NAIOP New Jersey

2019 Commercial Real Estate

Intercollegiate Case Study Competition

Kearny Point, NJ

Heddon Street Capital Tom Brady

Dante Intindola Lindsay Kase

Jacob Nerenberg Manish Aggarwal

John Frisina

Table of Contents:

I. Project Overview

A. Site History

B. Project Summary

C. Job Creation

D. New Jersey’s Innovation Economy

II. Market Analysis

A. Kearny, NJ Demographics

B. Northern, NJ Market Drivers

C. Transportation Analysis

D. Office and Lab Space Market Overview

E. Comparable Projects

III. Project Risk Analysis

A. Construction Risk

B. Post-Construction Risk

IV. Financial Assumptions

V. Pro Forma

VI. Financial Summary

VII. Conclusion

VIII. Works Cited

I. Project Overview

A. Site History

The Kearny Point site is situated in the eastern area of South Kearny, a peninsula

surrounded by the Hackensack River to the east and the Passaic River to the west, with both

rivers joining in confluence to the south as Newark Bay. The project site, currently under control

of the Hugo Neu corporation, was once home to the Federal Shipbuilding and Drydock

Company, a subsidiary of U.S. Steel that built hundreds of ships for the United States Navy from

1917 to immediately following World War II. The site then became a major shipbreaking and

recycling center beginning in the late 1950s under the Lipsett Company. By the late 1980s, the

site had become a hub for low-density logistics and transportation uses, which continues to

present day.

B. Project Summary

The purpose of this project is to design Phases 3 and 4 of the Kearny Point

redevelopment, focusing mainly on the area surrounding the North Basin, as well as the parcel

currently containing Building 82. This building, along with Buildings 9, 10, and 12 are slated to

be demolished in order to create opportunity for a high-density innovative use.

We are proposing a research and development/laboratory complex surrounding the North

Basin to cater to New Jersey’s biotech and pharmaceutical industries. These technology-oriented

buildings will also contain retail on the ground floor due to the lack of dining and shopping

options surrounding the Kearny Point site. In addition, the Building 82 site will be used to

provide additional commercial office and light industrial space in the same vein of the highly

successful building at 78 John Miller Way.

C. Job Creation

The proposed project will create thousands of jobs within the Gateway Region of New

Jersey. Our proposed office spaces will bring well-educated doctors, scientists, engineers,

pharmacists, computer scientists, and analysts to the proposed redevelopment area. Additionally,

the proposed industrial sites will create hundreds of blue-collar jobs, as well as numerous

management positions that will operate the strategically located warehouses. Therefore, our

proposed redevelopment effort fits into the Kearny Point Redevelopment Plan and will further

solidify that the Essex and Hudson County areas are attractive places to work.

D. New Jersey’s Innovation Economy

In 2018, New Jersey Governor Phil Murphy announced a new focus on innovation within

the state’s private sector. New Jersey has a strong history of innovation, with Thomas Edison’s

invention of the light bulb in Menlo Park and Bell Labs’ groundbreaking research in Murray

Hill. Because of the state’s history of scientific achievement, New Jersey’s new focus is to bring

back its innovative roots, to attract innovative companies to the state, and to create the

high-paying jobs that come with cutting-edge discovery. Our proposed redevelopment effort

reflects the goals of the state and the new direction that New Jersey is moving toward. The

proposed Shipyard Innovation Campus will attract top pharmaceutical, engineering, and life

science companies to the space. Additionally, innovative logistics companies like Amazon,

UPS, and Fedex will be attracted to our proposed industrial plans, strategically located near the

Port of New York and New Jersey. Innovation is at the heart of this project’s design and

strategically fits the needs of New Jersey’s elected officials.

II. Market Analysis

A. Kearny, NJ Demographics

Kearny is a diverse and cultural rich community with strong demographic forces that

would support office development. Many companies are attracted to young, entrepreneurial

talent and want to recruit people to lead their firm into the next generation. Kearny is an

attractive destination for companies who are looking for young talent. As seen in Figure 1

below, the majority of Kearny’s population is between the ages of 25-34 years old. This

demographic group is going to be highly sought after by office tenants at Kearny Point.

Figure 1:

B. Northern, NJ Market Drivers

The Northern New Jersey economy is driven by a diverse array of companies with

headquarters and satellite offices located in the Garden State. These companies find Northern

New Jersey attractive due to its proximity to New York City, its diverse and highly educated

workforce, and because of the mass transit options that are available to its employees. Northern

New Jersey’s market is led by institutions from numerous industries including finance,

accounting, banking, and a strong focus on pharmaceuticals, life sciences, and logistics. As seen

in Figure 2, there are many world-renowned pharmaceutical and logistics companies that chose

to set up offices and warehouses in Northern New Jersey. As a result, it is a natural transition for

innovative companies located outside of New Jersey, or companies already located within the

Garden State and looking to expand operations, to choose to occupy office and industrial space at

Kearny Point.

Figure 2:

C. Transportation Analysis

The Kearny Point site will benefit from its proximity to the heart of New Jersey’s

transportation network. One of the most important transit assets adjacent to the site is the New

Jersey Turnpike, part of Interstate 95, providing access to the entire eastern seaboard. Most

importantly, 17% of the nation’s population is centered within the Northeast megalopolis

(Washington, D.C. to Boston), over 50 million people. This entire market can be accessed within

one day’s driving time, as well as service along Amtrak’s Northeast Corridor. The site is 1.7

miles by road from New Jersey Turnpike exit 15E, typically a five minute drive. Driving

distance to Newark Penn Station (Amtrak, New Jersey Transit), the Lincoln Tunnel, Holland

Tunnel and Newark Liberty International Airport is only 15 minutes under average conditions.

The George Washington Bridge is also accessible within 30 minutes’ driving time. The site also

provides convenient access to U.S. Routes 1&9, Interstates 78 and 280, as well as State Routes 3,

21, and 440.

On a local level, the site is currently served mainly by feeder roads emanating from the

Route 1-9 Truck Bypass, which links the Kearny Point Peninsula to Newark and Jersey City, to

the west and east respectively. North of Route 1-9, an original portion of the historic Lincoln

Highway, various truck stops and service centers cater to truckers hauling containers out of Port

Newark/Elizabeth to warehouses around South Kearny.

The #1 bus, operated between

Newark and Jersey City by NJTransit, runs

through the site. Additional stops should be

created in conjunction with continued

construction in Phases 3 and 4 in order to

provide access to prime job markets in

Newark and especially Jersey City. There

should be at least two additional stops,

possibly along Hackensack Avenue at the

intersections of John Miller Way and

Campus Drive (shown to right).

There is also active rail connecting to the Kearny Point site, administered by Norfolk

Southern, mainly serving several refuse transfer companies in the vicinity of the redevelopment

area.

City Via Public Transit By Car

Newark (downtown) 20 minutes 15 minutes

Harrison 35 minutes 20 minutes

Jersey City (Journal Square) 30 minutes 15 minutes

Hoboken 45 minutes 20 minutes

New Brunswick 1 hour 30 minutes 35 minutes

D. Office and Lab Space Market Overview

New Jersey has traditionally been home to sprawling suburban office complexes, some of

which were leading research and development centers for the world leaders in technology,

starting with Thomas Edison’s early laboratories in 1870s Newark. These powerhouses of New

Jersey innovation include Bell Labs (transistor, C programming language), Hoffmann-La Roche

(Valium, Librium), the Sealed Air Corporation (Bubble Wrap), DuPont (Teflon), and Johnson

and Johnson (Band-Aids and more).

In the spirit of New Jersey’s storied history as a center of innovation, Phases 3 and 4

include both office and spec lab space, which will fill a niche with emerging biotechnology

companies looking for an affordable and accessible home. Already, Modern Meadow, a biotech

firm originally based in Brooklyn, has relocated to Nutley at the former Hoffmann-La Roche

site. Quest Diagnostics has committed to build a (find sqft) laboratory on the same parcel. The

Kearny Point site’s accessibility to Jersey City, Hoboken, and Newark gives it the upper hand for

attracting a highly-educated workforce without overspending the budget.

E. Comparable Projects

Our redevelopment initiative follows a recent trend of projects that are currently under

development or that have been completed in New Jersey. Seeking science and technology driven

tenants and supporting them with office and lab spaces is a recent trend within New Jersey. This

is a trend that we plan to follow with our redevelopment effort. Additionally, the industrial real

estate market in the Garden State is among the strongest in the United States. Because of its

coastal location, proximity to ports, and strong transportation system, New Jersey is an excellent

candidate for a company’s distribution center. By highlighting comparable projects, it shows

that our proposal is feasible and realistic given the current New Jersey real estate market.

Comparable projects include the following:

● Comparable 1:

● Project Name: Liberty Innovation Centre

● Location: Jersey City, NJ

● Developer: SJP Properties

● Asset Class: Office Building with tenants from the life sciences, health care, and

biotechnology industries.

Comparable 2:

● Project Name: ON3

● Location: Nutley, NJ

● Developer: Prism Capital Partners

● Asset Class: Mixed-use with lab space for life science and biotechnology companies.

Comparable 3:

● Project Name: Bridge Point Turnpike

● Location: Carteret, NJ

● Developer: Bridge Development Partners

● Asset Class: Industrial facility with over 200,000 square feet of warehouse space on 10

acres in a thriving industrial market.

These comparable projects focus on office space with innovation based tenants and

industrial spaces that are adapting to the modern e-commerce economy. Therefore, we are

following recent development trends within New Jersey while taking advantage of New Jersey’s

focus on the sciences and robust industrial real estate market.

III. Project Risk Analysis

A. Construction Risk

Construction cost overruns and delays are risks that all real estate developers take on

when committing to a project. This may result in an additional equity contribution made by the

real estate developer and its investors. Another possible consequence of construction overruns

is additional debt taken on by the real estate developer. Both of these potential scenarios would

affect the the financial returns of the project. In order to mitigate the financial risk associated

with cost overruns and construction delays, cost contingencies were provided in the project’s

pro-forma.

B. Post-Construction Risk

Failure to lease the office and industrial spaces in our proposed project is a significant

risk that all real estate developers take on. If spaces are not leased as quickly as projected in the

pro-forma, returns would be negatively affected. However, the New Jersey market will mitigate

such risks. The state’s new focus on innovation centers and science-based jobs will create

demand for our proposed office spaces. Also, New Jersey’s strong industrial market, the site’s

proximity to ports, and the state’s strong network of highways will increase demand for our

proposed industrial warehouses. Therefore, it is safe to assume that the project’s location, along

with other factors such as the influence of New Jersey’s elected officials, the state’s strong

transportation network, and New Jersey’s real estate market will mitigate lease up concerns.

Macro trends such as the health of the national economy is a risk associated with the

subject redevelopment post-construction. Recent fluctuations in the market and global economic

slowdowns are a concern for the United States economy and its health for years to come.

However, the increased demand for distribution centers because of the strong expansion of

e-commerce will likely mitigate such factors and keep industrial demand strong in the long-term.

Also, the increased demand for health services and innovation from the aging baby boomer

generation will open up opportunities for science, healthcare, and engineering fields. The baby

boomer generation is one of the largest in American history and is now reaching retirement age.

As their healthcare needs continue to increase, American life science and pharmaceutical

companies will constantly be researching and coming up with innovative solutions in lab spaces.

Therefore, these increased demands from the baby boomers will make our proposed investment

in lab space for collaborative, innovative companies a strong long-term investment and mitigate

macro risks.

IV. Financial Assumptions

For the Operating Assumptions we used market comparable rents to establish a

conservative estimate of potential operating income. We assumed a slightly higher year 1

vacancy while we wait for the lease up to occur. Operating expenses are assumed to be

approximately 35% of gross revenues and we expect to be able to recover most of this due to the

asset classes that we are leasing.

To finance the project we aimed to have a relatively conservative amount of leverage

while maintaining enough leverage to get an impressive IRR. We settled on an initial equity

investment of 60 million which covers the construction expenses in the first year. The remainder

is financed with debt for an LTV of 68.25% on a $189 million project.

Due to existing leases we are forced to build the project in stages. In 2020 we construct

building 82 because that is the first building we reclaim. In 2021 we begin work on the first of

three buildings making up the Kearny Point Innovation Hub. We finish the project in 2022 and

2023 where we are able to fully capitalize on the property. The total construction costs for this

project are $189 million which equals the total project cost since we already own the land. Due

to the extent of the redevelopment that we are anticipating we chose to use a very conservative

$300/ square foot for construction.

V. Pro Forma

Each of the individual buildings is able to quickly get leased up and draw significant

income. The major limiting factor to financial performance for the project is the amount of time

required for leases to expire and to reclaim the property.

VI. Financial Summary

After combining the NOI’s of the two developments on the site and subtracting the debt

service the property is able to generate significant cash flows each year as well as generating a

significant capital gain on the sale of the property in year 10. The assumed cap rate on the

property in year 10 is 9% based off an NOI of $27.8 million in year 10. This results in a

valuation of approximately $310 million.

The property generates an impressive leveraged IRR of 31.38%. Since this property is in

an opportunity zone it is important to look at the impact of the tax law on return for investors.

The opportunity zone legislation states that any property that is developed in an opportunity zone

and held for 10 years will be given a complete deferral on capital gains tax. In our case this

boosts the IRR to the investor by 2.5% after tax resulting in a strong 26.46% IRR after taxes are

considered.

VII. Conclusion

Overall, the Kearny Point site is in an excellent position to create value to developers,

businesses, and the local population on the whole. This uniquely situated property has the

potential to create a new precedent for commercial real estate in the state of New Jersey, creating

jobs and providing an incubator for homegrown innovation. With an equity investment of only

$60 million and an IRR of 31.38%, this investment is a no-brainer.

Works Cited

https://nj.gov/governor/news/news/562018/approved/20181001b.shtml

http://www.roi-nj.com/2018/12/11/real_estate/sjp-properties-rebrands-site-to-liberty-innovation-

centre-in-jersey-city/

http://www.thehubnewbrunswick.com/

https://patch.com/new-jersey/belleville/new-labs-will-add-rebirth-ex-roche-site-nutley-clifton