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Morristown, New Jersey, Office Buildings Sell for $135.3 Million, a State Record for 2018

Hospital Chain Is Major Tenant at Properties in Hot Medical Segment
September 12, 2018
A $135.5 million three-building sale in Morristown, New Jersey, with a hospital chain as a major tenant is the largest office transaction in the state this year, a sign of rising demand for outpatient care as more baby boomers age.

The price is a record for an office sale transaction, according to CoStar data. Harrison Street Real Estate Capital LLC, a Chicago firm that invests in health care assets, has purchased the trio of properties at the Southgate Corporate Center from National Business Parks of Princeton, New Jersey. Atlantic Health System, a regional hospital and health care provider based in Morristown, is the main occupant of the South Street office buildings.

The portfolio included 435 South St., a 190,000-square-foot building, for $59.6 million; 465 South St., a 139,000-square-foot building, for $30 million; and 475 South St., a 240,000-square-foot property, for $45.7 million, according to CoStar data.

The sale reflects the upbeat outlook of firms like CBRE, the world's largest real estate company, for medical-use office space based on U.S. demographics. The nation’s population is getting older and needs more medical care, delivered in the most inexpensive settings, meaning outpatient care when applicable, not hospitals. That will fuel demand for the medical-office commercial real estate sector, CBRE said in a recent report. The oldest of the baby boomers, the largest age group in the U.S., are in their 70s.

Atlantic Health has nearly all the space at 435 South St., which CoStar described as office condominiums. Atlantic Health also leases almost the entire square footage at 475 South St., the former Western Electric and AT&T Network Systems corporate headquarters, CoStar said.

And the hospital group has sizable space at 465 South St., which has a four-story glass atrium and winding staircase. At that site, for example, Atlantic Health has physician practice, hospice and home care offices.

"Health care is very stable, so investors that need to park money in places only have so many opportunities to choose from, and health care seems to be a good fit for parking money in a safe place for long periods of time, especially when a system like Atlantic Health takes on the responsibility of being the tenant," said Darren Lizzack, a commercial real estate health care adviser at NAI James E. Hanson, a brokerage firm in Hackensack, New Jersey.

Taken collectively, the sale of the Southgate buildings appears to be the priciest one to date in the Garden State’s office segment. In February, a three-building portfolio, the Offices at Liberty Corner in Basking Ridge, New Jersey, was acquired by Signature Acquisitions for $74.5 million, or $141.52 a square foot, from The Silverman Group, according to CoStar’s Northern Jersey 2018 mid-year office market report. CoStar listed the highest sales from April 2017 through June 2018.

The highest price paid during that time span, in July 2017, was $115 million, or $249.17 a square foot, for 500 Plaza Drive in Secaucus, New Jersey, an asset that Manulife U.S. Real Estate Investment Trust acquired from Marcus Partners Inc., the CoStar report said.

"There are a lot of investors looking to place a lot of money, and only so many opportunities available, and that drives the pricing up," Lizzack said of the Morristown portfolio sale. "It’s just economics. I don’t see it changing in the future. I think health care was a sector that was overlooked because it wasn’t fully understood in the past, but a lot of people are becoming more comfortable with that as an asset class."

For the first six months of the year, sales activity in North Jersey’s office market has lagged behind last year, according to that report, with total dollar volume down compared to 2017. In the first three months this year, there were 37 office-sales transactions with a total volume of just $486.7 million, averaging $126.49 a square foot. In the same first three months of 2017, the market posted 26 transactions with a volume of $768.5 million, averaging $190.98 a square foot, CoStar said.

Harrison Street paid an average $238 a square foot for the buildings, almost double what CoStar said is the overall price-per-square-foot this year to acquire office space this year in Northern Jersey.

But health care and medical use has done well even in the once severely depressed office sector, according to CBRE.

"The medical-office market has performed well in recent years, registering a lower peak vacancy rate than traditional office properties during the 2008 recession and showing a steady decline in vacancy since that time," CBRE said in its medical-office report. "Net absorption has outpaced new supply in 24 of the past 29 quarters, with particularly large imbalances since 2015."

CBRE forecast that the demand for medical-office buildings will grow further, "fueled by continued health care job growth, the aging population, tight market conditions and the relative recession-resistance of these properties."

One of the portfolio's buildings, 475 South St., serves as Atlantic Health’s corporate headquarters, with the health care provider leasing the entire building for its administrative and back-office uses, a company spokesman said in an email. Atlantic Health also rents all of 435 South St. which is a medical office building housing various primary and specialty care practices. In addition, Atlantic Health leases 80 percent of 465 South St., which houses its Atlantic Home Care and Hospice offices, as well as the offices of Atlantic Medical Group and Atlantic Accountable Care Organization.

“Atlantic Health System, which has long-term leases, will not be impacted by the sale of these buildings,” the spokesman said.

Mark Barkeeper, managing director and head of health care real estate in Harrison Street’s transactions group, couldn’t be reached for comment Tuesday. He is responsible for finding deals and forming joint-venture relationships involving health care assets, CoStar said. While at Harrison Street, Barkeeper has acquired or developed over $7 billion of medical office and senior housing transactions on behalf of the firm's discretionary funds, according to CoStar.

Officials at seller National Business Parks couldn’t be reached for comment.

The Morristown portfolio totals 569,000 square feet and just over 49 acres, according to CoStar.
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