Looking more closely at these projects, more than 8,000 of these units – a full 49 percent of the total – is located along the Hudson River Gold Coast in Hudson and Bergen counties. Within that submarket, Jersey City houses two-thirds of this activity.
Anecdotally, Gold Coast Class A multi-family vacancies are in the low single-digit range. The submarket has everything going for it in order to absorb this huge amount of inventory. Provided that Manhattan remains a regional employment powerhouse, the city’s multi-family vacancy rate stays at 1% or less and rent growth continues, people will either be displaced or choose to live in New Jersey based on its value proposition. The Gold Coast’s proximity and PATH, NJ Transit and ferry connections to New York City make it the most attractive alternative.
We may see a short-term impact on Class A rent growth in the Garden State as this abundance of new inventory is absorbed. However, we do not anticipate any backtracking. The demand is there, and in the long term, this is a finite market. There are only so many properties that can be built on the waterfront or within a convenient walk to mass transit.
Regarding the non-Gold Coast construction, the majority is occurring near or at train stations. We are seeing an increase of infill developments that are either rehabs of existing structures or involve the reuse of former industrial sites. Even then, the recycling of land in mature markets typically connects to ease of commuting.
The logical question circling this sheer amount of development is “why now?” Today’s momentum can be traced back to mid 2010, when two shifts occurred in lockstep. First, fundamentals began to improve. Since then, vacancy rates have declined to their current rate of 3.9 percent, according to REIS, which mirrors pre-recession levels.
This, in turn, has driven rental rates to the highest point in recorded history, per REIS. The average Class A rent currently is $1,973. The previous peak, of $1,968, occurred during the third quarter of 2008. Northern New Jersey recorded 2.4 percent rent growth in 2011; this ranks first in the Northeast out of 15 metropolitan areas and fourth in the entire United States. Simply put, New Jersey is in a good place in terms of fundamentals.
Second, debt and equity capital, as well as construction financing, came back into multifamily and quickly picked up pace. Fannie Mae and Freddie Mac are lending on existing assets, with rates that are all-time lows in the 3% range depending on loan term. This is creating a yield arbitrage for buyers coming into multifamily. We also have seen local and regional banks become more aggressive to compete with the agencies. This combination of available financing at rates that continue to decline has created cap rate compression that is driving up pricing. Since the first quarter of 2010, cap rates for Class A product have largely remained between 4.5% and 5.0%. When owners see this appreciation, it fuels their motivation to sell. The result? A perfect storm for stepped-up property transaction volume.
WHY DO INVESTORS LOVE MULTIFAMILY?
In 2010, 10 multi-family sales in excess of $10 million in size, totaling $523 million, closed in Northern New Jersey; three involved Class A properties. In 2011, 13 transactions totaling $825 million closed; nine involved Class A assets. This year, New Jersey seems in line for volume somewhere in between, with one or two Class A trades per half year. Looking back nearly a decade, New Jersey sees on average three Class A transactions per year.
In 2012, we have seen a number of generational sellers put properties on the market. They believe that pricing is peaking and are uncertain about what the capital gains tax is going to look like moving forward. The market also is ripe with REIT and institutional sellers choosing to exit non-core properties and those they purchased before the recession and now can sell at a profit. Active buyers include a diverse mix of institutions, private investors and opportunity funds.
Equity capital loves multifamily. While the economic recovery may well be under way, investors still see retail, office and industrial property as a relatively more risky asset class. Multifamily is accepted as the “safest” hard asset investment alternative, and, historically, the returns appreciation have been more stable than the other commercial sectors.
Additionally, the propensity for successful professionals to rent has increased. Some are transient and do not want to establish roots, while others may not have the 20 percent down payment needed to secure a mortgage. A growing number of qualified would-be buyers have seen home-owning family members and friends struggle during the past few years. So whether due to an aversion or inability to buy, the pool of prospective multi-family residents has deepened.
These factors all have contributed to a greater share of investment capital being shifted into multifamily versus the other real estate asset types. As we head into the heart of 2012, transaction volume is picking up. This, along with Northern New Jersey’s incredible development pipeline and impressive fundamentals, will keep the regional multifamily market among the most interesting industry discussion topics for foreseeable future.