November 8, 2007 – With increasing demands from office tenants for new, aesthetically pleasing Class A space, more real estate companies are taking another look at aging assets and their potential to be renovated. It can be an expensive gamble to invest millions in an old building, but some companies say the reward is worth the risk in North Jersey's competitive office market.

A prime example is The Hampshire Cos.' decision to take a 100,000-square-foot building at 8 Sylvan Way in Parsippany, tear it down to the steel and build a 170,000-square-foot, Class A facility. This will be the new headquarters of The Medicines Co., a publicly traded pharmaceutical company based in a smaller facility in Parsippany that has signed a 15-year lease for the property.

James E. Hanson II, President and chief executive officer of the Morristown-based Hampshire Cos., said his company bought 8 Sylvan Way in 2005 for the bargain price of $75 per square foot, or $7.5 million. The building was constructed in the late 70s and, at the time of Hampshire Cos.' purchase, was half empty, partially occupied by the Chubb Institute, a job-training school.

Though the exterior of the building left much to be desired, "We liked the bones of the building, and the location was just superb," Hanson said. "Our idea was to take a B-, C+ building and turn it into a true A+ building."

Onyx Equities, a private real estate investment firm based in Woodbridge, saw a similar chance for improvement when it purchased the two-building, 577,000-square-foot Meadows Office Complex in Rutherford in 2005. The two 12-story buildings were built from 1978 to 1981. In the past two years, Onyx has spent about $8 million to bring the complex up to Class A standard, said Michael Nevins, vice president of asset management for the company.

Similar to 8 Sylvan Way, The Meadows was not attractive on the outside, but its location – at Route 3 and 17 – prompted Onyx to invest in its renovation.

"An improved asset equals better tenants and better rents," Nevins said. "This wasn't always the case in New Jersey, but it was a bet we were willing to take."

Historically, the Meadows catered mostly to local tenants such as law firms and small professional companies. Now the complex is home to new tenants like Prologis, an international warehouse development and Logistics company; financial services company Metropolitan Insurance, Cancer Genetics Inc., a supplier of cancer research products; and Aon Corp., a Chicago-based risk management firm that recently leased 15,000 square feet in a relocation from Lyndhurst. The building is now 85 percent occupied, Nevins said.

Other well-known Bergen County office buildings are receiving multimillion–dollar face-lifts. In July, Normandy Real Estate Partners began an extensive renovation project at the three-building, 650,000-square-foot Continental Plaza on Route 4 in Hackensack. Normandy has not specified the cost of this process, describing it only as a "multimillion-dollar" endeavor that includes new landscaping, redesign of the lobby and new pedestrian bridges between parking decks and buildings. In September, the company announced nearly 17,000 square feet in new leases.

According to the Chicago-based real estate company Grubb & Ellis, 401 of the 1,298 office buildings in North and Central Jersey are classified as Class A, which generally denotes higher interior quality and available amenities.

Yet what passes as a Class A in New Jersey often pales in comparison to new Class A space in office markets such as Washington D.C. and California's "Inland Empire" east of Los Angeles, Hanson said. With larger regional or national office tenants, the expectation of what a Class A building is supposed to deliver has changed, and developers in New Jersey must constantly adapt to evolving demands, Hanson said.

David Simson, president of the Manhattan-based commercial real estate firm GVA Williams, said bringing aging buildings up to contemporary Class A standards can mean the difference between attracting and retaining, large tenants, or fading into half-occupancy. GVA Williams is the leasing agent at both the Meadows and at Glenpointe West, in Teaneck, where owner Sanzari Enterprises has put $6 million into upgrading the entire 650,000-square-foot complex's common areas, entranceways and the adjacent "amenity package" – spa, hotel and conference center.

"Each asset needs to be viewed on its own merit and the objective of the company," Simson said.

"Certain assets have better wear-and-tear than other buildings. The mindset to spend in a wise manner, to create the image that is required in 2007, is usually well-spent money."