Over the last few generations, a handful of local old-line families controlled New Jersey’s multifamily inventory. However, in the early 2000s, the popularization of Northern New Jersey’s Hudson Waterfront (Jersey City, Hoboken, Weehawken, West New York and Edgewater) and the entry of institutionally backed builders paved the way for a liquid investment market that took hold in 2004.
During the past five years, multifamily has been a darling of the real estate investment community in the Garden State—defined by low vacancies, steadily increasing rental rates and high barriers to entry. And while the market has been impacted due to financial layoffs and pharmaceutical mergers, it continues to perform relatively well.
The Class A vacancy rate in Northern New Jersey moved above its 10-year trailing average (3.9 percent) to settle at 4.8 percent during the summer of 2009. While this is the highest rate recorded in four years, it remains at about half the nation’s average (8.1 percent) and below the northeast average (6.2 percent). Class B and C properties, which are less reliant on “renters by choice,” have taken their lumps, too, but with a less pronounced correction compared to the Class A market.
Through the end of 2009, the vacancy rate is expected to remain in the current range of between 4.5 percent and 5.2 percent. We are seeing owners use their arsenal of incentives (mainly in the form of concessions and limited security deposits) to keep their vacancies in the low- to mid-single digits. As more tenants turn cost-conscious, the importance of competitive rent is overweighing amenities and convenience.
The average Class A asking rent at mid-year 2009 was $1,927—$31 below year-end 2008—marking the first negative rent growth (a 1.6 percent decrease) in 10 years. Historically, the highest annual increase was set at 8.5 percent in 2000. The previously recorded low registered 1.3 percent in 2005, a result of landlords moving to fill approximately 9,000 condominium and rental units constructed during the previous four years. For context, during the first six months of 2009, rents across the nation fell by 1.2 percent and in the Northeast by 1.3 percent.
We expect asking rents to remain at their current levels and slightly increase during 2010. Owners have been adamant about holding their market rents high, and it has been rare to see a large movement of advertised rents. Conversely, effective rents have adjusted more during 2009 due to ubiquitous concessions averaging approximately one month.
Northern New Jersey’s overall apartment inventory has steadily grown by 3.5 percent annually (3,000 to 4,000 units a year). It has been kept low by dense, mature submarkets with barriers to entry and an onerous approval process. In 2009, 2,400 Class A units will be completed. Their impact on fundamentals will be muted, however, as those who may be prospective homeowners will opt to rent due to uncertainty or unavailability of financing. Young mobile corporate professionals will also gravitate towards this choice as job uncertainty discourages them from planting roots.
Six major construction completions to date this year have introduced new properties along the Hudson River shoreline—one of the most desirable and valuable residential areas of the state. Of the seven additional rental communities currently under construction, all are located in urban areas and within walking distance to transportation hubs.
Through 2010, we expect to see few additional construction starts as lenders keep the financing tight and wait for fundamentals to strengthen. Developers are continuing to take projects through the approval process so they can be ready to move once the clouds break.
Within this larger context, we have witnessed continued demand for quality multifamily investments in Northern New Jersey—with transactions occurring at the same time that fundamentals are adjusting to their long-term averages. Buyer interest has only gained momentum, with high tour counts and submission of offers that number 20+ for the assets we have taken to market this year.
The bid-ask spread is narrowing with each additional transaction, as the road to price discovery begins to clear. However, there remains a wide gap between the highest and lowest offers— anywhere between 15 and 40 percent depending on the quality of the deal. During the first six months of 2009, the Northern New Jersey market had five multifamily sales in excess of $10 million, totaling 1,726 units. Three were urban mid/high-rises and two were suburban garden-style properties. The largest and most recent involved the 776-unit Fox Run Apartments in Plainsboro. In Jersey City, a portfolio of five buildings on Fairmont Avenue sold in March. The Trio in Palisades Park represented the state’s first bankruptcy liquidation of a fractured condominium, selling for $18.1 million, or $254,000 per unit, in April.
Sales volume at mid-year totaled $169 million, which, on an annualized basis, is 44 percent behind the $597 million recorded in 2008. Average price per unit is off by 51 percent ($98,000 vs. $198,000) given the mostly B nature of the deals sold this year, and the average deal size fell by 21 percent ($34 million vs. $43 million).
The average cap rate rose 176 bps to 7.27 percent, which falls in line with where cap rates were in 2000-2002 for New Jersey multifamily product. Rates have shifted upward by 150-200 bps over their range in the mid-5 percents seen at the peak of the market in 2005-2007. The basis for quoting cap rates has shifted from first year pro forma to trailing actuals and now “back to the future” as projections have become more conservative.
The sellers involved in the aforementioned dispositions included three REITs and two private investors. With institutional investors largely on the sidelines, private high net worth individuals, raised funds and local operators paired with opportunity funds are making the lion’s share of offers to buy.
Looking ahead, there exists a growing consensus that values are near the bottom. We foresee sales volume progressively growing through the end of 2009 and into 2010 due to more compelling pricing. This will be led by an adjustment of fundamentals and additional data points supporting the new level at which cap rates will reset.
(Jose Cruz is executive director in Cushman & Wakefield Inc.’s Metropolitan Area Capital Markets Group.)