THERE'S STILL SOME GROUND to cover, but the multifamily market in Northern New Jersey has come a long way in a short period of time.

Free rent and similar concessions are slowly being eliminated; moderate rent steps are being implemented; and, most importantly, investors are taking notice. The competition for quality assets in the New York area is intense. Institutional investors have been leading the pack with aggressive pricing driven by a lack of available quality product in the tri-state area. The market is also beginning to test the appetite for coreplus and value-add multifamily deals.

Particular submarkets that are attracting interest include mostly infill locations in the more dense counties of Hudson, Bergen, and even Morris, which include towns such as Hoboken, Westwood, and Morristown. And this bodes well for the future of Northern New Jersey—a region that will continue to see strengthening fundamentals and growth for the next five years.

Climbing Rents

While most Class A owners are reporting higher resident traffic, they have grown tougher in their approach to applicant credit scores.

Overall, vacancy rates for Northern New Jersey averaged 5.3 percent in the first quarter of this year, according to New York-based market research firm Reis. That vacancy rate is expected to drop to 4.7 percent next year, and fall further to 4.2 percent in 2012, forecasts Reis. For comparison, during the darkest days of the recent recession, Class A multifamily vacancy rates rose as high as 16 percent for the most challenging assets (though most were still less than 10 percent).

There has been a lack of new construction over the past two years, and this will help drive rents. The new product recently delivered in markets such as Hoboken, Morristown, and Riverdale is being warmly received by renters. For example, the 217-unit, Class A Highlands at Morristown Station in Morristown came online last September and is already more than 90 percent leased.

The turnaround in rent growth has been swift. Last year, Northern New Jersey rents dropped about 3.7 percent. But when the calendar year flipped, the area started gaining momentum. Rents grew modestly in the first quarter and are expected to grow about 60 basis points this year.

But not all markets are created equal. In select Class A markets on the waterfront, such as Edgewater, Weehawken, and Hoboken, rent growth of 3 percent to 5 percent so far this year is not uncommon. And some Class A projects throughout other areas of Northern New Jersey have already reported a 3 percent to 4 percent increase year-to-date.

Arbitrage Activity

Well-leased, well-located Class A properties are trading in the 5 percent to 5.5 percent cap rate range or better. And Class B assets in Northern New Jersey are always in demand due to their lower per-unit pricing—and the fact that they tend to be located in more infill areas.

While institutional appetite for multifamily product is generally high, private buyers armed with equity and driven by well-priced debt have been especially competitive recently. Even with a slight increase in the number of transactions on the market, there is still an overwhelming amount of capital chasing product, particularly near New York City.

The number of bidders on Class A transactions has increased to the point where two or three rounds are required to select a winner. It was only 18 months ago when a second round resulted in lower pricing— buyers expressed major concern when they were invited to this round.

But the trades that have been completed this year have been for smaller properties. In 2007, there were 38 transactions greater than $10 million throughout New Jersey. Last year, just six. In the first five months of 2010, there have been little Class A closings of more than $20 million in the state.

Appraisers are having trouble identifying comps as aggressive pricing took hold in the second quarter. Now, they're looking nationally for comps or sifting through transactions under contract as leading indicators.

Markets Heat Up

The debt markets continue to support today's multifamily pricing by allowing for aggressive loan proceeds and pricing. Most lenders see the positive changes in the market—such as less concessions and rent growth—and unlike just six months ago, they are willing to underwrite to those positives.

Both Freddie Mac and Fannie Mae dominate, capturing close to two-thirds of the multifamily debt market. Sizing to a 1.25x debt service coverage ratio (DSCR) and 75 percent to 80 percent loan-to-value (LTV) is not uncommon from the governmentsponsored enterprises (GSEs).

Life insurance companies have reentered the market and are giving the GSEs a run for their money on lower leverage financing. In fact, life insurance companies are generally winning on both price and structure (flexible pre-payment, for instance) on transactions at the 65 percent LTV level and below.

But regional banks are also a big player in the Northern New Jersey multifamily arena. These banks will go to 75 percent LTV on a non-recourse basis and, from time to time, are able to beat the agencies.

The Northern New Jersey multifamily market has always maintained high occupancy rates and steady rent growth. Compared to other asset classes, multifamily is the most sought-after for multiple reasons including the availability of high-leverage affordable financing and relatively stable fundamentals in difficult economic times.

Jose R. Cruz is a senior managing director in the New Jersey office of HFF and was previously the executive director of Cushman & Wakefield's New York Area Investment Sales Group.