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With nearly 24,500 units planned, under construction or recently completed, Northern New Jersey’s impressive multifamily development pipeline continues as one of the region’s hottest discussion topics. Specifically, inquiring minds want to know how this growth in inventory will impact market fundamentals moving forward.
The bulk of the development pipeline and activity (59 percent) is taking place along the Hudson River Gold Coast, from Jersey City to Edgewater. Just north of Edgewater, Fort Lee is seeing a surge of new construction. Three projects are underway or at the cusp of breaking ground there; over the next two years, they will add 1,000 units within a three-block radius of the entrance of the George Washington Bridge. This will have a transformative effect on the neighborhood.
This raises some questions. At what pace will the new product be absorbed? What will happen to short- and longer-term rent growth? Northern New Jersey always has maintained high, unmet demand for newly constructed communities (especially along the Gold Coast), evidenced by high occupancy levels and rent growth for Class A product that outperforms the regional and national market averages.
Currently, asking rent for Class A communities is at an all-time high of $2,043 per month. The vacancy rate continues to fall from its sub-recession peak of 4.6 percent, currently resting at 3.1 percent. It is expected to hold at that level through the next four years, according to Reis.
Within this context, the general consensus holds the belief that there is not an issue with the new inventory being absorbed. However, as various developments are delivered there will be competition for residents, so this may curtail rent growth for a time. We do not expect this to be a long-term trend, especially if rents in Manhattan continue to rise and employment remains stable. New York City rates are double the average rent on the New Jersey Gold Coast, with rents in Brooklyn at 1.5 times higher and continuing an upward trajectory. This rent differential makes New Jersey a compelling value proposition for those who need to be linked to Manhattan’s employment engine.
Jersey City — where nearly 11,000 apartment units are under construction — is positioned to be a huge benefactor of the continued build out of the World Trade Center and its direct linkage via the PATH train. In fact, the majority of multifamily development in Northern New Jersey follows the state’s train lines.
Jersey City is one of the most active areas for present and planned development, which is concentrated in the CBD, but also follows the PATH line west and includes Journal Square. The next PATH stop is Harrison, where premier local developers Ironstate, Pegasus, Russo, Advance, Heller and BNE all have made forward-thinking investments.
The same trend can be seen at stations along NJ Transit lines as they wind their way out of Secaucus Junction. To that end, Prism is finishing its Parkway Lofts project in Bloomfield. LCOR and Pinnacle are getting ready to break ground in Montclair, while AvalonBay is completing a multiphase project in Wood-Ridge, and Woodmont is underway in Cranford and Red Bank.
Investment Outlook
Why are so many players turning to development? Demand for existing, institutional-quality apartments remains exceptionally strong, and the competition to acquire these assets has driven down cap rates. This compression in yield has driven investors out on the risk curve to find alternatives such as forward-sales of projects still under construction and joint venturing on development. This shift has had a profound impact on the value of development sites, especially those that are within the vicinity of public transit. Starting in 2011, the pricing of development sites has risen with each successive transaction, which has paralleled the increase of both incumbent and new market entrants that are bidding on these deals.
Other development opportunities opening up in suburban Northern New Jersey involve obsolete corporate campuses, many of which are infill locations where prior use dates back multiple decades. Developers and their capital partners are capitalizing on the chance to create mixed-use communities with multifamily components on these prime sites that have not presented themselves for an alternative use for a generation or two.
— Brian Whitner, senior director, metropolitan area, Capital Markets Group, Cushman & Wakefield