Real estate indicators by HFF Senior Managing Director Jose Cruz in HFF's New Jersey office.
In a year where most predicted a slowdown in multifamily investment in the state of New Jersey, we are seeing very strong activity and record pricing being achieved for both core and core plus assets. We are also observing both aggressive cap rates being paid and per unit pricing north of $600,000 per door for Hoboken and Jersey City. In addition, Class B assets in the suburban markets are trading at more than $250,000 per unit and reaching as high as upper $300,000 per unit. Multifamily continues to be the only asset class to trade above replacement cost.
One of the reasons for the high pricing is that occupancy rates on average throughout the state continue to be north of 93 percent and are more than 98 percent on the waterfront, given the representative sample we track. In addition, when New Jersey multifamily assets are compared to their surrounding markets in New York City and the boroughs, we are a lower entry basis price point.
During the last 24 months, we observed an increase in the number of foreign capital sources that have either purchased New Jersey multifamily assets or bid on them. We saw the government of Singapore take a position in Hoboken and China Construction purchase multiple land sites in Jersey City. We also saw Landsea purchase 700 Avenue at Port Imperial in Weehawken for condominium development. Condo projects are being developed to a 30 percent profit margin, mid-20 percent’s IRR, and 2x+ multiple.
Class B assets remained in high demand during 2016, and we expect the trend to continue into 2017. Additionally, the ability to add value though unit renovation and additional lease up was a priority on all investors’ lists. We saw assets trade hands in Chatham, Cedar Knolls and New Providence with projected net returns after renovations north of 20 percent.
Class A assets, which have historically been the most sought after assets in New Jersey, are still in high demand from core funds and 1031 buyers and average in the four to 4.4 percent cap rate range. Core product both on and off the waterfront offers a great hedge against inflation, and the near 100 percent occupancy provides consistent income on which the investment managers rely.
One of the major topics of conversation this year focused on new construction. Jersey City was first, given that there are more than 6,000 units under development plus another 3,000 units that can start in the next six to nine months. Not only are the ones under construction impactful, but more than 1,700 units have been completed this year. Despite the amount of new construction, we are witnessing well over 45 units a month being absorbed by recent multifamily deliveries. We are also seeing waterfront rent increases average more than 3.5 percent per year despite the delivery of new units. And as viable development sites remain difficult to find, more commercial properties, particularly office complexes, are being targeted for repurposing to multifamily.
As we move into 2017, we are hearing from investors who are interested in selling out of their existing core multifamily assets and looking for more value add or actual development sites for the coming year. We also expect to see continued interest from real estate investors, including those with 1031 Exchange needs who have not been traditional multifamily buyers but are looking for the stability the product type offers as well as the steady rent growth that is so valuable.
Senior Managing Director Jose Cruz is Co-Head of HFF’s New Jersey office and a member of the firm’s Leadership Committee. He specializes in investment sales throughout New Jersey, New York and Connecticut and also oversees the day-to-day operations of the firm’s New Jersey office. During the course of his more than 25-year commercial real estate career, Mr. Cruz has been involved in more than $18.4 billion of office, industrial, retail, multi-housing and land sales. Mr. Cruz joined the firm in March 2010.
This article originally appeared in Northeast Real Estate Business Magazine.