Cushman & Wakefield of New Jersey, Inc.
One Meadowlands Plaza
East Rutherford, New Jersey 07073
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N.J. Multifamily Market Returns to Pre-Recession Fundamentals
YTD in 2011, Continued Lack of Institutional Quality Product, Seller Hesitancy Limits Sales Volume Despite Pent Up Investor Demand
By Brian Whitmer, Director
Cushman & Wakefield, Inc.’s Metropolitan Area Capital Markets Group
East Rutherford, N.J.
March 23, 2011 – “Optimistic” may be an understatement at this point when it comes to describing the attitude toward the multi-family real estate climate in Northern New Jersey. As we head into the second quarter of 2011, we are seeing the best Garden State submarkets hitting their stride and returning to strong, pre-recession fundamentals.
The multi-family vacancy rate was just 4.9 percent in Northern New Jersey at year-end 2010. Occupancy again has risen to the high 90 percent range along the Hudson waterfront Gold Coast, with rising demand for best-in-class assets within that first-tier commute of New York City. Concessions have been eliminated almost entirely along the waterfront and for newer construction throughout the state. Rents grew 1.5 percent in 2010 after decreasing 3.1 percent in 2009. Tenants at year-end 2010 paid an average of $1,510 per month across the board, which is 45 percent higher than the national average. In short, renter advantage is fading.
Why? Employment is strengthening in Manhattan, within financial services and supporting occupations. The rental market in the city has gotten incredibly tight; reports show that in the third quarter occupancy reached 99 percent. That level of performance immediately pushed up rents, which has priced many tenants out of that market. Waterfront towns in New Jersey – including Weehawken, Hoboken and Jersey City –absolutely are benefiting.
The progress is tangible, and the investment market is responding. Our team is in the last stages of transacting a $100 million multi-family asset in Hoboken, where the bidding competition was fierce. At the recent, very well attended National Multifamily Housing Council’s annual meeting, everyone seemed to be looking to make a deal. From the largest pension fund advisors to small private firms, investors of all sizes have money they want to spend.
Our main challenge in Northern New Jersey is a continued lack of institutional quality deals to be had. Looking at the numbers historically, in the early 2000s, we saw an average of three or four Class A communities trade. In 2006, that number doubled. Core multi-family asset sales came to a virtual halt in 2008 and 2009, but activity again picked up in 2010. Investors face a delicate balance: If they put something up for sale they know they can get top dollar, but they may not be able to redeploy that money with so few properties coming online in the New York metropolitan area.
Even across classes, opportunities remain tight compared to the robust sales levels during 2005 through 2007. Considering all multi-family investment deals valued at more than $10 million, 15 deals totaling $509 million in volume closed in 2008, six transactions totaling $195 million closed in 2009 and 12 transactions totaling $451 million closed in 2010.
Additionally, the development pipeline has slowed significantly. In 2009 and 2010, 1,478 and 2,205 units, respectively, were delivered in Northern New Jersey. This year, only 894 units will come online in Harrison, Jersey City and Rahway. As an aside, the supreme focus on communities near mass transit is worth noting. Of the eight communities completed last year, six were within walking distance to a train, PATH or ferry stop. All three of the communities currently under construction offer immediate rail access.
Looking again at the numbers, the 2010 delivery “surge” mainly consisted of units started in 2008 and likely financed in 2007 – before the crash and a total lack of available construction financing in 2008 and 2009. To date in 2011, our team has been active arranging joint ventures and forward commitments on development sites.
We definitely are noting a return of construction financing for well-located development sites in fortress markets like the Gold Coast. But until some of these properties begin to come online in 2013 and even later, the undersupply of new Class A product will drive rent growth for the current owners, with existing communities that are much more in demand without notable new competition.
What this all means for Northern New Jersey multi-family investment for the balance of 2011 remains to be seen. Yes, there is incredible demand in the market – the fundamentals have dramatically improved. However, these positive trends are leading sellers to remain hesitant about marketing their properties until the improvement in operations begins to plateau. Coupled with uncertainties over interest rates and financing, these factors have kept the New Jersey market quiet so far this year. But looking ahead to the near term, an abundance of all-cash buyers should keep cap rates where they were in 2010 – at historic lows that in general mirrored the pre-2008 heady times. Once a few deals have been priced, sellers will be enticed to test the market. We expect that will likely generate a flurry of deals in the second and third quarters of this year.