NORTHERN N.J. MULTIFAMILY PROGRESSING AT AN IMPRESSIVE PACE
Market Fundamentals, Investment Sales Head Toward Pre-Recession Levels
November 9, 2011 – (RealEstateRama) — The turnarounds in multi-family market fundamentals and investment sales, which both can be traced to an inflection point in the first half of 2010, have continued at an impressive pace through the first three quarters of 2011. Should the current positive trending continue, we could be on pace to revisit pre-recession conditions in the near term.
For context, at the end of 2006 the Northern New Jersey Class A rental market vacancy rate hit a historic low, at 2.4 percent. That tightening in supply was followed by an average rental rate peak of $1,968 per month by late 2008. But this trend reversed in haste in 2009. By midyear, the recession had resulted in the highest five-year vacancy rate, 4.9 percent, and by year end rents had fallen 3.6 percent.
Yet 2010 provided upward change. At year end, the region’s Class A multi-family vacancy rate had begun to improve; by the third quarter of 2011 it rested at 4.0 percent, with Morris County enjoying the lowest rate (2.8 percent). The average rental rate rebounded by 3.1 percent over its recent trough in first quarter 2010 through the current period; it is holding steady today with Hudson County recording the highest average rent ($2,614 per month).
For further context, while we still are 1.6 percentage points below that historic low vacancy in 2007, the northern part of the state only needs to absorb 1,209 units to put us back on par. This seems readily achievable as in 2010, the market absorbed 2,032 units. For rents to return to the 2008 high, we need 0.9 percent rent growth. During the first three quarters of 2011 alone, rents grew 1.2 percent.
On paper, we can trace the health coming back into the rental market. Anecdotally, one only needs to speak with multi-family owners and property managers to feel their confidence in where things are headed. We may continue to hear that the economy is shaky and employment uncertain, but landlords simply are not seeing the same level of apprehension in renters today than they did two and three years ago. The trend of doubling up with a roommate is no longer the dominate circumstance, as since occupancy units such as studios and one bedrooms are in the highest demand. Also, an increase in demand can partially be attributed to pre-2008 home buyers choosing to rent and forgo purchasing due to market uncertainty, thus becoming a “renter by choice,” or not having the ability to source the down payment or secure financing, thus placing them a “renter by necessity.” Also, retirees and empty nesters are replacing suburban homes with rental residences at fully amenitized communities near walkable suburban CBDs.
The multi-family market has re-entered a positive trajectory from an investment perspective as well. Back in 2008, seven Class A properties changed hands in Northern New Jersey. That number dropped to one in 2009 and two in 2010. By mid-year 2011, two Class A sales had closed – including the $280 million trade of Liberty Towers (648 units) in Jersey City and the Cushman & Wakefield brokered $96.5 million trade of 800 Madison (217 units) in Hoboken. Three more properties currently are under contract. All recent institutional-quality multi-family investment sales in the tri-state area, outside of Manhattan, have closed at sub-five cap rates since the beginning of 2010.
One of the only factors inhibiting this pace from picking up in the near term is an evident lack of product coming to market. During the investment heyday from 2005 to 2007, a huge percentage of Northern New Jersey’s Class A multi-family inventory traded to institutional players with investment cycles of five, seven or 10 years. As those properties begin to come through their cycles over the next 24 or 36 months, we expect to see increased volume.
MULTI-FAMILY CONSTRUCTION HEATS UP
New construction starts in the Northern New Jersey market came to a virtual standstill during the downturn due in most part to a lack of financing, yet that is beginning to reverse as well. The moons are starting to align, where rents justify the creation of new supply. Equity and debt are available again, which has put developers back into play.
In total, 1,097 units are under construction, with completion dates beginning this fall through 2013. Major developments are underway in Wood-Ridge, North Bergen, Harrison, Lyndhurst, Hoboken and Jersey City. Each of these projects is an infill development, and four of the six are transit oriented. This trend of development in New Jersey’s more urban, dense communities ringing Manhattan – especially involving projects with easy public transportation access to the city – reflects the future of multi-family growth here. Absorption rates for newly constructed luxury units are setting records, especially at communities offering easy mass transit to Manhattan, where up to 70 leases per month are being signed.
Yet despite this jump, Northern New Jersey’s multi-family inventory growth remains very low compared to the northeast and the United States. We currently rank 11 out of 15 markets in the northeast and 70 out of 82 nationally, according to REIS. Simply put, the entitlement and site availability barriers to entry keep competition constraints high.
This actually is one of the reasons we maintain a bullish outlook on vacancies staying low and rent growth remaining healthy. As such, moving into the final months of 2011, we will look for further progress in Class A multi-family rental market fundamentals. And while investment sales volume will remain sideways in the region, we will continue to see no shortage of capital chasing the few Class A properties that do come online.
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By Brian Whitmer, Director
Cushman & Wakefield, Inc.’s Metropolitan Area Capital Markets Group
East Rutherford, N.J.
Contact:
Media Contact: Evelyn Weiss Francisco: evelyn (at) caryl (dot) com, (201) 796-7788
