Proving its historic resilience once again, a hale and hearty multifamily investment market continues to outpace other commercial real estate sectors in the wake of the latest economic dip. Thanks to an ailing housing market that doesn’t seem to have a tangible cure in the foreseeable future, the “new normal” in residential living is apartment rentals. Strong leasing fundamentals; 1950s-era, bank-friendly interest rates; and the lack of other risk-averse investment options have contributed toward a dramatic increase in sales velocity along the highly sought-after South/Central/Northern New Jersey corridor. Demand is unrelenting.
Just 18 to 24 months ago, many investors were sitting on the sidelines waiting for multifamily properties to follow in the footsteps of other hard-hit commercial real estate assets, including office, non- grocery-anchored retail and industrial, where vacancies skyrocketed and lending came to a virtual standstill. These fears had little-to-no impact on multifamily properties, which possess certain inherent “recession-proof” characteristics. Rental living provides a viable, affordable alternative to people who are concerned about their long-term employment outlook, cannot qualify for a single-family residential home loan or are displaced due to rising foreclosures or natural disaster, such as flooding in the aftermath of Hurricane Irene.
As the economic recovery continues to hit peaks and valleys in the coming months, due to tepid consumer confidence and rising household expenses, in-place renters are expected to stay put in an ever-strengthening tenant pool, virtually eliminating the words “rent concession” from the multifamily lexicon. Rents in cities like Philadelphia and New York City will fortify, leaving those who cannot afford to reside in these urban centers to establish tenancies in New Jersey’s surrounding commuter hubs that typically boast Class B and C apartment buildings built in the post-war era.
Today’s strong tenant pool comprises young professionals, newlyweds saving for their first home and working-class families. Adding to this robust renter phenomenon is an influx of young adults, in their early 20s to mid 30s, who recently completed their education or previously lived with their parents. Since all of these tenant demographics favor proximity to mass transit, employment centers, good schools and lifestyle services, such as shopping, dining, cultural venues and recreational centers, investors are aggressively pursuing these same properties for their proven long-term economic performance outlook.
One multifamily trading hotbed is Northern New Jersey, where a high density of existing apartment buildings throughout Hudson, Essex and parts of Union counties are located along the Gold Coast. Just across the Hudson River from Midtown and Lower Manhattan, these cities have few single-family home neighborhoods and a high concentration of in-demand multifamily properties that were constructed in the early to mid- 20th century and that have been upgraded over the years through refurbishments and renovations. Occupancy rates are hovering in the high 90th percentile and sales prices are holding strong and trending higher. Certain areas, like downtown Jersey City, are even yielding above-average per-unit prices. A 45-unit building near the Holland Tunnel — a school that was converted 25 years ago — recently fetched $155,000 per unit, which is significantly higher than the average $50,000 to $60,000 per unit in other parts of the city.
Sellers are also recognizing all of this positive momentum, which is pushing values northward and cap rates southward, similar to those of just a few years ago. With the supply chain of for-sale product quite thin, and an extremely “friendly” multifamily lending environment, capital is competing vigorously for the rare opportunities that do come to market. Off-market transactions that close in 45 to 90 days have become the rule, rather than the exception, and there is a steady stream of activity closing in an even shorter time period. In North Jersey, during two recent months, 10 deals encompassing 429 units traded for a total of $27.66+ million in a 22-day timeframe and six separate transactions involving 357 units closed for $16.14 million in just seven days.
Multifamily investing is poised to gain even greater ground in the coming year. Adding to this momentum is a tightening bid/ask gap, favorable tax advantages, the ability to purchase apartment buildings well below replacement cost and a lack of new construction starts. The flowing pipeline of readily available low-interest financing, huge investor demand and solid fundamentals approaching pre-recession conditions will further advance the velocity of multifamily deals at a healthy clip.
— Ken Uranowitz is managing director of Livingston, New Jersey-based Gebroe-Hammer Associates.