Multifamily Demand Stays Strong in Northern New Jersey
Rising costs of homeownership and the lack of SALT deductions on federal income tax returns will help maintain the strong demand for apartments in Northern New Jersey. We are seeing an increase in construction activity as municipalities settle their affordable housing lawsuits with developers and long-awaited projects, especially those located along major public transportation hubs, are completed.
In Jersey City and Hoboken, these new projects are placing upward pressure on Class A vacancy as they take time to lease. We see an increase in more concessions being offered, which will dampen the appreciation of monthly rates. This could impact the upgraded Class B buildings, which find themselves battling for renters with recent finished projects and more affordable options that can be found inland.
In areas west of the Gold Coast, we see continued higher occupancy rates with many landlords reporting well under 30 day turnover rates, unless major renovations are needed. Outside of Hudson County, the overall vacancy factor trends between 2 and 3 percent allowing for increased revenue, according to research from Marcus & Millichap. Landlords in strict rent control markets are faced with the decision of either renovating to increase rents via capital improvement programs or take advantage of the market and sell to find better returns in less management intensive properties and in markets with more favorable landlord laws.
Investors continue to seek opportunities inland as both Bergen and Hudson County continue to see compressed cap rates despite the increase in rates last year. We are seeing have investors looking farther west than they have in the past as they can achieve deals in the 6-7 percent capitalization rate range. As a result, cities such as Paterson and Elizabeth are seeing large increases in transaction velocity compared to just a few years ago. Much of this activity is being driven by out of market buyers who are chasing yield.
These buyers are also changing the manner in which deals are transacting as they are creating stiff competition for local buyers. We have been able to close deals with little to no due diligence whereas 3-4 years ago, buyers would have been locking up deals for 30-45 days with a refundable deposit.
There continues to be a significant spread between what new, Class A construction units command for rent and older vintage Class C and even some Class B properties. This gap can be between $500-$700 per month depending on the submarket. This provides incredible opportunity for investors to add value to these properties and still be well-positioned in the rental market.
The average effective rent should increase to $1,938 per month this year, following a 2.8 percent rate of appreciation in 2018. Rental rates on Class A properties in Hudson County could remain stagnant as than 4,000 units are expected to be delivered this year in the Jersey City, Hoboken, and other parts of Hudson County.
While renovated Class B/C are poised to have big increases as they feed off the newly priced inventory, initial concessions offered during lease up will be a determining factor as to how much. Submarkets like Bergen County will see between 2.3 and 2.6 percent average increases.