COVER STORY, OCTOBER/NOVEMBER 2009

MULTIFAMILY COMMENTARY
Limited supply and lack of construction translate into stable apartment markets in the Northeast.
By Jaime Lackey

The overall apartment market in the Northeast has seen slightly increased vacancies and slightly decreased rental rates with the down economy. However, brokers who work in the multifamily markets in northern New Jersey, Boston, Pittsburgh and Philadelphia report optimistic news from their respective markets.

“Today’s buyers hope they are buying at the bottom of the economic cycle,” says Simon Butler, executive director with the Apartment Brokerage Group in Cushman & Wakefield’s Boston office. “They see a compelling story. [Multifamily] operations are improving, there is no new supply, and they envision rent growth as the economy picks up.”

“Will the economy rebound? It is the greatest unknown,” Butler says.  “We really need to see employment growth in order to see marked improvement in the multifamily market.”

In the meantime, it is becoming a little easier for buyers to purchase properties in today’s market. “As the economy turns around, financing multifamily purchases certainly isn’t as difficult as it was in the darkest days of the last 9 months,” says Jason Pucci, chief operating officer with Woodbridge, New Jersey-based The Kislak Company.

Pucci also notes that there are new, smaller investors buying 10- to 30-unit apartment properties. “When the stock market took a nose dive, many clients developed an appreciation for the tangibility of real estate investments,” he says. “Even when property values are not climbing, owners are still collecting rent, and they still own the property even if there are vacancies here and there.”

Northern New Jersey

The Northern New Jersey apartment market remains strong compared to other markets nationwide, Pucci says. “The market is stable. We didn’t experience over-development; there isn’t a glut of inventory on the market.”

“Vacancies are low at 3 to 5 percent. Rents are cheaper than in New York, which helps keep buildings full, and there are very few concessions,” he adds. The occasional concessions are small: a deal on the first month’s rent or a slight decrease in rent for a short period of time.

Apartment property values have remained fairly stable, Pucci says. “We are still seeing strong pricing. For example, we recently sold a small portfolio of 42 residential units and one medical office space in Westwood, New Jersey, for approximately $142,000 per unit.”

In this particular transaction, Hampton West Apartments, which includes 18 units and the medical office, sold for $2.85 million. Seven units at Hampton East Apartments and 17 units at Sutton Place Apartments sold together for $3.12 million. “We had a strong summer with many closings,” Pucci says. “Another good example is the sale of a 64-unit property in Orange, New Jersey, for $4.95 million, approximately $77,000 per unit.”

New Jersey is the most densely populated state in the country, Pucci says. “There will always be a strong housing need here, especially in northern New Jersey, which offers a reasonable commute to New York City.”

“The job market is relatively strong [in New Jersey] compared to other parts of the nation,” he adds. New Jersey has a number of Fortune 500 and Fortune 1000 companies, and the pharmaceutical industry provides many stable jobs. The multifamily market benefits from New Jersey’s suburban office campuses as well as its proximity to New York.

Boston

The Hanover Company recently delivered units at the Lodge at Ames Pond in Tewksbury, Massachusets.

“Boston’s apartment market is also quite strong,” Butler says. “Operations are improving and there has been a marked drop off in new supply.” New supply in the market has averaged just over 4,200 units each year since 2005, peaking at 6,000 in 2007. Butler expects only 1,200 units to deliver in 2010.

Recent deliveries include 222 units at Criterion Development Partners’ The Residences at Rivers Edge in Medford, Massachusetts, as well as The Hanover Company’s Charles River Landing (350 units) in Needham, Massachusetts, and Lodge at Ames Pond (364 units) in Tewksbury, Massachusetts. 

According to Butler, the lack of construction financing and equity is keeping most apartment developers out of the market. He expects developers to stay quiet for a while. “The developers will need to see sales transactions closing in order to understand the required returns for them to get back in the game. They also want to see positive trends and rent growth,” he explains.

The Hanover Company recently delivered units at Charles River Landing in Needham, Massachusets.

According to Butler, the urban core of Boston is performing very well. The area with the strongest employment is between the Mass Turnpike and 495. South of 495 has a softer office market, which correlates to a slower apartment market. However, Butler stresses, this area is not performing poorly. “We see opportunity here and expect to see rent growth going forward,” he adds.

Boston’s universities and healthcare companies make the city somewhat recession-resistant, Butler says. “This type of intellectual capital will always lead to innovation, producing new industries and new companies to spur employment growth.”

Pittsburgh

Cynthia Kamin, senior vice president with the Pittsburgh office of CB Richard Ellis (CBRE), also sees positive trends in the Pittsburgh apartment market. She says, “The current multifamily market in Pittsburgh is very strong. Many of the apartment owners I speak with tell me this is the best year ever for apartment rentals. Occupancy is strong, rental rates are increasing, concessions are waning and new construction has come to almost a halt, with only 119 units slated to deliver in 2010.”

Overall vacancy in Pittsburgh’s apartments was 3.4 percent during second quarter 2009, with central Pittsburgh the lowest at 2.1 percent and south Pittsburgh the highest at 4.4 percent. Rental rates have increased 2.1 percent over last year.

Multifamily prices have also remained stable. CBRE recently concluded the sale of Penn Towers Apartments in Wilkins Township, Pennsylvania. The property contained 241 rental units and sold for $10.29 million. The property was 81 percent occupied at closing. The owner is renovating the property and leasing the units.

Kamin predicts Pittsburgh’s multifamily market will remain strong in 2010. The medical and education sectors continue to drive the Pittsburgh market. She notes that 4,000 new jobs are slated to be created in 2010, which will only advance the multifamily market in Pittsburgh.

Philadelphia

The Philadelphia market is also stable, according to Andrew Townsend, an associate with Marcus & Millichap’s Philadelphia office. “There has been little building over the last 10 years. This year, only 600 units are being delivered to the entire Philadelphia MSA,” he says. “It is difficult to get apartment zoning and expensive to build. So the existing product is old but it is full, it commands good rents and there is still a market for it.”

In the Philadelphia MSA, overall apartment vacancy is 5 to 10 percent, though Townsend says it may approach 15 percent in some submarkets.

There is some pressure on rents due to the overall economy. Most landlords are holding rental rates steady or decreasing them slightly, but there are few concessions in the market. “For example, a few landlords are offering half-off the first month’s rent, which is unheard of in this market,” according to Clarke Talone, an associate with Marcus & Millichap’s Philadelphia office.

Philadelphia has a diverse employment base, and the area’s hospitals and universities keep employment fairly stable. However, Townsend says, the rental apartment market is not likely to see improvement until the area sees job growth.

On the sales side, apartment property prices are down and there are fewer buyers bidding for deals. There are some new local management and family companies entering the market though. “Overall, it is tougher to get deals done,” says Ridge MacLaren, vice president of investments with Marcus & Millichap’s Philadelphia office. “But financing is available and interest rates are as low as 5.5 percent.”

Are we at the bottom of the cycle? If we knew for certain, these brokers would see climbing property values and more bids on properties. In the meantime, these brokers strive to find common ground in the bid/ask spread, and everyone is watching for employment trends that will translate into multifamily demand.

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