Falling vacancies and notable rent growth marked 2012 as yet another positive year for the Northern New Jersey multi-family market. The continued strengthening of fundamentals attracted an influx of equity and debt capital from existing players and new market entrants alike. Developers and investors continue to intensely target opportunities along the Hudson River waterfront and around transit hubs further inland.
With demand outstripping supply in the Garden State, the average multi-family vacancy rate at year-end 2012 is anticipated to rest at 3.7 percent - down from 4.1 percent at year-end 2011, according to REIS. Effective rents will have grown 3.0 percent across all property classes year over year, bringing the average monthly rate to an all-time high of $1,536 (breaking the $1,492 record set in 2011 and significantly above the current national average of $1,101).
For context, rents are up 8.2 percent since the depth of the recession; at year-end 2009, renters paid an average of $1,420 per month. Additionally, REIS projects that rents will grow an average of 3.7 percent annually over the next four years. This trending rate ranks Northern New Jersey 8th highest out of 82 metros in the United States, and supports the argument that multi-family real estate makes a safe bet against inflationary pressures on investments.
In turn, the multi-family development pipeline also has reached historic heights, with approximately 21,000 units planned and under construction in Northern New Jersey. Of that, 55 percent of this new inventory is centered on the Hudson River Gold Coast extending from Fort Lee to Bayonne. A full 40 percent is located in Jersey City, which has become a hotbed thanks to its pro-development local government and continued evolution as a "livable" city with an ever expanding fabric of vibrant dining, retail and services that remain open well after business hours. Add to that the abundant public transit options available in Jersey City, and renters are more than willing to pay the type of rents that justify the cost of new high-rise construction.
While New Jersey's abundant development may be concentrated on the waterfront, several major projects further inland have launched or are set to launch as well. The rehabilitation of Harrison, a former industrial town, is beginning to gain momentum, with multiple developments centered around an under renovation PATH stop. Mill Creek is launching a project in transit-oriented Morristown. New Brunswick, Bloomfield, Montclair, Red Bank, and Cranford, which all boast strong rail infrastructure, will see some development activity this year as well. Clearly, mass transportation continues as the main draw for developers, who are catering to tenants that commute to Manhattan via rail.
One shift worth noting involves the "who" associated with these projects. New Jersey multifamily traditionally has been built and managed by long-term generational owners. In the early 2000s, we began to see institutional capital partners enter the market to back local and regional developers. Today, that group - local operators supported by institutional funding sources - has taken center stage and now comprises a majority of the current development activity.
THE INVESTMENT MARKET
Within this larger picture, multi-family investment activity in Northern New Jersey was largely in line with that of 2011. Taking the statistics at face value - for those transactions over $10 million - the number of sales (19), units that traded (3,400), and the total dollar volume ($482 million) in 2012 was roughly equal to half of 2011. However, excluding the four largest transactions in 2011, which comprised 54% of the sales volume, the results of the two years fall close to being on par.
The activity in 2012 started out slowly but picked up in the second quarter in terms of available opportunities. That faster pace held until shortly before the presidential election, when many investors and potential sellers decided to pause and reevaluate. In late November and early December, the market was near void of available product. Going against convention of starting a marketing process during the fourth quarter, a number of firms took advantage of this aberration and put properties out to bid. This resulted in a flurry of late-year opportunities.
Looking back at 2012, 51% of the sales volume was related to Class A communities; however, the bulk of the transactions (16 of the 19 sales) were Class B and C assets. Institutional-quality communities with walking distance to mass transit and a central business district are consistently trading at sub-five cap rates. The most active investors for this asset class in 2012 were institutional advisors and REITs. Demand for Class B assets is growing and has created very aggressive pricing (trading at cap rates in the fives). This is especially true for properties in dense, infill areas and those positioned for turnaround. We are seeing significant demand for B properties from high-net-worth private investors.
Looking forward, we anticipate that 2013 investment activity will mirror 2012, with a steady but measured pace of assets coming onto the market throughout the year. The availability and attractive terms of financing has played an important role in supporting investment sales activity and value appreciation. Provided the current debt environment remains status quo, we believe that will influence cap rates to hold their current levels.
What trends are we watching? The stepped-up debate on the rent ceiling for Class A multifamily as rents are increasing faster than income levels. It remains unclear at what point renters-by-choice will shift from stretching for Class A product they can't afford to either purchasing a home or settling for higher-quality, Class B product. We see that trend being a boon for Class B assets that can be upgraded and are located near mass transit.