Gov. Murphy's New Tax Incentives Favor Life Sciences And Tech At The Cost Of Office
New Jersey had a big third quarter in terms of office leasing, but its success only served to underscore the state's reliance on tax incentive programs for busines recruitment.
Israel-based Teva Pharmaceuticals announced in July that it will move its U.S. headquarters from the Philadelphia suburb of North Wales to an expanded footprint in Morris Corporate Center III in Parsippany, where it already had a presence. The 345K SF deal is the largest new lease in the state in two years, and was due in large part to a 10-year, $40M tax incentive package through the New Jersey Economic Development Authority's Grow NJ initiative, according to a CBRE report.
Grow NJ and its sister incentive, the Economic Redevelopment and Growth program, are both set to expire July 1. Gov. Phil Murphy has been critical of both programs, but announced in an address at the ON3 mixed-use development in Clifton and Nutley on Oct. 1 a plan to revamp Grow NJ and create a series of new tax breaks meant to spur investment.
Chief among the new programs will be the New Jersey Innovation Evergreen Fund, which will auction off $60M in tax breaks in each of the next five years to raise $250M. Murphy plans to use that money to match venture capital investment one-to-one in startups statewide. The idea behind the plan is to leverage the tax breaks for large companies on which the state depends to help fund smaller businesses, especially those started by minorities and/or in struggling markets.
That program should be a boon to New Jersey's life sciences market, CBRE Senior Vice President Tom Sullivan said. But even though Teva fits that category, its lease was for strictly office space, and deals like that may become more difficult to come by.
“If you’re looking at high-cost, commercial-scale pharmaceutical manufacturing, that will see a positive impact because the state will focus on that," Sullivan told Bisnow. “The diminished benefits will be for strictly office transactions with retained New Jersey jobs, because that will become a secondary focus.”
Further restricting office-only tax incentives would be a cap to the Grow NJ and ERG programs, which Murphy has proposed at a level lower than the $1B per year they currently dole out, NJBIZ reports.
Other major deals in the third quarter that might become an endangered species include E-Trade's renewal and expansion at Mack-Cali Realty's Harborside development in Jersey City. That transaction was also impacted by Grow NJ incentives, according to CBRE. Ralph Lauren agreed to lease a full 255K SF building within the ON3 campus where Murphy spoke, receiving $33M in tax breaks over the next 10 years, according to a JLL report.
Both of those deals would look very different under Murphy's proposed changes, especially because of the increased emphasis on job creation, rather than job retention. E-Trade is expanding in place and Ralph Lauren is relocating from Lyndhurst.
The focus on life sciences and emerging technology could prove to be prescient, as much of New Jersey's office stock is in the form of suburban office parks that don't fit the modern model of live-work-play communities. That being said, part of Murphy's "master plan" announcement was the creation of a funding program to revitalize such outmoded developments.
New Jersey's rich history in life sciences, especially pharmaceuticals, has seemed ancient in the wake of the Great Recession. But with increased focus on emerging technology and job creation rather than retention, Murphy is betting that the tax incentives that are so crucial to the state's business community can go toward creating innovation districts, rather than propping up the previous generation of office development.
“The legacy of Big Pharma [in New Jersey] led to the strength of the underlying labor market, the availability of facilities and the broad zoning that allows for R&D," Sullivan said. "When you add the tax incentives, all of those factors come into play to add to the strength of New Jersey.”
Though traditional office users may be dismayed at the changes to the incentive programs, the outlook from the sectors intended to benefit the most is not completely sunny.
“We’re excited about the plan," New Jersey Business and Industry Association President Michele Siekera told NJTV. "The pathway to get there, though, has to consider tax reform, especially coming off the tax bill last week that imposes million of dollars in new taxes on the exact innovators that we’re looking to grow in the state of New Jersey.”
Siekera was referring to a new tax bill, eventually passed in early October, increasing taxes on companies headquartered in the state and reducing forgiveness on companies that operate at a loss — a regular occurrence with startups. With corporate taxes being cut at the federal level, more onerous state taxes could leave New Jersey lagging behind competitors in the life sciences. But Sullivan views the Teva lease, the result of an international company's consolidation and contraction into a suburban office, as an indicator that the state will be just fine.
“The [Teva] deal is indicative of longer-term trends and stability, and the continued strength of New Jersey versus national markets," Sullivan said. "You’ve got Boston, Cambridge, San Diego, San Francisco and a lot of activity in those markets, but the foundation, legacy and demographics of these industries we have in New Jersey points to stable, continued growth.”