Analysis: How the Hiccup in New York Rents Affects New Jersey Gold Coast CRE
by Brian Klebash
JERSEY CITY, New Jersey –Although long-term fundamental trends are healthy, the robust apartment supply pipeline in the New York metropolitan area could stifle rent growth along New Jersey’s “Gold Coast” over the next couple of years, according to panelists at CAPRE’s Fifth Annual New Jersey Gold Coast Investment Summit, held recently in Jersey City.
More than 11,000 new apartment units are under construction in Northern New Jersey, including 4,800 in Hudson County municipalities Jersey City and Hoboken alone, Yardi Matrix data shows. But the biggest impediment to rent growth in the area is the abundant amount of new supply in New York City, which has led a slowdown or reduction of rents in New York apartment properties and the growing use of concessions.
Since Gold Coast municipalities lie across the Hudson River from Manhattan, a fair portion of their appeal is the easy commute to Manhattan via PATH trains, buses and ferries, which makes the multifamily market susceptible to pricing trends in the New York boroughs.
“We’re now seeing real pressure on rents,” Abe Naparstek, the senior vice president of East Coast development at Forest City Realty Trust, said, speaking on the “Analysis of the Investment Opportunities and Outlook For 2017” panel. “It’s hard to see pressure on rents in New York not affect (Gold Coast) markets in the near term … The next two to three years, it’s hard to imagine there will be a lot of rent growth,” Naparstek said.
The competition with New York City for tenants is somewhat less in suburban New Jersey submarkets, which have seen solid, if not spectacular rent growth in the recent recovery. Northern New Jersey – which includes a mix of urban and suburban submarkets – recorded rent growth of 4.8 percent year-over-year in 2016, while Central Jersey came in at 4.4 percent, according to Yardi Matrix. Yardi forecasts rent growth to slow this year to 4.5 percent in Northern New Jersey and 3.0 percent in Central New Jersey.
New Jersey’s Gold Coast – particularly Hudson County municipalities Jersey City and Hoboken – has experienced a rebirth over the last decade due to the urbanization trend, the increase in the number of Millennials looking for live-work-play environments and their proximity to Manhattan. The cities have also benefited from large employers moving offices across the river to take advantage of lower rents. Those factors led to a significant amount of redevelopment that has turned abandoned industrial and waterfront sites into luxury housing.
Just over 7,000 units were added to inventory in Northern New Jersey in 2016, about 3.5 percent of total stock, and another 6,500 are expected to come online in 2017. Combined with the large supply pipeline in New York boroughs such as Brooklyn and Manhattan, that puts some pressure on rents in Northern New Jersey, particularly the Gold Coast, and an increased use of concessions as a tool to lure tenants.
Although the steady development has produced worries about oversupply, particularly in Jersey City, long-term trends are favorable. For one thing, occupancy rates are among the highest in the nation. The occupancy rate for stabilized properties in Northern New Jersey was 97.4 percent at year-end 2016, while for Central New Jersey it was 97.2 percent, per Yardi. Demand should remain strong, since the area attracts many immigrants and workers that migrate from other parts of the country and commute to New York City. The renter pool includes both young adults that enjoy the access to the city and the growing number of Baby Boomers that are downsizing from large suburban houses.
What’s more, the development pipeline is expected to slow down after 2017. New Jersey is a heavily regulated state with development closely controlled by municipalities, and builders must wade through a thicket of zoning and affordability requirements, all while bank financing terms have grown more stringent. Oversupply “is not something I’m worried about,” said Russell Tepper, senior managing director at Mill Creek Residential Trust, a Dallas development firm that converted an eight-story industrial building in Jersey City into the 366-unit luxury Modera Lofts complex.
Investor demand for properties is high, with a broad base of capital sources that include domestic and foreign institutions, REITs and local players. Jose Cruz, a senior managing director at brokerage Holliday Fenoglio Fowler, said that there is more capital looking to invest than there are sellers, which has led to an increase in deals involving partnership buyouts, joint ventures and partial equity stakes. “There is not a lot of opportunity to buy in Jersey City or Hoboken,” he said, cities that are popular with investors.
Paul Fiorilla is Associate Director of Research at Yardi Systems, working on the company’s new Matrix data service, which collects property and loan data on multifamily properties in nearly 90 markets nationwide. Yardi has started publishing regular outlooks using the Matrix data. Fiorilla has worked in the industry as a writer and analyst for nearly 20 years. He spent six years as an investment vice president in the research group of Prudential Real Estate Investors, where he was responsible for publishing the firm’s well-regarded quarterly outlooks and white papers. Before joining PREI, Fiorilla wrote for the Commercial Mortgage Alert for 12 years, the last nine as managing editor. He also has worked as a consultant producing research white papers, outlooks and articles for clients that include Real Capital Analytics, Marcus & Millichap, Colliers International, Clarion Partners, Terra Capital and Institutional Investor. Since 2011, Fiorilla has served as volunteer co-managing editor of CRE Finance World magazine, which is published three times a year by Washington, DC, based trade group CRE Finance Council.