Multifamily Capital Chases Limited Supply in Northern New Jersey
An abundance of capital continues to flow into Northern New Jersey’s multifamily market, with most investors completing 2019 as net buyers and
major institutions looking to remain
active in 2020.
Over the past decade, domestic and foreign investors alike have diversified into the multifamily space in Northern New Jersey and nationwide. The result has been a highly competitive playing field with limited opportunities. And with more capital in the market than opportunities to place it, many larger funds are now looking to make portfolio acquisitions in order to divest large amounts of capital at once.
Excluding portfolio deals, transaction volume for multifamily investment in Northern New Jersey reached $1.6 billion in 2019, marking a 38 percent year-over-year increase, with 4,846 units sold across 27 transactions.
This rise in deal volume can be attributed largely to the “Mack-Cali Effect.” The locally based REIT made two major 2019 purchases in Jersey City — SoHo Lofts ($264 million) and Liberty Towers ($409 million) — that accounted for 41 percent of the year’s individual transaction volume.
While larger institutions and REITs like Mack-Cali are active in Northern New Jersey, private investors still dominate the regional market. This year we may see a major migration by New York real estate investors to properties in New Jersey as new rent regulations push them out of New York City and into more favorable regulatory environments.
New Jersey investors tend to favor a mix of value-add and Class A product. While the value-add space has been a frontrunner for several years, investment demand is currently far outpacing supply in that niche. In fact, value-add deals comprised only 15 percent of multifamily transaction volume in 2019.
A tight supply of potential value-add properties has also pushed capitalization rates under 4 percent, prompting some buyers to expand their scope and pursue core-plus or core investments, where they can obtain attractive
returns at lower risk levels.
Within this context, following historic construction numbers over the past several years, the New Jersey multifamily construction pipeline has slowed. However, it still remains booming in several key submarkets that offer walkability, favor density, provide retail and recreation and feature mass transit
Jersey City leads the pack with 4,500 units under construction downtown and another 12,000 units in various stages of planning and approval. Most notable is that nearly every neighborhood in Jersey City is seeing new apartment projects rising.
Developers are also targeting surrounding municipalities such as Bayonne, which currently has 1,850 units under construction and an additional 6,500 units in various stages of planning. Residents are finding that rental rates in Bayonne can be 40 to 50 percent less than the highest-priced Jersey City communities, while offering a similar set of building amenities as well as larger unit sizes.
Similarly, with two New Jersey Transit train stations offering non-transfer service to New York’s Penn Station and an urban walkable downtown, Hackensack has a become a premier market for developers, with 1,700 units under construction and an additional 2,000 units in various stages of planning. The influx of foot traffic from the residential development is expected to accelerate the revitalization of the city’s Main Street district.
In short, these towns promise coming supply additions. And new product will be absorbed as quickly as it is built, keeping vacancies down as rent growth ticks up.
Why is Northern New Jersey so attractive to investors and developers? Rental rates for Class A apartment product in Northern New Jersey increased by 2 percent in 2019,
registering an average of $2,627 at year end, according to Reis. Vacancy remains flat year-over-year at 4.8 percent, despite 3,437 units being delivered. Compare this to a $1,498 average rent and 4.7 percent vacancy rate nationwide, and the appeal of the Garden State becomes clear.
As we enter the heart of 2020, we expect to see an increase in transaction activity due to abundant, pent-up investor demand and capital flowing into the multifamily space. We anticipate a strong first half of the year as buyers and sellers seek to take advantage of the favorable interest rate environment and avoid potential uncertainty that November’s presidential election could create. However, as investors largely plan to be net buyers again in 2020, they may soon find limited
— By Brian Whitmer, Director, Cushman & Wakefield. This article originally appeared in the March/April 2020 issue of Northeast Real Estate Business magazine.