 2,359 1,805 1,516 1,475 2,784 1,037 976 806 682Camden 796 757 1,160 1,934 1,413 1,706 1,183 1,191 895 585 487Cape May 1,242 1,403 1,422 1,693 2,149 2,433 1,580 1,081 485 428 434Cumberland 255 256 310 374 566 630 737 683 336 262 246Essex 1,491 1,548 1,588 2,235 2,343 3,128 3,284 1,854 1,314 777 663Gloucester 1,337 1,635 1,802 1,859 2,050 2,075 1,141 920 788 865 716Hudson 1,338 1,116 1,534 2,116 3,808 4,498 4,275 3,081 3,229 1,618 917Hunterdon 616 685 602 814 648 506 350 316 206 268 275Mercer 1,283 1,355 1,428 1,188 1,641 1,296 847 700 625 269 655Middlesex 2,460 1,884 1,999 2,306 2,622 3,206 2,567 1,597 1,020 1,018 1,568Monmouth 2,912 2,194 2,372 2,756 2,628 2,584 2,820 2,060 1,526 964 915Morris 2,684 1,577 1,914 1,555 1,427 2,503 1,670 1,052 795 613 579Ocean 5,633 3,830 3,534 4,009 3,818 2,904 2,114 2,160 1,527 902 1,325Passaic 457 631 689 829 763 647 850 760 432 281 402Salem 161 180 170 307 334 297 298 148 198 149 105Somerset 2,282 1,439 1,530 1,260 1,362 1,220 1,058 926 791 438 716Sussex 719 808 679 587 612 668 603 360 302 182 210Union 776 551 681 1,198 1,399 1,278 1,593 1,123 673 488 730Warren 896 765 877 585 620 560 512 258 146 165 172

Total 34,585 28,267 30,441 32,984 35,936 38,588 34,323 25,400 18,369 12,396 13,535

Source: U.S. Census Bureau, Manufacturing & Construction DivisionPrepared by: New Jersey Department of Labor & Workforce Development, June 2011

TABLE III-4

New Residential Construction Authorized by Building Permitsin New Jersey

2000-2010

New Residential Building Permits

70


TABLE III-5

1 Family 2 Family 3-4 Family 5+ Family Total2005Northern 10,122 2,596 1,133 9,919 23,770Southern 12,142 616 304 1,756 14,818Total 22,264 3,212 1,437 11,675 38,588

1 Family 2 Family 3-4 Family 5+ Family Total2006Northern 8,367 2,488 1,467 9,424 21,746Southern 8,746 600 241 2,990 12,577Total 17,113 3,088 1,708 12,414 34,323

1 Family 2 Family 3-4 Family 5+ Family Total2007Northern 6,295 1,434 990 11,925 20,644Southern 6,782 258 321 1,695 9,056Total 13,077 1,692 1,311 13,620 29,700

1 Family 2 Family 3-4 Family 5+ Family Total2008Northern 4,483 536 343 6,383 11,745Southern 4,692 128 71 1,736 6,627Total 9,175 664 414 8,119 18,372



2005-2010Percent Change (66.9) (79.0) (81.0) (58.1) (65.0)

Units AuthorizedState of New Jersey2005-2010 Summary

TABLE III-5

71


The decline in New Jersey’s residential construction occurred in all product sectors and was

also distributed throughout the Northern and Southern Regions of the State. During the period

between 2005 and 2009, single-family construction in the Northern Region of New Jersey

(Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Passaic, Somerset, Sussex

and Warren Counties) declined by 62.5 percent while multi-family construction decreased by

72.0 percent. In the Southern Region of New Jersey (Atlantic, Burlington, Camden, Cape May,

Cumberland, Gloucester, Mercer, Ocean and Salem Counties), the number of new single-family

homes declined by 71.9 percent between 2005 and 2009 while multi-family construction

decreased by 49.1 percent. The overall declines in residential construction occurring between

2005 and 2009 in the Northern Region (68.0 percent) and in the Southern Region (67.8 percent)

were essentially the same as the overall statewide decline of 67.9 percent:

Residential Construction By Region In New Jersey

Northern Region Southern Region Statewide Single Multi- Single Multi- Single Multi- Family Family Total Family Family Total Family Family Total Units 2005 10,122 13,648 23,770 12,142 2,676 14,818 22,264 16,324 38,588

2009 3,795 3,823 7,618 3,416 1,362 4,778 7,211 5,185 12,396

Change Number -6,327 -9,825 -16,152 -8,716-1,314 -10,040 -15,053 -11,139 -26,192

Percent -62.5 -72.0 -68.0 -71.9 -49.1 -67.8 -67.6 -68.2 -67.9

The residential construction trends within the Northern and Southern Regions of New Jersey are

further detailed in Table III-6.

Non-Residential Construction - Accompanying and exacerbating the impact of the decline in

residential construction has been an equally significant decrease in the amount of non-

residential construction occurring in New Jersey, particularly in the Office, Retail, Hospitality

(hotel), and Industrial (warehouse/storage) sectors. Between 2000 and 2010, construction in

these four sectors (office, retail, hotel, and warehouse) resulted in the issuance of Certificates of

72


Occupancy (CO’s) for 239.6 million square feet of new non-residential space, or an average of

21.8 million square feet annually during this period. This average annual non-residential

construction (21.8 million square feet) was comprised of 7.1 million square feet of office space,

4.0 million square feet of retail space, 1.2 million square feet of hotel space, and 9.5 million

square feet of storage facilities. Non-residential construction remained at these approximate

levels through 2005, when 22.5 million square feet of non-residential space was constructed.

The annual volume of non-residential constructed completed, as reflected in CO’s issued,

averaged 23.3 million square feet from 2000 through 2005.

73


TABLE III-6

YEAR Single Multi Total Single Multi Total Single Multi Total2000 12,145 7,333 19,478 13,115 1,992 15,107 25,260 9,325 34,5852001 9,762 5,220 14,982 11,741 1,544 13,285 21,503 6,764 28,2672002 10,242 5,994 16,236 12,137 2,068 14,205 22,379 8,062 30,4412003 9,907 7,623 17,530 12,256 3,198 15,454 22,163 10,821 32,9842004 10,105 10,269 20,374 12,324 3,238 15,562 22,429 13,507 35,9362005 10,122 13,648 23,770 12,142 2,676 14,818 22,264 16,324 38,5882006 8,367 13,379 21,746 8,746 3,831 12,577 17,113 17,210 34,3232007 6,295 10,049 16,344 6,782 2,274 9,056 13,077 12,323 25,4002008 4,483 7,262 11,745 4,692 1,932 6,624 9,175 9,194 18,3692009 3,795 3,823 7,618 3,416 1,362 4,778 7,211 5,185 12,396 Total 85,223 84,600 169,823 97,351 24,115 121,466 182,574 108,715 291,289

Percent Change2005-2009 (62.5) (72.0) (68.0) (71.9) (49.1) (67.8) (67.6) (68.2) (67.9)

NoteNorthern New Jersey includes Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth. Morris, Passaic, Somerset, Sussex, and Warren CountySouthern New Jersey includes Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem County

TABLE III-6

Northern Southern

Statewide DistributionNew Residential ConstructionAuthorized by Building Premits

Statewide

74


During 2005, the selected non-residential components reported the construction of 22.5 million

square feet of new non-residential space, including 6.4 million square feet of office space, 4.7

million square feet of retail space, 1.0 million square feet of hotel space, and 10.4 million square

feet of storage facilities. As further detailed in Table III-7, between 2005 and 2010, there was a

decline in the overall level of new non-residential construction, as well as declines in each of the

major non-residential components. During 2010, CO’s were issued for 9.9 million square feet of

non-residential construction and included 3.2 million square feet of office space, 2.2 million

square feet of retail space, 0.4 million square feet of hotel space, and 4.1 million square feet of

storage facilities. The declines in the amount of new construction between 2005 and 2010

ranged from 60.9 percent (hotel) to 50.1 percent (office) and averaged 55.8 percent, overall:

Annual Square Feet of Non-Residential Construction

Certificates of Occupancy for New Jersey Year Office Retail Hotel Storage Combined

2005 6,401,008 4,673,601 998,013 10,412,728 22,485,350

2010 3,194,239 2,238,111 389,989 4,106,272 9,928,611

Percent Change

2005-2010 -50.1 -52.1 -60.9 -60.6 -55.8

75


TABLE III-7

Annual Square Feet of Non-Residential Construction Certificates of Occupancy for New Jersey

Year Office Retail Hotel Storage

2000 7,220,201 4,600,742 583,861 8,745,256

2001 9,612,039 3,792,320 705,867 12,675,292

2002 9,143,027 5,282,976 1,646,024 14,509.741

2003 6,248,101 4,838,512 2,255,927 8,058,014

2004 10,106,346 3,631,080 643,416 8,966,590

2005 6,401,008 4,673,601 998,013 10,412,728

2006 6,441,371 4,030,389 938,367 10,352,007

2007 7,306,834 3,172,240 1,724,981 9,940,862

2008 7,649,786 4,934,934 2,397,445 8,743,538

2009 5,174,574 2,591,000 468,346 8,058,924

2010 3,194,239 2,238,111 389,989 4,106,272

2000-2010 Total 78,497,526 43,785,905 12,752,236 104,569,224 Average 7,136,134 3,908,537 1,159,294 9,506,293 Comparison 2005 6,401,008 4,673,601 998,013 10,412,728 2010 3,194,239 2,238,111 389,989 4,106,272 Percent Change 2005-2010 -50.1 -52.1 - 60.9 -60.6

76


Sales Price Impacts

The restructuring of New Jersey’s economy over the past several years has manifested itself,

not only in decreased levels of growth, but in absolute and relative declines in other key

economic indicators. The decreases in total private sector employment have resulted in a loss

of 185,500 jobs between 2005 and 2010 and, notwithstanding the broad-based nature of these

job losses, there have been disproportionate losses in the construction and manufacturing

sectors. Whereas the decreases in manufacturing employment are a part of a long-term trend in

New Jersey, the losses in the construction sector, which amount to a 23.4 percent decline since

2005, are directly related to the diminished levels of residential and non-residential construction

in New Jersey. Absent significant population2 growth and with a documented decline in total

employment, there has been a decreased demand for new residential (housing) and non-

residential (commercial) space. The diminished demand for residential and non-residential

space have resulted in decreased vacancy rates and diminished price for existing and new

construction. According to the preliminary reports of the 2010 Census of Population, the

number of vacant housing units in New Jersey increased from 245,630 in 2000 to 339,202

vacant housing units in 2010. The 38.1 percent increase in vacant housing amounts to 93,572

additional vacant housing units and resulted in an increase in the statewide vacancy rate from

7.4 percent in 2000 to 9.5 percent in 2010. The increased vacancy rates are consistent with a

substantial “out-migration” of New Jersey residents, reported to be the fifth highest in the United

States, according to reports prepared by the Internal Revenue Service.

The market impacts of the economic downturn on non-residential properties has been most

apparent and chronicled in the office sector where there has been negative net absorption

(more space vacated than new occupancies), increased vacancy rates and a concomitant

decrease in rental rates. Current market reports for New Jersey prepared by Newmark Knight

2 Although New Jersey’s population is reported by the U.S. Bureau of the Census to have increased from

8,414,350 persons at the time of the 2000 Census to 8,791,894 persons at the time of 2010 Census, for a gain of

377,544 persons, the majority of the population increase occurred in the earlier parts of the decade. The U.S.

Census Bureau’s population estimates for New Jersey of 8,685,300 residents in 2007 and 8,724,560 residents in

2006 would indicate that 71.8 percent of the total gain occurred by 2004 and 82.2 percent occurred by 2006.

Conversely, the Census data suggests that the State’s total population increased by only 67,344 persons between

2006 and 2010.

77


Frank indicate a 25.1 percent vacancy rate (21.9 percent direct lease and 3.2 percent sublet)

accompanied by a net decrease in the average rental rate per square foot. Data regarding the

sales of commercial properties reveal even greater declines in the actual transaction prices.

Distress sales and financing-related liquidations have had a downward impact on other market

transactions, as supply or oversupply and reduced demand have further reduced market

expectations and sales prices. Residential sales prices have also been impacted by more

stringent financing requirements, excess inventory levels, elevated foreclosure rates and buyer

hesitance in a downward trending market. This combination of unfavorable economic

conditions has yielded little in the way of an incentive for purchasers to proceed with

transactions without steep price discounts.

A survey of sales prices in the Northern and Southern Regions of the State recorded during

2005 and in 2010 for multi-family apartments, office space, hotels, retail space, and warehouse

space that was undertaken by Otteau Valuation Group has confirmed decreases in prices that

would be associated with the declining economic factors previously identified. This survey of

sales prices, which included 1,011 transactions in 2005 and 739 transactions is 2010, has

revealed decreases in per square foot sales prices ranging from 16.1 percent in the Southern

portion of the State to 21.2 percent in the Northern portion of the State, with an overall

Statewide decline of 20.6 percent in per square foot sales price between 2005 and 2010.

The greatest statewide price decrease (25.0 percent) was observed in the price for office space,

followed by a 20.4 percent decrease in the price of retail space. The decline in sales prices are

consistent with the 25.1 percent office vacancy rate, are less than the decreases in residential

construction (67.9 percent), and the decrease in new commercial construction (55.8 percent).

The decrease in per square foot sales prices are summarized below, and are detailed by sector

and region on Table III-8.

78


Market Pricing Survey Price Per Square Foot

Sale Price Percent Change 2005 2010 2005-2010

Multi-Family Apartments $102.81 $ 83.00 -19.3

Office-Composite $155.90 $116.99 -25.0

Hospitality-Composite $139.35 $127.02 -8.8

Retail-All Categories $143.15 $113.95 -20.4

Industrial-Warehouse $ 53.37 $ 48.69 -8.8

Overall Sales Weighted Average -20.6

79


TABLE III-8

New Jersey Market Pricing Price Per Square Foot

Sale Price 2005-2010 Multi-Family Apartments 2005 2010 Change Percent North $104.90 $ 85.36 -$19.54 -18.6 South $ 80.34 $ 62.10 -$18.24 -22.7 Statewide $102.81 $ 83.00 -$19.81 -19.3 Office-Composite 2005 2010 North $167.51 $123.19 -$44.32 -26.5 South $117.23 $ 98.49 -$18.74 -16.0 Statewide $155.90 $116.99 -$38.91 -25.0 Hospitality-Composite 2005 2010 North $139.35 $127.02 -$12.03 - 8.8 South $139.35 $127.02 -$12.03 - 8.8 Statewide $139.35 $127.02 -$12.03 - 8.8 Retail-All Categories 2005 2010 North $145.34 $111.24 -$34.10 -23.5 South $134.88 $119.59 -$15.29 -11.3 Statewide $143.15 $113.95 -$29.20 -20.4 Industrial-Warehouse 2005 2010 North $ 54.21 $ 50.54 -$ 3.67 - 6.8 South $ 48.39 $ 36.68 -$11.71 -24.2 Statewide $ 53.37 $ 48.69 -$ 4.68 - 8.8 Overall Sales Weighted Average North -21.2 South -16.1 Statewide -20.6 Source: Otteau Valuation Group, Inc., August 2011

COMPONENTS OF PRICE DECLINE

The survey of sales prices of residential and non-residential properties in New Jersey has

disclosed significant declines in the per square foot prices between 2005 and 2010, with price

decreases reported for all types of properties throughout the entire State, both the Northern and

Southern Regions. The decline in the total sales prices per square foot is a composite of

80


changes in the land price and the value of the construction (improvements) on the property. In

order to determine the portion of the overall decrease in prices that may be attributed to

changes in land values, as opposed to the construction improvements, a survey of the

proportion of total value represented by land values in twenty representative3 municipalities in

New Jersey was undertaken. These selected municipalities, which include ten municipalities in

each of the Northern and Southern Regions of the State, collectively represent 22.9 percent of

the New Jersey’s total employment base.

Land values as a percentage of total values were obtained for a variety of properties including

apartments, hotel, office space, retail space, and industrial (warehouse) space in the survey

municipalities. The data obtained for 2005 has revealed proportional variations as a function of

the type of use as well as geographic location. In the Northern region of New Jersey, land

generally represents a higher proportion of the total sales price than in the Southern portion of

the State, where there is a greater availability of developable land. The land component of the

total price also varies by the type of use, and typically represents the highest proportion for

warehouse space and the lowest proportion for retail and apartment properties. On a Statewide

basis, land accounted for 31.0 percent of the total price in 2005 with a deviation of + 1.7

percent:

Land As Percent of Total Price

(2005 Values)

Apartments Office Hotel Retail Whse

Northern New Jersey 30.4 34.2 29.6 34.2 36.1

Southern New Jersey 21.8 25.1 29.6 25.1 23.9

New Jersey 29.3 31.3 29.6 29.3 32.7

Changing Distributions – The declines in the sales prices of properties that have occurred

3 Northern New Jersey - Bridgewater Township, Edison Township, Jersey City, Middletown Township,

Morristown Town, Newark City, Paramus Borough, Parsippany Township, Wayne Township, and Union Township;

Southern New Jersey - Camden City, Cherry Hill Township, Deptford Township, Egg Harbor Township, Hamilton

Township, Mount Laurel Township, Trenton City, and Toms River Township, Vineland City, and Washington

Township.

81


between 2005 and 2010 reflect, and are also affected by, changes in land values. Information

available through the New Jersey Association of County Tax Boards regarding the proportion of

total value that is represented by land has revealed varying changes in land value allocations by

geographic location (Region) and type of use between 2005 and 2010. Whereas total price and

land prices have declined between 2005 and 2010, the decline in land prices has been less than

the overall decrease in prices, and has resulted in an increased proportion of the total sales

prices now being represented by land. During 2010, the proportion of total value represented by

land continued to be higher in the Northern Region than the Southern Region of the State. The

land component of the total price also varies by the type of use, and currently accounts for the

highest proportion of the total price for office space and the lowest proportion for apartment

properties. On a Statewide basis, land accounted for 34.8 percent of the total price in 2010,

with a deviation of + 2.2 percent:

Land As Percent of Total Price (2010 Values)

Apartments Office Hotel Retail Whse

Northern New Jersey 33.8 40.4 35.0 40.4 39.9

Southern New Jersey 24.2 29.6 35.0 29.6 26.4

New Jersey 32.6 36.9 35.0 34.6 36.2

A comparison of the statewide changes in the proportion of the total value represented by land

indicates increases of 10.7 percent to 18.2 percent between 2005 and 2010:

Changes in Land Allocation

2005 2010 Change Percent

Apartments 29.3 32.6 3.3 11.3 Office 31.3 36.9 5.6 17.9 Hotel 29.6 35.0 5.4 18.2 Retail 29.3 34.6 5.3 18.1 Warehouse 32.7 36.2 3.5 10.7

82


Although the proportions of the total sales prices represented by land have increased between

2005 and 2010, the per square foot prices attributable to land have actually decreased during

this period. The increased proportion of price attributable to land was more than offset by the

overall price declines in three of the five construction components (apartments, office, and retail

space), while minor per square foot price increases are indicated for hotel and warehouse

space. This information, which is summarized below and detailed on Table III-9, indicates

decreases in per square foot land prices of $3.06 for apartments, $5.63 for office, and $2.51 for

retail space, while increases of $3.21 and $0.18 per square foot are indicated for hotel and

warehouse space, respectively:

New Jersey Market Pricing Land Price Per Square Foot

Total Price $ / SF Land $ / SF Land Change $ / SF Sector 2005 2010 2005 2010 Amount Percent

Apartments $102.81 $ 83.00 $30.12 $27.06 - $3.06 -10.2

Office $155.90 $116.99 $48.80 $43.17 - $5.63 -11.5

Hotel $139.35 $127.02 $41.25 $44.46 +$3.21 + 7.8

Retail $143.15 $113.95 $41.94 $39.43 - $2.51 - 6.0

Warehouse $ 53.37 $ 48.69 $17.45 $17.63 +$0.18 + 1.0

IMPLICATIONS FOR LABOR

The decline in volume and value of new construction has had significant impacts upon the

construction industry, with a 2005 to 2010 decrease in the number of construction businesses

(3,666 fewer businesses) and reduced construction employment (from 175,322 jobs to 144,244

jobs), with these impacts being most severe upon the sectors involved with “new” construction.

As previously detailed (Table III-3), between 2005 and 2010, total construction employment

decreased by 21.5 percent, while the number of construction employees engaged in the

construction of new residential and non-residential buildings declined by 29.6 percent.

Construction employment involved with maintenance, repairs, small alterations, and

improvements would appear to be less affected by economic decline.

83


TABLE III-9

New Jersey Market Pricing Price Per Square Foot and Land Distribution

Total Price Land $/SF Land Percent

Multi-Family Apartments 2005 2010 2005 2010 2005 2010

North $104.90 $ 85.36 $31.89 $28.85 30.4 33.8

South $ 80.34 $ 62.10 $17.51 $15.03 21.8 24.2

Statewide $102.81 $ 83.00 $30.12 $27.06 29.3 32.6

Office-Composite 2005 2010 2005 2010 2005 2010

North $167.51 $123.19 $57.29 $49.77 34.2 40.4

South $117.23 $ 98.49 $29.42 $29.15 25.1 29.6

Statewide $155.90 $116.99 $48.80 $43.17 31.3 36.9

Hospitality-Composite 2005 2010 2005 2010 2005 2010

North $139.35 $127.02 $41.25 $44.46 29.6 35.0

South $139.35 $127.02 $41.25 $44.46 29.6 35.0

Statewide $139.35 $127.02 $41.25 $44.46 29.6 35.0

Retail-All Categories 2005 2010 2005 2010 2005 2010

North $145.34 $111.24 $49.71 $44.94 34.2 40.4

South $134.88 $119.59 $33.85 $35.40 25.1 29.6

Statewide $143.15 $113.95 $41.94 $39.43 29.3 34.6

Industrial-Warehouse 2005 2010 2005 2010 2005 2010

North $ 54.21 $ 50.54 $19.57 $20.17 36.1 39.9

South $ 48.39 $ 36.68 $11.57 $ 9.68 23.9 26.4

Statewide $ 53.37 $ 48.69 $17.45 $17.63 32.7 36.2

84


The overall (average) decline in construction prices between 2005 and 2010, which amounted

to a 20.6 percent decrease, has a magnified impact upon the direct construction components

represented by labor and materials due to lesser declines in land prices. When sales prices

are adjusted to reflect the changes in land prices, the direct construction prices represented by

contract construction (labor) and materials are subject to even greater percentage declines.

Deducting land prices from the total sales prices results in prices for direct contract construction

that are even further reduced. As indicated in the following tabulation and detailed in Table III-

10, the price available for the payment of construction labor yields Statewide price reductions

ranging from 13.5 percent to 31.1 percent, with an overall (sales weighted) average of 27.4

percent:

Construction Pricing Summary- Price Per SF

Price / SF 2005 2010 Percent Change

Multi-Family Apartments $ 72.69 $55.94 -23.0


Hospitality-Composite $ 98.10 $82.56 -15.8


Industrial -Warehouse $ 35.92 $31.06 -13.5

Overall (Sales Weighted) Average -27.4

The economic conditions that have prevailed in New Jersey since 2005 have resulted in a

restructuring of the State’s economy, accompanied by decreased employment, substantially

diminished residential and non-residential development, reduced population growth, an out-

migration of residents, increased residential and commercial vacancy rates, and decreased

prices for new and existing properties. The construction industry has been one of the most

severely impacted segments of the State’s economy. Although construction employment

represented 5.0 percent of the State’s total private sector jobs in 2005, the loss of construction

jobs accounted for 23.4 percent of the State’s total employment loss. The decrease in new

residential construction (64.9 percent) and the decrease in commercial development (55.8

percent) have been accompanied by a 20.6 percent decline in Statewide per square foot sales

prices. To the extent that land prices have decreased to a lesser degree intensifies the impact

85


and compression on contract construction and labor rates.

The following analysis indicates that the overall decline of 20.6% in real estate prices equates to

the need for a 27.4% reduction in the cost of construction. This downward pressure on

construction prices is reinforced by an abundant inventory of available residential and

commercial properties at offering prices that are near or in some cases below replacement cost.

Although recent reductions in new construction activity will over time help to balance today’s

high vacancy levels, the absorption of that space is likely to require an extended period of time.

As a result, the depth of the recession and its lingering effects are challenging builders who

have managed to remain in business, who are now finding that increased material costs are

further reducing their already minimized margins. A study by The Associated General

Contractors of America has reported that the cost of construction materials during the first half

of 2011 have greatly exceeded the Consumer Price Index and even exceeded the overall

Producer Price Index. The June 2011 Producer Price Index reveals that the components

affecting construction were up 7.5 percent during the preceding 12-months compared to a 3.6

percent increase in the CPI. Average copper prices were up 17 percent, while steel was up

10.1 percent and diesel fuel had experienced the greatest increase of 39 percent compared to a

year ago.

86


TABLE III-10

Construction Pricing Summary Price Per Square Foot

Price / SF Percent Change

2005 2010 2005-10 Total Land Const Total Land Const Total Const Multi-Family Apartments North $104.90 $31.89 $ 73.01 $ 85.36 $28.85 $56.51 -18.6 -22.6 South $ 80.34 $17.51 $ 62.83 $ 62.10 $15.03 $47.07 -22.7 -25.1 Statewide $102.81 $30.12 $ 72.69 $ 83.00 $27.06 $55.94 -19.3 -23.0 Office-Composite North $167.51 $57.29 $110.22 $123.19 $49.87 $73.42 -26.5 -33.4 South $117.23 $29.42 $ 87.81 $ 98.49 $29.15 $69.34 -16.0 -21.0 Statewide $155.90 $48.80 $107.10 $116.99 $43.17 $73.82 -25.0 -31.1 Hospitality-Composite North $139.35 $41.25 $ 98.10 $127.02 $44.46 $82.56 -8.8 -15.8 South $139.35 $41.25 $ 98.10 $127.02 $44.46 $82.56 -8.8 -15.8 Statewide $139.35 $41.25 $ 98.10 $127.02 $44.46 $82.56 -8.8 -15.8 Retail-All Categories North $145.34 $49.71 $ 95.63 $111.24 $44.94 $66.30 -23.5 -30.7 South $134.88 $33.85 $101.03 $119.59 $35.40 $84.19 -11.3 -16.7 Statewide $143.15 $41.94 $101.21 $113.95 $39.43 $74.52 -20.4 -26.4 Industrial-Warehouse North $ 54.21 $19.57 $ 34.64 $ 50.54 $20.17 $30.37 - 6.8 -12.3 South $ 48.39 $11.57 $ 36.82 $ 36.68 $ 9.68 $27.00 -24.2 -26.7 Statewide $ 53.37 $17.45 $ 35.92 $ 48.69 $17.63 $31.06 - 8.8 -13.5 Overall (Sales Weighted) Average - Northern -21.2 -29.0 Southern -16.1 -20.5 Statewide -20.6 -27.4

87


The restructuring of the Statewide and National economies as a result of the “great recession”

coupled with the long term structural challenges facing New Jersey have had a disproportionate

impact on the construction industry. Looking ahead, these challenges are likely to continue for

the foreseeable future as lower market price levels for commercial real estate demand a

corresponding reduction in construction cost to achieve financial feasibility. In other words, new

construction projects will need to achieve a reasonableness of finished cost or they simply won’t

be constructed. While this ‘top down’ compression places downward pressure on the total cost

of construction, we have found that two of the major components of that cost have actually been

rising as represented by the increased cost of construction materials and higher proportional

land values. These dynamics point to long term downward pressure and compression of costs

associated with both construction management services and labor.

ADJUSTING CONSTRUCTION PRICING TO THE MARKET

The changed circumstances of the past decade have created downward pressure on

construction demand across all real estate sectors. These events have resulted in an increased

sensitivity to construction costs which must compete with the existing underutilization and lower

market prices of existing real estate inventory. One of the direct effects of these changes is that

the finished cost of new construction must achieve price points conducive to satisfying

economic feasibility. In other words, new construction must achieve a reasonableness of

finished cost to participate in any economic recovery. Therefore, achieving cost efficiencies are

a necessary first step toward recovery of the construction industry.

Our prior analysis of non-residential real estate prices indicated an average statewide market

price decline of 20.6 percent in per square foot sales price between 2005 and 2010. By sector,

the observed price declines are summarized immediately below.

88


Market Pricing Survey - Price Per Square Foot

Sale Price Percent Change 2005 2010 2005-2010

Multi-Family Apartments $102.81 $ 83.00 -19.3


Hospitality-Composite $139.35 $127.02 -8.8


Industrial-Warehouse $ 53.37 $ 48.69 -8.8

Overall Sales Weighted Average -20.6

In developing an indication of competitive construction pricing which corresponds to the 2010

average market price levels, it is important to note that the overwhelming majority of individual

property sales included in our price change survey were existing buildings. Given the

competitive disadvantages of older existing buildings in terms of physical depreciation,

functional utility and operating efficiency, the results of the 2010 market price survey require

upward adjustment to correlate to the superior appeal of new construction. We conducted an

age sampling analysis of the individual property sales included in our survey to understand their

age composition as summarized below.

Multi‐Family Apartments $83.00 $27.06 $55.94 46

Office $116.99 $43.17 $73.82 34

Hospitality $127.02 $44.46 $82.56 28

Retail $113.95 $39.43 $74.52 24

Industrial $48.69 $17.63 $31.06 33

Total

Sel l ing

Price (Ft2)

Land

Al location

Impl ied

Bui lding

Value

Effective

AgeReal Estate Category

The next step in our analysis is to apply upward adjustment above implied building values to

develop a correlation to new construction pricing. To accomplish these we have referred to

various age-life studies which analyze the effects of age and life expectancy on accrued

depreciation in existing buildings. These studies analyze a multitude of relevant factors

including actual mortality, condition of existing buildings and ages at which major reconstruction

or changes of occupancy take place. The most notable of these studies is published by

Marshall Swift Valuation Service which provide a segregated analysis of these factors by use

type (office, retail, etc.), building class (construction materials, quality, etc.) and building age.

89


The results of this analysis are summarized in the table below which develops estimates of

implied construction values by property type.

Multi‐Family Apartments $83.00 $27.06 $55.94 46 54 60.0% $139.85

Office $116.99 $43.17 $73.82 34 51 43.0% $129.51

Hospitality $127.02 $44.46 $82.56 28 52 26.5% $112.33

Retail $113.95 $39.43 $74.52 24 46 29.4% $105.55

Industrial $48.69 $17.63 $31.06 33 46 52.5% $65.39

Tota l

Sel l ing

Price (Ft2)

Land

Al location

Impl ied

Bui lding

Value

Accrued

Depreciation

Effective

AgeReal Estate Category

Impl ied New

Construction

Value

Average

Li fe

Expectancy

The preceding table provides projections of new construction costs (per Ft2) that theoretically

align with 2010 market price levels. To test the reliability of these projections we have

developed cost estimates for each of the real estate use types identified. These cost estimates

have been based upon data obtained from Marshall & Swift Valuation Service (M&S) which

provide localized construction cost data at the regional, state and local submarket levels. The

cost figures provided in the far-right column of the table below reflect average construction costs

for Class-C construction based upon the M & S data.

Multi‐Family Apartments $83.00 $27.06 $55.94 46 54 60.0% $139.85 $131.94

Office $116.99 $43.17 $73.82 34 51 43.0% $129.51 $144.94

Hospitality $127.02 $44.46 $82.56 28 52 26.5% $112.33 $120.50

Retail $113.95 $39.43 $74.52 24 46 29.4% $105.55 $109.55

Industrial $48.69 $17.63 $31.06 33 46 52.5% $65.39 $67.71

Total

Sel l ing

Price (Ft2)

Land

Al location

Impl ied

Bui lding

Value

Accrued

Depreciation

Effective

AgeRea l Estate Category

Impl ied New

Construction

Value

2010 Construction

Cost ‐ Class C

(M & S Cost)

Average

Li fe

Expectancy

Note: Class C Construction is characterized by masonry or reinforced concrete (including tilt-up) construction. The walls may be load bearing, i.e., supporting roof and upper floor loads, or non-bearing with open concrete, steel, or wood columns, bents or arches supporting the load. Floors and roofs are supported on wood or steel bar or web joists or trusses, or the floor may be a concrete slab on the ground. Upper floors or roofs may be of concrete plank, steel deck, or wood. Bearing walls are frequently strengthened by concrete bond beams and pilasters. Included In this classification are Uniform and Basic Building Code Type III (noncombustible wall), Standard Code Type V and ISO Classes 2 and 4, and those Class 5 and 6 buildings which have load-bearing walls without interior framing and of low-rise (3 stories or less) design. This class is also referred to as Masonry or Unprotected Noncombustible, Joisted, or Unprotected Masonry, or Ordinary or Unprotected One-hour and to include certain Two-hour or Mill construction (heavy timber). Note: The Class C construction type is different from Class C building types which generally refer to lower quality commercial building types.

The preceding analysis provides a high degree of correlation between implied new construction

values and current construction costs. At the sector level, the implied market price indication

exceeds average construction cost which is attributable to rising demand for multi-family rental

90


properties associated with the previously identified trends of rising rentership and falling

homeownership rates. Implied market pricing for the other categories is however slightly less

than current average costs due to the excessive supply overhang affecting the commercial

market sectors.

91


PART IV – CONSTRUCTION SPENDING FORECAST

HISTORICAL CONSTRUCTION SPENDING

In developing our forecast of construction spending in New Jersey we have considered a wide

range of factors and trends beginning with those contained in the earlier section of this report. In

this regard, the combined effects of the recent economic recession, a subpar pace of economic

recovery in the state, systemic weakening of real estate demand and recent volatility of the

financial markets all point to an extended recovery period for construction spending.

In developing our forecast we have expanded the prior analyses of economic, demographic and

market trends to include historical measurements of sector-level construction activity in New

Jersey. This analysis and the resulting forecasts have been limited to the following construction

sectors identified by the client as being of greatest relevance to the intended users of this report:

Multi-Family Housing Office Retail Industrial Hospitality (hotels & motels)

Healthcare Miscellaneous Non-Residential Government Education

As such, the following construction sectors that have been excluded from this analysis:

Single-Family Residential Civil (including roads, highways & bridges) Military

In developing our analysis of construction spending we have utilized a comprehensive database

of construction projects maintained by Reed Construction Data, Inc (REED), a leading

information provider for construction activity, cost data and analytics at the national, regional,

state and local levels. Through the use of this database we have identified construction projects

that reached the stage whereby a general contract, or subcontract bid, has been accepted for a

particular project and for which the contract was not subsequently cancelled. These projects,

which include new construction, renovations and additions, are therefore representative of

future construction spending which typically commences within a 30 – 60 day time period and

continues over time until project completion. As such, they are a measurement of construction-

starts with the total dollar of spending being aggregated to the commencement date.


92

The granularity of this database provides for categorization and quantification of construction

spending at the sector (e.g. Multi-Family Housing, Office, Retail, etc) and county submarket

(e.g. Atlantic, Bergen, Burlington, etc.) levels which was extremely useful in determining

historical measurements of construction spending at a localized level. The results of this

research are summarized in the following table:

$5,492

$6,394

$5,076 $5,814

$4,498

$6,280

$3,329 $3,569

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2003 2004 2005 2006 2007 2008 2009 2010

$ M

illions

Aggregate Construction SpendingNJ Specific Sectors

Segregating the historical analysis at the sector level is depicted in the following chart which

shows the yearly dollar volume of starts and the percentage change compared to each prior

year:


93

94


Aggregate construction spending for the limited sectors analyzed in this report demonstrate a

general decline over the study period. Given the start of the economic recession in December

2007, coupled with the weakening of the housing market in Q4 2005, the logical starting point

for declining construction spending should have occurred in 2007. And while that is generally

true, a rebound occurred in 2008 which seems to defy market logic. A closer look at the data

table above shows the spending increases were limited to the retail, industrial, hospitality,

healthcare, government and miscellaneous-non-residential sector categories. This is consistent

with earlier observations that erosion in market fundamentals occurred initially in housing and

office market sectors, and later in other non-residential categories. Another reason for the lag in

construction declines in these specific sectors is attributable to the lengthy incubation period

from project conceptualization to construction commencement. This is due to the lengthy

process that developers must navigate before building a project, including land acquisition,

project design, project entitlements and construction financing approval. As a result, a regularly

occurring phenomenon in New Jersey is for some projects to come to market after demand has

already weakened. Due to this lengthy timeline, project commencements which coincide with

the inflection point for market change are often ill fated and can worsen a developing oversupply

condition in a submarket.

FORECAST METHODOLOGY

The final step in our study is to develop a forecast of future construction spending in New

Jersey, both for the individual sectors and in the aggregate. The reader is once again reminded

that the preceding historical analyses and forecasts that follow are limited to the specific

construction sectors identified by the client. As a result, the aggregate forecasts which follow

reflect the sum total of these limited sectors only and are therefore not representative of total

construction spending in New Jersey.

The forecasts that follow have been developed using a combination of methods. The primary

methodology is Multiple Linear Regression which is a technique for modeling and analyzing

multiple variables, when the focus is on the relationship between a dependent variable and one

or more independent variables. More specifically, regression analysis helps us understand how

the typical value of a dependent variable changes when any one of the independent variables is

varied (see Definitions & Terms section of report).

95


In developing our analysis, the dependent variable being solved for in each forecast is the dollar

volume of construction spending authorizations in each of the following sectors:

Multi-Family Office Retail Industrial Hospitality (hotels & motels)

Healthcare Miscellaneous Non-Residential Government Education Aggregate of Sectors

In developing each of our forecasts we have analyzed and tested a range of economic,

demographic and real estate market factors with a logical historical linkage to the independent

variables identified above that are potential key drivers of development activity. These

independent variables include:

NJ Months Supply US Mortgage Rates US GDP Change (Qrtly) US GDP Change (Annual) NJ Unemployment Rate NJ Non-Farm Employment NJ Non-Farm Job Change US CPI Index US CPI Change NY/NJ CPI Index NY/NJ CPI Change Phila CPI Index Phila CPI Change NY/NJ/PA CPI Change NJ Homeowner Vacancy Rates (%) NJ Homeownership Rate NJ Median HH Income NJ Median HH Income Change NJ Median Home Price NJ Median Home Price Change NJ Housing Affordability Index US Consumer Confidence NJ Population NJ Population Growth US Retail Sales US Retail Sales Change NJ Households NJ Household Formation NJ Office Total # Buildings NJ Office Total RBA NJ Office Total Vacant SF

NJ Office Total Vacant % NJ Office Occupied % NJ Office Average Asking Rent NJ Office Average Asking Rent %

Change NJ Office RBA Delivered NJ Office # Buildings Under

Construction NJ Office Total RBA Under

Construction NJ Retail Total # Buildings NJ Retail Total RBA NJ Retail Total Vacant SF NJ Retail Total Vacant % NJ Retail Occupied % NJ Retail Average Asking Rent NJ Retail Average Asking Rent %

Change NJ Retail RBA Delivered NJ Retail # Buildings Under

Construction NJ Retail Total RBA Under

Construction NJ Industrial Total # Buildings NJ Industrial Total RBA NJ Industrial Total Vacant SF NJ Industrial Total Vacant % NJ Industrial Occupied % NJ Industrial RBA Delivered NJ Industrial # Buildings Under

Construction

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NJ Industrial Total RBA Under Construction

NJ Flex Total # Buildings NJ Flex Total RBA NJ Flex Total Vacant SF NJ Flex Total Vacant % NJ Flex Occupied % NJ Flex RBA Delivered NJ Flex # Buildings Under

Construction NJ Flex Total RBA Under

Construction US Hospitality Occupancy Change

(%) US Hospitality Demand Change (%) US Hospitality Supply Change (%) NJ Multi-Family Inventory (SF/Units) NJ Multi-Family Completions NJ Multi-Family Conversions NJ Multi-Family Vacancy %

NJ Multi-Family Vacant Stock NJ Multi-Family Occupied Stock NJ Multi-Family Net Absorption NJ Multi-Family Avg. Asking Rent $

(weighted) NJ Multi-Family Avg. Asking Rent $

(non-weighted) NJ Multi-Family Asking Rent %

Change (weighted) NJ Multi-Family Asking Rent %

Change (non-weighted) NJ Multi-Family Avg. Effective Rent

$ (weighted) NJ Multi-Family Avg. Effective Rent

$ (non-weighted) NJ Multi-Family Effective Rent %

Change (weighted) NJ Multi-Family Effective Rent %

Change (non-weighted)


97

In addition to the regression methodology described above, we have also employed more

subjective analyses such as trend analysis, multiple year averaging, and considering present

day economic realities such as declining public sector employment, lingering high

unemployment, and structural deficiencies in specific sectors such as office buildings and home

purchase demand. These more subjective rationales are equally valid in and some cases have

greater reliability than more objective statistical methods. This is because regression

methodology is predicated upon the assumption that past correlations between certain variables

provide a reliable indication of what the future will bear. Given the unprecedented present day

volatility of the financial and real estate markets, the historical relationship between variables is

certainly diminished at the present time. As an example, past conditions in home purchase

demand have been correlated inversely with home mortgage interest rates. In this past

relationship, falling interest rates triggered increased purchase demand, rising home prices, and

increased employment in the construction industry. In today’s “New Normal” however,

historically low interest rates have failed to stimulate home purchase demand. Therefore, any

reasonable forecast must employ both objective and subjective reasoning.

CONSTRUCTION SPENDING FORECAST CONCLUSIONS

Based upon our entire analysis we present the following forecast of future construction starts in

New Jersey.


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Family Office Retail Industrial Hospitality Heathcare Res Gov't Education

Year $ $ $ $ $ $ $ $ $ $ ∆

Actual 2003 $611.8 $763.5 $426.2 $194.4 $220.0 $360.9 $380.3 $325.9 $2,208.5 $5,492 n/a

Actual 2004 $898.0 $536.7 $623.9 $102.4 $122.0 $377.8 $272.4 $547.9 $2,913.0 $6,394 16%

Actual 2005 $1,224.5 $326.6 $414.6 $244.3 $264.6 $445.7 $253.9 $304.8 $1,596.9 $5,076 ‐21%

Actual 2006 $1,242.4 $255.2 $333.3 $122.6 $650.0 $678.4 $616.4 $269.5 $1,646.3 $5,814 15%

Actual 2007 $1,006.9 $370.1 $439.5 $216.6 $112.3 $396.5 $246.5 $299.1 $1,411.0 $4,498 ‐23%

Actual 2008 $892.0 $222.2 $882.0 $389.7 $170.8 $1,387.5 $683.7 $366.8 $1,285.3 $6,280 40%

Actual 2009 $355.4 $75.1 $196.5 $164.9 $149.8 $271.2 $543.8 $568.0 $1,004.0 $3,329 ‐47%

Actual 2010 $521.0 $63.8 $211.0 $64.1 $282.5 $695.8 $342.1 $458.5 $930.2 $3,569 7%

Forecast 2011 $615.3 $146.2 $236.1 $31.0 $28.1 $160.5 $447.0 $361.8 $1,188.2 $3,214 ‐10%

Forecast 2012 $793.1 $67.1 $227.1 $55.3 $70.2 $289.2 $306.1 $377.7 $1,172.8 $3,358 4%

Forecast 2013 $872.5 $90.6 $238.4 $57.8 $112.2 $343.0 $284.8 $383.4 $1,182.0 $3,565 6%

Forecast 2014 $959.7 $114.2 $250.3 $60.3 $106.9 $396.9 $263.6 $389.2 $1,191.3 $3,732 5%

Forecast 2015 $1,007.7 $137.8 $275.4 $62.7 $101.5 $450.8 $242.4 $394.9 $1,200.5 $3,874 4%

Aggregate

FORECAST OF NEW JERSEY CONSTRUCTION STARTSDollar Volume of Construction Starts ($) & One Year Change (∆)


99

The results of this forecast indicate that while construction spending is expected to rise

beginning in 2012, the pace of recovery will be slow. On an annualized basis we forecast a

10% decline in aggregate spending in 2011 (as measured by the dollar volume of new starts)

followed by modest increases ranging from 4% - 6% from 2012 through 2015. This slow growth

is primarily attributable to the anticipated slow pace of economic recovery over the forecast

period.

2011 -10% 2012 +4% 2013 +6% 2014 +5% 2015 +4%

Therefore, given continuing complications resulting from the economic recession as well as the

more long-term systemic challenges in New Jersey, the present day compression in the

construction industry is not expected to reverse course in the near term.

Following is a presentation of Sector-Level forecasts from 2011 – 2015.

MULTI-FAMILY RESIDENTIAL CONSTRUCTION – construction spending in the Multi-Family

sector is anticipated to rise sharply over the initial 2 years of the forecast due to rising renter

demand and developing supply shortages. The rate of rise will slow during the later forecast

years as higher rental prices coupled with job creation and less rigid mortgage underwriting

standards result in rising purchase demand.


100

OFFICE CONSTRUCTION - Remarkably, this sector is presently on pace for a 129% increase

in 2011 despite deep long term structural challenges relating to private-sector job creation. A

closer look at this year’s strong pace indicates it to a handful of large projects in Bergen,

Burlington, Hudson, Middlesex and Morris Counties. The largest of these projects are a $16-

Million reconstruction project for Siemens at MetroPark in Iselin, a $15-Million pharmaceutical

facility in Parsippany and a $10-Million data center in Weehawken. Also figuring into the large

percentage increase in 2011 is that spending in 2010 of $63.8-Million was down by a stunning

92% from the peak year in 2003. As shown in the forecast below, spending is anticipated to

recede in 2012 to be more in line with 2010, followed by moderate increases from 2012 – 2015.

$763.5

$536.7

$326.6

$255.2

$370.1

$222.2

$75.1

$63.8

$146.2

$67.1

$90.6

$114.2

$137.8

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ M

illions

New Jersey Construction SpendingOffice Sector


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RETAIL CONSTRUCTION – Retail construction has fallen dramatically from the peak year in

2008 when there were $882-Million in starts and which resulted in a structural oversupply

condition in the market. More recently, construction activity has been hovering in the $220-

Million range, and is anticipated to rise modestly beginning in 2014.

INDUSTRIAL CONSTRUCTION – The decline in industrial construction has a dual cause

attributable to both the weakening economy as well as the continuing loss of manufacturing jobs

in the Northeastern US. Currently, industrial construction in 2011 is on pace for $31-Million in

construction starts, which is more than a 50% decline from 2010 and equates to a 92% decline

from the peak year in 2008. Our forecast calls for minimal recovery in this sector due to the

manufacturing situation as well as a large overhang of vacant warehouse space in the state.

One bright spot which could increase construction of warehouse-distribution centers is the

widening of the Panama Canal which is projected to be completed in 2014 and could increase

cargo volume arriving at Port Newark-Elizabeth. However, that shipping volume hinges on the

lifting of the Bayonne Bridge at a project cost of $1-Billion. Given that project has not yet begun,

it is unlikely that it can be completed soon enough to capitalize on the Canal completion and so

will likely push any increases in Industrial construction beyond the 2011 - 2015 forecast period.


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$194.4

$102.4 $244.3

$122.6

$216.6

$389.7

$164.9

$64.1

$31.0

$55.3

$57.8

$60.3

$62.7

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ M

illions

New Jersey Construction SpendingIndustrial Sector

HOSPITALITY CONSTRUCTION – The previously outlined improvement in hotel metrics is

anticipated to result in increased construction activity in this commercial real estate sector.

However, any gains in the overall market are likely to be largely offset by the continuing

weakness in the Atlantic City market which has lost 12,900 jobs since 2006, equivalent to a 21%

decline.

In developing our forecast we note that the surge in construction spending in 2008 was

attributable to a handful of projects in Atlantic City including Borgata’s Water Club, Harrah’s


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Marina Waterfront Tower and the Mirage which is presently on hold. Given the current

economic climate in Atlantic City, which is also being affected by the opening of casino

operations in Pennsylvania, future statewide spending is likely to be modest. As a result, our

forecast calls for modest increases in overall construction spending for this sector with overall

activity to remain far below the peak year in 2006 for the foreseeable future.

$220.0

$122.0

$264.6

$650.0

$112.3

$170.8

$149.8

$282.5

$28.1

$70.2

$112.2

$106.9

$101.5

$0.0

$200.0

$400.0

$600.0

$800.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ M

illions

New Jersey Construction SpendingHospitality Sector

HEALTHCARE CONSTRUCTION – Given the financial challenges facing this industry coupled

with the approaching completion of the $447-Million Princeton Medical Center in Plainsboro and

Capital Health’s $530 million regional medical center in Hopewell Township, construction

spending in this sector is expected to be greatly reduced in future years. This is confirmed by

2011 construction starts which are on pace for $28.1-Million in 2011 compared to $282.5 Million

in 2010. As a result we forecast lower levels of construction starts in this sector which will be

more in line with long-term historical averages.


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$360.9

$377.8

$445.7

$678.4

$396.5

$1,387.5

$271.2 $695.8

$160.5

$289.2

$343.0

$396.9

$450.8

($300.0)

$200.0

$700.0

$1,200.0

$1,700.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ M

illions

New Jersey Construction SpendingHealthcare Sector

MISCELLANEOUS NON-RESIDENTIAL CONSTRUCTION – as discussed previously, this

sector includes the following subtypes:

Amusement Misc. Non-Categorized Commercial Misc. Non-Residential Parking Garages Religious

We forecast much lower levels of construction spending in this catch-all category due primarily

to the extended reach of the economic recession. As a result, we anticipate that future

construction spending will be more closely aligned with long-term averages. We do however

expect that spending in this area will increase significantly with each passing year due in large

part to the expectation that increasing urban redevelopment construction activity of multi-family

housing, retail and offices will generate the need for construction of parking facilities which are

included in this category.


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$380.3

$272.4

$253.9

$616.4

$246.5

$683.7

$543.8

$342.1

$447.0

$306.1

$284.8

$263.6

$242.4

$0.0

$200.0

$400.0

$600.0

$800.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ M

illions

New Jersey Construction SpendingMisc. Non‐Residential Sector

GOVERNMENTAL CONSTRUCTION – the effects of the economic slowdown were not evident

in governmental construction expenditures which did not peak until 2009, later than any other

sector of the construction market. This is largely attributable to the life-cycle of governmental

projects which tends to be slower in starting and therefore more likely to continue well after an

economic slowdown. Another factor to be considered is New Jersey’s large growth in public

sector jobs from 2000 – 2007, during which 9 out of every 10 jobs created in the state were in

the public sector. More recently however, governments in New Jersey and throughout the US

are struggling with budgetary constraints which will reduce construction spending in future

years. As a result, we forecast that governmental construction spending will occur at a more

modest level over the forecast period with relatively small annualized increases.


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EDUCATIONAL CONSTRUCTION – The historical trend of construction spending in this sector

shows sizable declines following the peak year in 2004. However, year-to-date spending in

2011 indicates a significant increase over the prior year. It is unlikely however that the recent

increase will carry forward into future years due to a combination of factors. One reason for

much slower growth in construction spending for this sector is the same budgetary constraints

discussed in the Governmental forecast. Equally important however is the developing trend of

declining school enrollments in New Jersey whereby 65% of households in the state having no

children under the age of 18 living at home has caused a decline of 48,687 (3.3%) decline in

public school enrollment over from the 2005-2006 to 2010-2011 school years. This reflects a

decline from the peak of 48,687 students statewide, or 3.3%. Despite these trends we

anticipate increased public awareness and interest in local community and state colleges due

largely to the lower costs for in-state residents. As a result, long-term construction in this area is

expected to offset the declines in public sector classroom demand. We forecast that

construction spending in the educational sector will remain relatively stable in future years and

likely to perform consistent with long term averages.


107

$2,208.5

$2,913.0

$1,596.9

$1,646.3

$1,411.0

$1,285.3

$1,004.0

$930.2

$1,188.2

$1,172.8

$1,182.0

$1,191.3

$1,200.5

$0.0

$500.0

$1,000.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

$3,500.0

2003200420052006200720082009201020112012201320142015

$ M

illions

New Jersey Construction SpendingEducational Sector


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CERTIFICATION OF THE AUTHORS

I certify that, to the best of my knowledge and belief:

The statements of fact contained in this report are true and correct.

The reported analyses, opinions, and conclusions are limited only by the reported

assumptions and limiting conditions and are my personal, impartial, and unbiased

professional analyses, opinions, conclusions and recommendations.

I have no present or prospective interest in the subject matter of this report or to the

parties involved.

I have no bias with respect to the subject matter of this report or to the parties involved

with this assignment.

My engagement in this assignment was not contingent upon developing or reporting

predetermined results.

My compensation in this assignment is not contingent upon the development or reporting

of a predetermined opinion, conclusion or forecast that favors the cause of the client, the

attainment of a stipulated result, or the occurrence of a subsequent event directly related

to the intended use of the consulting assignment.

My analyses, opinions, and conclusions were developed, and this report has been

prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

Jessica L. Curcio provided significant professional research, analysis and report writing

assistance to Jeffrey G. Otteau.

Eric G. Tazelaar provided significant professional research, analysis and report writing

assistance to Richard B. Reading.

Jeffrey G. Otteau, President, SCGREA, #42RG00094100, IFA

Richard B. Reading, Principal-Richard B. Reading Associates.


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PART V – ADDENDUM

LIMITING CONDITIONS, ASSUMPTIONS AND HYPOTHETICAL CONDITIONS Limiting Conditions - this study is subject to the following limitations:

Possession of this report, or a copy thereof, does not carry with it the right of publication, nor may it be used for any purpose by anyone but the client and then only with proper qualification. Neither all nor any part of the contents of this report (especially conclusions, identity of the authors or their respective firms) shall be used for any purposes by anyone but the client specified in the report nor shall it, or any part, be disseminated to the public through advertising media, public relations consent or approval of the authors. Further, the authors, and their respective firms, assume no obligation, liability, or accountability to any third party. If this report is placed in the hands of anyone other than the client and intended users identified herein, the client shall make such party aware of all of the assumptions and limiting conditions of the assignment.

We believe to be reliable the information which was furnished to us by others, but assume no responsibility for its accuracy.

Testimony and court appearances in connection with this study are limited to those situations for which prior arrangements have been made.

We reserve the right to recall this report and make any amendments, corrections, or changes deemed necessary.

This report must not be used in conjunction or combination with any other forecasts or analyses developed by others.

Extraordinary Assumptions reflect an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. The analysis, opinions and conclusions in this report have not been based upon any extraordinary assumptions. Hypothetical Conditions reflect an assumption that is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. The analysis, opinions and conclusions in this report have not been based upon any

Hypothetical Conditions.


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DEFINITIONS & TERMS

The following definitions apply to the terminology employed in this summary report.

Apartment is a dwelling unit of one or more rooms designed to provide complete living facilities for one or more occupants. Average is a single value (as a mean, mode, or median) that summarizes or represents the general significance of a set of unequal values. Consumer Confidence is a measure of the level of optimism consumers have about the performance of the economy. Generally consumer confidence is high when the unemployment rate is low and GDP growth is high. CPI (Consumer Price Index) is a measurement of the cost of living determined by the U.S. Bureau of Labor Statistics; the principal cost of living index and measure of inflation. Dollar Amount of Construction is the estimated cost of work as reported by the permit applicant to the construction official. Education Development is a composite category which includes the following subcategories:

Libraries/Museums which for the purpose of this study includes the following subcategories: Libraries and Museums.

Schools/Colleges which for the purpose of this study includes the following subcategories: Cafeterias, Classrooms, College, University – Miscellaneous, Dormitories, Elementary & Pre- Schools, Gyms & Athletic Buildings, Junior High Schools, Senior High Schools, School Auditoriums, Special Schools and Vocational Training.

GDP (Gross Domestic Product) is the term for the total value of goods and services produced within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing that output. (In contrast, Gross National Product (GNP) measures the output of the citizens of the US and the income from assets owned by US entities, regardless of where located.) The growth of output is measured in real terms, meaning increases in output due to inflation have been removed. Government Development is a composite category which includes the following subcategories:

Government Space which for the purpose of this study includes the following subcategories: Governmental Offices, Courthouses, Fire Stations, Jails, Juvenile Detention Facilities, Police Stations and Prisons.

Miscellaneous Government which for the purpose of this study includes the following subcategories: Government - Miscellaneous Buildings, Park Buildings and Post Offices.

Healthcare Development is a composite category which includes the following subcategories:

Hospitals/Clinics which for the purpose of this study includes the following subcategories: Hospitals and Clinics, Imaging Centers, Medical Offices, and Outpatient Surgery Centers.

Nursing/Assisted Living which for the purpose of this study includes the following subcategories: Assisted Living Facilities, Independent Living Facilities and Nursing Homes.


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Homeowner Vacancy Rate is the proportion of the homeowner inventory which is vacant for sale. Homeownership Rates: The proportion of households that are owners is termed the homeownership rate. It is computed by dividing the number of households that are owners by the total number of households Hospitality is defined as the industry consisting of a broad category of fields within the service industry that includes lodging, restaurants, event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. The hospitality industry is a several billion dollar industry that mostly depends on the availability of leisure time and disposable income. A hospitality unit such as a restaurant, hotel, or even an amusement park consists of multiple groups such as facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources. For the purpose of this study, hospitality includes the following categories:

Hotel is defined as a facility that offers lodging accommodations and a wide range of other services, e.g., restaurants, convention facilities, meeting rooms, recreational facilities, and commercial shops. Subcategories of lodging include budget, economy, luxury, mid-price, and upscale.

Motel is defined as a building or group of buildings located on or near a highway and designed to serve the needs of travelers by offering lodging and parking; may also provide other services and amenities, e.g., telephones, food and beverages, meeting and banquet rooms, recreational areas, swimming pool, shops.

Household refers to the number of related or unrelated people who live in one housing unit; all the persons occupying a group of rooms or a single room that constitutes one housing unit. A single person, couple, or more than one family living in a single housing unit may make up a household. Household Formation is an increase in the number of households located within a given territory or state. Household Income is the sum of money income received in the calendar year by all household members 15 years old and over, including household members not related to the householder, people living alone, and other non-family household members. Included in the total are amounts reported separately for wage or salary income; net self-employment income; interest, dividends, or net rental or royalty income or income from estates and trusts; Social Security or Railroad Retirement income; Supplemental Security Income (SSI); public assistance or welfare payments; retirement, survivor, or disability pensions; and all other income. Housing Affordability Index is a measure of the percentage of homes sold in a given area that a median-income family living in that area can afford. The index is used as an indication of the degree to which homes are reasonably priced, with a higher index indicating greater affordability. Industrial is defined as property (land and/or improvements) that can be adapted for industrial use; a combination of land, improvements and machinery integrated into a functioning unit to assemble, process, and manufacture products from raw materials or fabricated parts; factories that render service, e.g., laundries, dry cleaners, storage warehouses, or those that produce


118

natural resources, e.g., oil wells. For the purpose of this study, industrial includes the following subcategories: Industrial Laboratories, Laboratories, School Laboratories, Manufacturing, Rental Warehouses & Warehouses. Median is a measure of central tendency; the value of the middle item in an uneven number of items arranged or arrayed according to size of the arithmetic average of the two central items in an uneven number of items similarly arranged; a positional average that is not affected by the size of extreme values. Miscellaneous Non-Residential Construction is a composite category which includes the following construction subcategories:

Amusement which for the purpose of this study includes the following subcategories: Arenas and Convention Centers, Auditoriums, Clubs and Community Centers, Golf Courses and Country Clubs.

Miscellaneous Commercial which for the purpose of this study includes the following subcategories: Broadcast Studios and Transportation Terminals.

Miscellaneous Other which for the purpose of this study includes the following subcategories: Demolition and Electrical Work Facilities.

Parking Garages which for the purpose of this study includes the following subcategory: Parking facilities.

Religious which for the purpose of this study includes the following subcategories: Religious Auditoriums and Religious Classrooms.

Months Supply is a projection of how long it will take for the market to absorb the inventory of unsold homes (Unsold Inventory) within each market area. This is a more meaningful measure of market absorption than the traditional days-on-market calculation as it is not affected by re-listing unsold inventory nor it is skewed by exaggerated exposure times attributable to overpriced marketing strategies. Mortgage Rate is the term used which refers to the interest rate charged on a mortgage by a lender. Multi-Family is defined as being a building composed of three or more dwelling units, usually with common access, service systems, and land use. Multiple Regression Analysis (MRA) is defined as a particular statistical technique, similar to correlation, used to analyze data in order to predict the value of one variable (the dependant variable), from the known values of the other variables. If only one independent variable is used, the procedure is called simple regression analysis and differs from correlation analysis only in that correlation measures the strength of the relationship, whereas regression predicts the value of one variable from the value of the other. When two or more variables are used, the procedure is called multiple regression analysis. New Construction refers to the permit type authorizing the start of a new structure. Non-Farm Employment is the calculation of employment excluding the farming sector. Non-farm payroll is the most closely watched indicator in the Employment Situation, considered the most comprehensive measure of job creation in the US. Such a distinction makes the NFP figure highly significant, given the importance of labor to the US economy. Specifically, political pressures come into play, as the Fed is responsible for keeping employment in a healthy range


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and utilizes interest rate changes to do so. A surge in new Non-farm Payrolls suggests rising employment and potential inflation pressures, which the Fed often counters with rate increases. On the other hand, a consistent decline in Non-farm Employment suggests a slowing economy, which makes a decline in rates more likely. Office is defined as a place in which business, clerical, or professional activities are conducted. For the purpose of this study, office includes the following subcategories: Office and Office Warehouse. Office Vacancy Rate is the proportion of the office inventory which is vacant. Permit is a document issued by the construction officials that authorizes the construction of a new structure or an addition, alteration, or demolition of an existing structure. Price is the amount a particular purchaser agrees to pay and a particular seller agrees to accept under the circumstances surrounding the transaction. Population can be defined as all of the people inhabiting a specified area. The total number of such people; the total number of inhabitants constituting a particular race, class, or group in a specified area. Population Growth is an increase in the number of people who inhabit a territory or state. Residential refers to buildings where members of households live. This excludes group homes for six or more people and other institutional facilities. Examples of residential use groups include: one and two family houses, apartments, townhouses, and other multifamily houses, and mixed-use housing where the house is a relatively smaller part of a building that has another use (e.g., an apartment over a retail store). Retail is related to the sale of goods or commodities in small quantities directly to consumers. For the purpose of this study, retail includes the following subcategories: Automotive, Bank Branches, Food Stores, Funeral Homes, Individual Stores, Movies & Entertainment, Restaurants and Shopping Centers. Retail Sales are defined as a monthly economic indicator that measures the level of all retail sales in the United States. The data is collected and released during the second week of the month for the preceding month by the U.S. Commerce Department’s Bureau of the Census. Retail sales data is not adjusted for inflation, but is adjusted for holiday and seasonal differences. Retail sales figures are widely watched economic indicators because individual spending is a major driver of the U.S. economy, contributing about two-thirds to gross domestic product. Retail Vacancy Rate is the proportion of the retail inventory which is vacant. Square Feet is the estimated building area as reported on permits for new construction and additions. Unemployment Rate represents the number unemployed as a percent of the labor force.

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