NJ Construction Execs Talk State of the Market: “The Cycle Can’t Go on Forever”

JERSEY CITY, NJ — Saiber’s Philip A. Markowitz kicked off moderating CAPRE’s Ninth Annual New Jersey Apartment Summit’s luncheon discussion “The Future of Multifamily Construction, Design & Development in New Jersey” with a critical query for his six-member panel. “As the year comes to the end, many believe that we’re late in the New Jersey multifamily development cycle,” remarked Markowitz. “Looking to 2020 and beyond, what is your view? What are the near-future opportunities and risks do you see? Do you nevertheless remain bullish despite the many estimates and forecasts out there?”

“Yes, we are late in the cycle. We’re 25 days away from a ten-year bull-run. We’ve never had 10 years without a pause of pullback before, so this would be the longest period ever,” replied Adam Altman, Managing Director and Partner, KABR Real Estate. “Late cycles are late cycles. People are paying a lot of money – sometimes too much – for land. You have to be more of a sniper in this environment, rather than a broad-stroke approach, which is probably better at the bottom of a cycle.”

View slideshow of CAPRE’s 9th Annual New Jersey Apartment Summit in December 2019

Next up was Maurice Hornblass, Co-Founding Partner at Hornrock Properties. “I look at the fundamentals. The fundamentals are low cap rates, low interest rates, strong demand, high rents. So the fundamentals are there. As per what Adam is saying, to be a sniper, you want to look for the right piece of land. No one on this panel just buys anything. We’re looking for location, location, location. And from that standpoint, you should be okay. But there’s a lot more to it, and there’s a lot of upside left in the market for those with the right product in the right location.”

Diego Hodara, Principal at Titanium Realty Group the contributed another viewpoint. “The only way for me to approach development is that you always have to think that a crisis is coming, regardless of where you are in the cycle. Maybe it’s because of how I grew up in South America, with ups and downs constantly, and you just always knew that anytime things went up they had to come down,” he shared. “So we’re very cautious. Again, I agree that you have to be a sniper. And since there are strong fundamentals, you can wait a bit longer.”

“Look, no one up here knows what is going to happen,” added Andrew Donchez, Vice President for Development at Mill Creek Residential Trust. “But people want to invest in this market. If you step back a bit and take a look at the macro view of things, the fundamentals are still very strong. New York City is the greatest talent creator in the country. Companies need to be where talent is and talent wants to be, by and large, near New York City.”

“Our company is not developing in the inner boroughs, we’re active in places like Long Island and New Jersey,” Donchez continued. “We look at regional multifamily development as part of a solution for New York City’s affordable housing crisis. Compound that with the regulatory changes that have recently happened in New York City, and the fundamentals of what we do outside of New York City, like in New Jersey and elsewhere are positive.”

Markowitz then looked to panelist Jeff Persky, Executive Vice President, KRE Group for more thoughts from this perspective. “Jeff you seem like someone who takes a macro view,” remarked Markowitz. “What are your thoughts from a macro level?

“The cycle can’t go on forever. It’s been a good run. I think it will continue for awhile though. We’ve moved into TOD and those projects have done very well, but we’re cautious,” Perksy offered. “I’d say that over the year we’ve been doing this, if we’ve made errors, we’ve made more errors in good times than in bad times. In good times, you take a shot. You’re not as focused on fundamentals. In bad times, you tighten you belt and look at things carefully. Through experience we’ve learned that you should always be very careful, especially as you come to the end of the cycle. I think that’s where our head sits right now. I’m cautiously optimistic generally, but it depends. In Jersey City I’m very optimistic, in some other suburban markets, I’m more cautious.”

Michael Staton, Vice-President & Mortgage Officer, Community Preservation Corporation

Next Markowitz changed the topic to hone in on the financing part of the equation. Specifically, he looked to Michael Staton, Vice President and Mortgage Officer at the Community Preservation Corporation for his unique viewpoint from the lender’s side. “The good news is that there’s lots of capital out there with very low interest rates. All kinds of deals are getting good,” he asserted. “Interest rates are at an all-time low. Whether it’s conventional, market-rate financing, or workforce housing or small building loans, deals are getting done throughout New Jersey, New York and all throughout the country.”

However Staton then shared some bad news. “As it relates to New Jersey, subsidies are scarce,” he contrasted. “But deals are still getting done. Everyone is more nimble, changing their models to get those deals done. Folks are even just looking for tax abatement, if they can’t get those traditional subsidies.”

“The equity is out there,” added Donchez, who Markowitz then asked to talk about construction loans. “We’re a national company, though we’re developing in NYC and NJ. Lenders look at the market, and we look at the regulatory environment in New York City vs Long Island vs New Jersey, etc. And we look at projects that have risk factors in places like New Jersey where we might have to battle for entitlements for a couple of years, because PILOTs have fallen out of favor. And our investor will say, that’s fine, but you should go to another location such as Westchester County or Long Island, and then the sheen comes off those New Jersey deals in places like Hudson County, Gold Coast, etc. Land values are lower, spreads are better, deals are better.”

Markowitz then returned the spotlight to Altman of KABR, asking him to continue on with the theme of discussing his decision-making process for various municipalities who may or may not be able to be characterized as pro-business, thanks to the downward trendlines for incentives. “Well we’re only sitting a few blocks from Journal Square, the busiest PATH train stop in Jersey City,” mused Altman. “Jeff’s building is the only major development that’s gone up. There’s no major development taking place in Journal Square without incentives. So that should be a thriving part of New Jersey, creating unbelievable numbers of jobs and immense retail. It should not be a food desert. There should be tremendous activity happening there, and there’s not. Specifically because of those reasons you pointed out. I think that hopefully we can see that kind if development happen there. If you look at what has allowed for developers historically to build big buildings and take a lot of risks in the hundreds of millions of dollars, it’s been due to working with municipalities to create an outcome that’s good for the renters in New Jersey City and incentivize development.”

“One of the things Jersey City has been a beneficiary of isthe over-regulation that has hit New York City,” Altman continued. “We’re talking about whether a recession is coming, and there’s actually a recession that’s hit many asset classes in New York City right now. Multifamily is in a recession. Retail is in a recession. Condos that are expensive are in recession. There’s real pockets of weakness. People might gloss over it, and Jersey City has been a beneficiary of that, but we have to be careful as a community to be mindful of where people like living, where people like shipping and where people like building.”