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MARKET HIGHLIGHT, NOVEMBER 2011
NEW JERSEY
Multifamily
Proving its historic resilience once again, a hale and hearty multifamily investment market continues to outpace other commercial real estate sectors in the wake of the latest economic dip. Thanks to an ailing housing market that doesn’t seem to have a tangible cure in the foreseeable future, the “new normal” in residential living is apartment rentals. Strong leasing fundamentals; 1950s-era, bank-friendly interest rates; and the lack of other risk-averse investment options have contributed toward a dramatic increase in sales velocity along the highly sought-after South/Central/Northern New Jersey corridor. Demand is unrelenting.
Just 18 to 24 months ago, many investors were sitting on the sidelines waiting for multifamily properties to follow in the footsteps of other hard-hit commercial real estate assets, including office, non-
grocery-anchored retail and industrial, where vacancies skyrocketed and lending came to a virtual standstill. These fears had little-to-no impact on multifamily properties, which possess certain inherent “recession-proof” characteristics. Rental living provides a viable, affordable alternative to people who are concerned about their long-term employment outlook, cannot qualify for a single-family residential home loan or are displaced due to rising foreclosures or natural disaster, such as flooding in the aftermath of Hurricane Irene.
As the economic recovery continues to hit peaks and valleys in the coming months, due to tepid consumer confidence and rising household expenses, in-place renters are expected to stay put in an ever-strengthening tenant pool, virtually eliminating the words “rent concession” from the multifamily lexicon. Rents in cities like Philadelphia and New York City will fortify, leaving those who cannot afford to reside in these urban centers to establish tenancies in New Jersey’s surrounding commuter hubs that typically boast Class B and C apartment buildings built in the post-war era.
Today’s strong tenant pool comprises young professionals, newlyweds saving for their first home and working-class families. Adding to this robust renter phenomenon is an influx of young adults, in their early 20s to mid 30s, who recently completed their education or previously lived with their parents. Since all of these tenant demographics favor proximity to mass transit, employment centers, good schools and lifestyle services, such as shopping, dining, cultural venues and recreational centers, investors are aggressively pursuing these same properties for their proven long-term economic performance outlook.
One multifamily trading hotbed is Northern New Jersey, where a high density of existing apartment buildings throughout Hudson, Essex and parts of Union counties are located along the Gold Coast. Just across the Hudson River from Midtown and Lower Manhattan, these cities have few single-family home neighborhoods and a high concentration of in-demand multifamily properties that were constructed in the early to mid-
20th century and that have been upgraded over the years through refurbishments and renovations. Occupancy rates are hovering in the high 90th percentile and sales prices are holding strong and trending higher. Certain areas, like downtown Jersey City, are even yielding above-average per-unit prices. A 45-unit building near the Holland Tunnel — a school that was converted 25 years ago — recently fetched $155,000 per unit, which is significantly higher than the average $50,000 to $60,000 per unit in other parts of the city.
Sellers are also recognizing all of this positive momentum, which is pushing values northward and cap rates southward, similar to those of just a few years ago. With the supply chain of for-sale product quite thin, and an extremely “friendly” multifamily lending environment, capital is competing vigorously for the rare opportunities that do come to market. Off-market transactions that close in 45 to 90 days have become the rule, rather than the exception, and there is a steady stream of activity closing in an even shorter time period. In North Jersey, during two recent months, 10 deals encompassing 429 units traded for a total of $27.66+ million in a 22-day timeframe and six separate transactions involving 357 units closed for $16.14 million in just seven days.
Multifamily investing is poised to gain even greater ground in the coming year. Adding to this momentum is a tightening bid/ask gap, favorable tax advantages, the ability to purchase apartment buildings well below replacement cost and a lack of new construction starts. The flowing pipeline of readily available low-interest financing, huge investor demand and solid fundamentals approaching pre-recession conditions will further advance the velocity of multifamily deals at a healthy clip.
— Ken Uranowitz, managing director of Livingston, New Jersey-based Gebroe-Hammer Associates
Office
What was previously considered a “soft patch” in the U.S. economy is now indicative of a long-term economic realignment, as previously reported in the past quarter. A reversal of economic indicators, the downgrading of the U.S. credit rating, the debt ceiling debate, the European debt crisis, and market uncertainty are the cause of a decrease in consumer and business confidence across the board, both nationally and in New Jersey. The result is a continued slow recovery in the job market as corporations continue to build cash reserves, further delaying hiring, equipment purchases and real estate expansions.
The situation in New Jersey mirrors that of the national picture. The overall real estate market in New Jersey remains weak, although there was a significant shift to direct leasing of Class A space versus the previous subleasing activity. However, the reductions in labor and space needs have led subleases to play an important role in the local market — tenants are leveraging their subleased spaces to negotiate better financial terms when renewing their leases.
Vacancy Rates
Vacancy rates continued to climb, with Class A office space coming in at 16.4 percent, a 0.2 percent increase from the second quarter.
The Class B office space vacancy rate rose to 15.4 percent, continuing an unabated increase since 2006, when the vacancy rate was 9.9 percent.
Class A Office
CresaPartners has noted a major shift in leasing activity from subleases to direct leases. This shift was indicated by a positive net absorption for direct space of 265,000 square feet, which reversed the 464,000 square feet of negative absorption seen in the second quarter. Conversely, sublet space saw a negative net absorption of 431,000 square feet, reversing the 354,000 square feet of positive absorption the company reported in the second quarter.
Renewal activity increased significantly, as evidenced by a 1 million-
square-foot reduction in direct space being marketed, which resulted in 265,000 square feet of positive net absorption.
With a minimal amount of sublease activity, the discount for subleases increased from 20.3 percent to 22.5 percent, driving the average rental rate down from $26.65 in the second quarter to $26.52 in the third quarter.
Class B Office
Class B office space fared the worst in the third quarter, continuing its three-year decline in net absorption, with a negative absorption of 193,000 square feet. Since late 2008, Class B office space has seen an average negative net absorption of 200,000 square feet per quarter.
Asking rents for direct leases increased slightly to $21.43, which is inconsistent with the trend in the market.
What This Means for the Tenant
Reductions in labor and space needs have led tenants to use sublease space as leverage in the negotiation process in order to improve financial terms, particularly for renewals. Landlords have become more willing to make concessions in order to retain tenants, while tenants are able to avoid relocation costs and maintain flexibility with short-term renewals.
— Tom Giannone and Ron Ganter, co-managing principals with the New Jersey office of CresaPartners LLC
Retail
In this sluggish real estate market, how is it possible that two major mixed-use projects are under construction? With redevelopment all but halted elsewhere, New Brunswick keeps pushing forward with new opportunities for change for the better. With the assistance of state and federal tax programs through the Urban Transit Tax Credit Program and New Market Tax Credit, projects are becoming a reality.
These projects include the Gateway Transit Village and New Brunswick Wellness Plaza which are located within one city block of the New Brunswick Train station.
Gateway Transit Village
In early 2009, Gateway was the first project to be designated as eligible for the new Urban Transit Hub Tax Credit Program. Under the program, credits are issued against income taxes that would be owed by businesses locating within newly built offices within a mile of a transit center; the credits can then be used to attract tenants, or else be sold as commodities. Fast forward to April 8, 2011 —when Gateway held its topping off ceremony.
The Gateway Transit Village, as its name spells out, will serve as a gateway between downtown New Brunswick and Rutgers University. College Avenue, the central spine of the campus will be directly connected to the train station’s westbound platform via an expansive skywalk. The 624,000-square-foot building has a 657-space public parking structure at the core of its first 10 stories; that core is to be wrapped in retail, restaurant and office space. Above the parking structure are 14 floors consisting of 150 market-rate apartments with the top floors having 42 condominiums. Components of the retail and office space include a new 45,000-square-foot Rutgers University Barnes & Noble Bookstore, 45,500 square feet of office space, and 13,000 square feet of ground-floor retail and restaurant space. Additionally, both Rutgers University Press and Brother Jimmy’s BBQ, a New York City-based restaurant chain, have signed leases at Gateway. This project is a public-
private partnership including the City of New Brunswick, Rutgers University, and New Brunswick Parking Authority. Devco (New Brunswick Development Corporation) and Penn-rose Properties are co-developers of the project.
New Brunswick Wellness Plaza
In July 2011, a ground-breaking ceremony was held for New Brunswick Wellness Plaza, a $114 million, 625,000-square-foot project to be located in a federally designated “food desert.” This means that the U.S. Department of Agriculture has identified the area as an industrialized area lacking options for healthy, affordable food. The New Brunswick Wellness Plaza will include the area’s only full-service supermarket, a community fitness center and a 1,275-space public parking facility.
The New Brunswick Wellness Plaza, will consist of a 49,000-square-foot supermarket to be operated by Philadelphia-based Fresh Grocer, an additional 62,000 square feet is committed to Robert Wood Johnson University Hospital Wellness Center and a 1,275-space parking garage. The Wellness Plaza is located along Albany Street between Paterson and Jelin Streets and is scheduled to open in late 2012. WNC & Associates Inc., a national investor in urban renewal and affordable housing projects, has provided $10 million in New Market Tax Credit financing to developer Ferren Urban Renewal, LLC.
— Perry GraBois, retail broker with Metro Commercial Real Estate
Industrial
Industrial demand in New Jersey has picked up dramatically over the past year, in tandem with a clear shift in corporate America’s mindset to get serious about dealmaking while conditions remain favorable.
During the market downturn, tenants with two or three years left on their leases frequently tested the market, making offers that expected property owners and developers to assume the trailing liability of existing lease terms. Most owners simply were not willing to do that, and deals regularly fell apart or remained stagnant.
Beginning in mid-2010 and through the first three quarters of 2011, we have experienced a promising increase in real commitments. In fact, during the first six months of this year, some 11.1 million square feet of new industrial leasing took place in Northern and Central New Jersey — a 74 percent year-over-year increase. This included 12 transactions over 100,000 square feet during the second quarter alone. The largest involved Wakefern Food Corporation’s impressive 1 million-square-foot lease at 8001 Industrial Ave. in Carteret.
Why the jump? While we are seeing the stock market decimated what seems like every other week, corporate America for the most part is flush with cash. At this point, companies have extracted about as much inefficiency from their supply chains as possible. They are left with options to consolidate or upgrade the quality of their buildings, or reinvent their materials handling systems (which generally is part and parcel of a facilities change). They recognize that the market is turning around in favor of landlords, and they know that they need to make that move they have been considering now, before rents begin to rise markedly. Incentives, including the Urban Transit Hub Tax Credit program, also continue to drive larger transactions.
The increase in Garden State dealmaking had resulted in 2.5 million square feet of overall net absorption at mid-year 2011, as compared to negative 4.8 million square feet at mid-year 2010. This is most noticeable in what we can now call the formerly overbuilt Exit 8A and Exit 7A submarkets. In early 2010, seven or eight buildings of 500,000 square feet or more sat vacant between them. Today, that number is down to three, and several large requirements remain active in the market. Some users also are considering land purchases and the development of their own facilities.
While average asking rents held steady through the second quarter of 2011, at $5.62 per square foot, the tightening market is placing upward pressure on rents, which are now beginning to climb.
In another phenomenon, as the market reaches equilibrium, speculative construction is reemerging in New Jersey. Petrucci is getting ready to start a 570,000-square-foot building in Edison, while Prologis is talking about launching projects in Carteret and/or Elizabeth.
Looking ahead, we expect to see a continued flurry of companies and investors wanting to make deals, which will make for even more robust industrial fundamentals. Ultimately, New Jersey landlords will become increasingly bullish and less apt to grant free rent and excessive tenant work letters as the market continues to shift in their favor.
— Stan Danzig, executive director with the East Rutherford, New Jersey, office of Cushman & Wakefield, Inc.
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