FLORHAM PARK, NJ—Multifamily continues to be the hottest sector of commercial real estate, say panelists at this year’s RealShare New Jersey conference, held last week in Florham Park, NJ.
“Construction continues to boom, 5700 rental units were added last year, this year it’s projected to hit 9500,” says Mitchell S. Berkey, co-chair of the real estate group, Chiesa Shahinian & Giantomasi. Berkey moderated the “Unlocking the Value in Multifamily Properties: How are Developers and Investors Finding Opportunities in this Sector?” panel at the conference.
“That supply is starting to creep into the vacancy rate, which is projected to tick up to close to five percent, which would be a meaningful increase,” Berkey says. “Net effective rents are projected to be up to about four percent, and northern New Jersey continues to produce better multifamily yields than Manhattan and Brooklyn.”
With development of the Hudson Yards in Manhattan, the center of gravity in New York has shifted to the west, says Christopher M. Bellapianta, managing principal, Camber Real Estate Partners. The gold coast of northern New Jersey will benefit from that shift, he says.
“Transit nodes that have direct access are also going to do well,” he says. “An area that has a sense of place, where it’s a direct stop from the city and you can walk out of your office and get a Starbucks, people are going to want to move to these areas.”
Demographics mean multifamily finds itself in a “sweet spot,” because many people entering the workforce cannot afford to purchase starter homes, says Alex Cocoziello, principal and vice president of investment, Advance Realty. Pricing is going to be critical as investment moves outward from the city, he says.
“Now you’re seeing investment push out to the periphery where transit-oriented is not exactly the bellwether asset class,” he says. “The spreads, the risk premiums are wider on the units, you have your end user driving instead of commuting to an employment hub. Every time you talk to a lender or a capital provider or an asset allocator about this, they tell you your downside is the supply, but what we’ve found is that if there’s a slowing velocity in your leasing, you can just drop your rents by a couple of hundred dollars and you’re going to lease another 30 or 40 units.”
Tremendous demand from New York City is pushing investment out into New Jersey because of low cap rates in Manhattan. “To me it looks like the Brooklynization of New Jersey,” says Brian Hosey, vice president / regional manager of New Jersey, Marcus & Millichap. “Volume is down in New York for multifamily by about 20 percent, whereas volume is up in New Jersey by about 10 percent.”
Thirty percent of Marcus & Millichap buyers are coming from New York, he says, “because they are priced out.”
“We might have reached peak pricing in the short term, but I think in the long term we are at the front end of a massive wave of investment into New Jersey,” he says.
The market is “more competitive and more difficult than it has ever been,” says Brian Stolar, president and CEO, The Pinnacle Companies. “Overbuilding is already happening, New York City rents are down four or five percent. You really have to work very hard now to find the opportunities.”
The concessions and rent declines in New York are “a barometer” for developers to watch, “especially given the amount of multifamily supply under construction in Northern New Jersey,” says Russell Tepper, senior managing director for New York, New Jersey and Connecticut, Mill Creek Residential.
In contrast to New Jersey, on Long Island, where Mill Creek also develops projects, developers have to be willing to commit for the long haul.
“There is so little supply that comes to market in any given year, partially because it takes so long to find land in a village or a hamlet or a town that understands and appreciates high density development,” he says. “All we want to do is find land and be willing to wait it out to develop the property because rents are strong there, supply is low, and demand is very high.”
HFF is looking closely at opportunities to acquire properties that can be upgraded to take advantage of rent and renovation opportunities.
“What we look at is what’s going to happen in the next couple of years,” says José R. Cruz, senior managing director, HFF. “When we start looking at 2019, 2020, we see a spike in rents. It’s specifically the core-plus properties, the renovation plays, adding amenities, pushing amenity fees.”