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