Gold Coast Executives Make Their Plea To Keep Tax Incentives

Facing job growth numbers that lagged behind the national average, former Gov. Chris Christie revamped New Jersey's tax incentive programs for development and job creation in 2013.

The Grow NJ program, which gives incentives to companies either moving into or remaining in New Jersey, and the Economic Redevelopment and Growth program, which gives incentives for redeveloping outdated buildings, are both under scrutiny as the state government approaches the date when they can be renewed, canceled or changed. At Bisnow’s Future of the Gold Coast event on July 26, the real estate community made its case for the incentives to be kept.

“Absolutely,” SJP Properties Executive Vice President Jeff Schotz said when asked if incentives programs are still necessary. “We need to draw tenants from New York to New Jersey, and we need incentives to do that.”

Other topics discussed at the event include how the Gateway Tunnel project will affect the region, what the multifamily market will look like in 10 years and the progress of Mack-Cali Realty’s Harborside development, which hosted the event.

Developers and landlords coming out in favor of tax breaks is to be expected, and critics note that between Grow NJ and ERG, the state has promised $5.4B in tax breaks over the past five years, and many recipients of such promises have yet to hit the job creation benchmarks required by the program. Grow NJ does withhold such incentives until those benchmarks are hit. One of those critics has been Gov. Phil Murphy, which puts those in favor in an awkward position.

“We know the incentives will change a lot, but we’ve asked the governor to keep the into-state moving incentive,” Schotz said.

While Jersey City residents and businesses are quick to point out that it has become a self-sufficient city, rather than one wholly dependent on New York City commuters, it is impossible to think of the Gold Coast without factoring in the city across the Hudson River as a neighbor, rival and/or feeder system for workers and office tenants.

The area’s multifamily market has thrived because of its value relative to Manhattan and swankier parts of Brooklyn, but its office market has not had quite as much success drawing businesses across the river. Part of the issue is the cachet that comes with a New York City address, but Jersey City also isn’t necessarily cheaper than all parts of Manhattan or Brooklyn for office.

“If you look at where rents are going, we’re now starting to hit $45 to $48/SF, so we’re not materially cheaper than New York,” Cushman & Wakefield Managing Director David DeMatteis said. “But when you factor in the incentives per employee, it makes you really have to consider Jersey City.”

Even with the existing incentives, the office market on the Gold Coast waterfront has been experiencing negative net absorption in the past couple of years — especially in Jersey City, which has hit 18% vacancy, DeMatteis said. Many leases signed on the eve of the Great Recession have expired in that time, especially leases for financial firms, and their next leases were either for considerably less space or somewhere else altogether.

“Some longtime tenants are not comfortable paying the rents that Jersey City has started to command, so we’re seeing the effects of that,” KABR Group Managing Member Adam Altman said.

Rents have still been on the rise despite the slowing demand, as many landlords believe themselves more likely to get increasing rents from tenants with deeper pockets or less demand for space, Altman said. Smaller tenants are taking an increasing share of the market, HFF Senior Managing Director Jose Cruz said, and they are coming from more diverse backgrounds than finance alone.

Thanks to that diversification, Jersey City has seen some encouraging signs this year, with leasing velocity up 20% from the same point in 2017, according to DeMatteis.

“It couldn’t have gotten any worse than 2017,” Schotz said.

If the incentive programs can be preserved in some way, the development and investment community will be able to capitalize on some of that momentum. While construction loans are the toughest form of financing to come by at this time, the creation of opportunity zones from the recent GOP tax bill may be able to mitigate some of that cost.

“Opportunity zones and their benefits to investors are not being appreciated enough yet,” DeMatteis said. “I think they’re undervalued at this point, and as the laws become clearer, people will become more aware of the tax benefits of those zones and how profoundly they can affect capital.”

At this point, any new development in Jersey City would have to be for rents above $50/SF, Schotz said, and significantly pre-leased. But with much of the Gold Coast’s office stock obsolete and ill-suited for modern office tenants, opportunity zones could grease the wheels for more value-add redevelopment, DeMatteis said.

But help on the federal level can never be guaranteed in this environment, making state programs ever more crucial. Opportunity zones, panelists said, will not be enough to offset the cost if Grow NJ is not renewed. After all, it is still impossible to ignore New York as a competitor, and it has its own enticements, as Altman noted.

“I think that’s lost on people sometimes,” Altman said. “We need incentives just to level the playing field with the other side of the river.”