Between its proximity to its more popular neighbors New York and Pennsylvania and a typically (and debatably) derogatory portrayal of its central turnpike, New Jersey is often denied the respect it deserves. That may soon change, particularly for the state’s multifamily sector.
Consider that even as New Jersey emerges from the economic downturn and job growth accelerates, the median price of an existing single-family home here remains in excess of $300,000, well out of reach for many would-be home buyers. Furthermore, residential lending standards remain tight, which, combined with elevated down-payment requirements, will continue to limit renter attrition from apartments to homeownership in 2011. The northern portion of the state also benefits from its proximity to major office districts and access to public transportation, which allows local residents to commute to typically higher-priced areas, such as New York City, for work and play.
Statewide, private-sector payrolls will rise by 18,500 jobs this year, following the loss of 30,700 positions during 2010. That was a huge uptick from the loss of 114,100 positions in 2009, considered the worst stretch of the recession for the state. Meanwhile, employment gains in 2011 will be led by renewed, albeit moderate, gains in the leisure and hospitality, education and health services, and construction sectors. Weakness will continue in the public sector as state budget shortfalls persist, though layoffs should be limited compared with 2010, when New Jersey lost more than 29,000 government jobs. Northern New Jersey apartment owners will also benefit from strengthening job creation in nearby New York City, where payrolls are forecast to rise by 84,000 jobs in 2011—more than twice the total added last year.
All told, this good news gives renters and investors much to appreciate in the Garden State in 2011.
A TALE OF SUPPLY AND DEMAND
As job growth resumes and new construction slips further this year, apartment vacancy in New Jersey will continue to fall. Developers will deliver approximately 1,100 rental units to the New Jersey apartment market this year, down from nearly 2,400 units in 2010. While developers nationwide are reportedly ramping up operations to take advantage of the unfolding recovery in apartment fundamentals and an anticipated supply shortage come 2012 and 2013, the construction pipeline in New Jersey remains relatively thin.
Apartment starts in early 2011 were running nearly 65 percent below the peak levels achieved in 2005. While the period used for comparison was marked by a housing boom that drove up residential construction dramatically, the amount of multifamily units started in New Jersey last year also fell significantly short of levels reported in 2002 and 2003, when market conditions were more in line with historical norms. Multifamily permitting activity has picked up since bottoming in mid-2009 to early 2010, but apartment developers likely will continue to face some challenges securing construction financing through much of this year, potentially delaying delivery of newly planned/permitted projects for several more quarters.
The current lull in statewide multifamily construction and a thin pipeline of planned projects will provide an opportunity for apartment owners to rebuild robust property operations this year. Statewide, apartment vacancy will slip approximately 100 basis points (bps) in 2011, to 3.6 percent, led by healthy improvements in the northern and southern sections of the state. At the end of 2010, the vacancy rate reached 4.8 percent, a 10 bps decrease from year-end 2009.
In northern New Jersey, where more than 2,100 units came on line in 2010, construction will slip considerably this year. The primary project slated for delivery in northern New Jersey is Monaco in Jersey City, which, at 50 stories, is set to become one of the tallest apartment developments in the state. While overall apartment construction subsides, hiring will pick up in Essex, Hudson, and Bergen counties as well as in New York City. As a result, vacancy in the northern part of the state will fall to 3.7 percent by year-end 2011, the lowest level on record since late 2008. More than half of the New Jersey apartments due for completion in 2011 will be delivered in the central part of the state. Fortunately, central New Jersey started the year with a comparatively low vacancy rate, and the outsized share of apartment construction slated for the region this year will slow, not stall, the recovery already under way. During 2011, vacancy in the central New Jersey area will slip 60 bps, ending the year in the low– to mid–3 percent range. In southern New Jersey, the vacancy rate will decline approximately 80 bps, to 6.3 percent, as only one apartment project comes on line and tightening occupancies in neighboring Philadelphia and its close-in suburbs drive stronger renter demand.
Improving occupancy will encourage New Jersey apartment owners to raise asking rents at a faster clip in 2011 while cutting concessions further. During the year, asking rents in the state will advance 2.7 percent, to an average of $1,325 per month, while effective rents increase 3.8 percent, to $1,274 per month. That’s a far cry from 2009, when asking and effective rents dropped 3.1 percent and 5.3 percent, respectively.
Apartment owners in New Jersey began to regain some pricing power in mid-2010 after experiencing a yearlong contraction in rents, resulting in increases of 1.7 percent and 2.3 percent in asking and effective rents, respectively, during 2010. Statewide, recovery in asking rents to date has been strongest in the Class A sector; however, Class B/C properties in southern New Jersey, where rents remain the most affordable in the state, have outperformed over the past year, rising 2.2 percent.
The resumption of job growth in New Jersey will support greater investment activity this year, providing encouragement to buyers who are waiting for additional indications of a sustainable recovery in apartment property operations and fundamentals.
Buyers will likely become more aggressive with pricing as well, particularly in light of the slowdown in apartment construction, which should foster healthy occupancy and rent gains in the near term. The median price in the 12 months ending October 2010 was $75,000 per unit, down 3 percent from the previous year.
The financing climate also continues to improve, with community banks becoming more active and offering apartment loans at relatively low rates and favorable terms to qualified borrowers. In fact, all-in mortgage rates offered by portfolio lenders on smaller loans were within striking distance of competing with agency loans from the GSEs.
The combination of attractive interest rates and strengthening investor demand for apartment properties, particularly in densely populated areas near major employment centers, will help maintain average statewide cap rates in the low–7 percent range through the first half of 2011. Interest in properties in Hudson County will intensify as recently completed rentals stabilize. In the central and southern regions of the state, strengthening tenant demand will sustain investors’ interest in local complexes. Average cap rates in these areas will range from about 7.3 percent to 7.8 percent this year.
It’s numbers like these that have earned the Garden State a spot as one of the most solid multifamily markets in the country.