Equity market update from HFF Senior Managing Director Jon Mikula.
After a year of price discovery, increased target allocations and a commitment to real estate investing strategies by institutional investors speak to the health of the market. New Jersey has remained at the forefront of the investment scene, attracting a healthy mix of investment from private investors, listed REITs, institutions and foreign capital sources seeking better risk-adjusted returns. In an environment where policy uncertainty looms, transaction volume has been slow to gain momentum across the U.S. during the first quarter of 2017, but pricing remains resilient, and investors are eager to deploy capital.
The joint venture equity space is both abundantly liquid and highly fragmented, with no single player accounting for a significant market share. This deep bench of capital sources changes regularly with new sources entering the space and others taking a backseat (to adjust strategies, await market disruptions or allow construction allocations to stabilize). For local and regional operators, this atmosphere has become increasingly daunting to navigate. Amidst today’s economic backdrop, investors are becoming more selective and generally more cautious. The vetting process for new operating partners can be scrupulous as capital providers look to place money with best-in-class operators that offer insightful local expertise, extensive development experience and/or strong pre-existing platforms.
Institutional investors remain under-allocated to the industrial space relative to other asset classes, producing a healthy appetite for high-quality and well-located industrial product. New Jersey is a primary target market for investors looking to amass scale in core locations. Trends of cap rate compression carry forward into 2017 as many pursue e-commerce tenants and urban in-fill “last mile” B product as covered land plays. Recapitalizations and joint venture development opportunities enable investors to break into the New Jersey market without competing for existing product at sub-five percent cap rate levels. Minimum yield on cost (“YOC”) for new development or value-add recaps: 6 to 6.25 percent.
New Jersey’s healthy renter base, combined with a tapering off of new deliveries over the next two years, indicates a stable future for New Jersey’s multi-family market. Demographic trends continue to demonstrate a propensity for renting versus owning, and the state boasts a diverse renter base in terms of age, income and household type. Along the Gold Coast, concerns of a potential correction in the ultra-luxury market loom, yet performance has proven strong in the face of heightened deliveries with absorption rates reaching record levels and leasing specials limited to a handful of communities during initial lease up. Core investors remain focused on the fundamental drivers of long-term property performance, while value-add investors seek higher yield opportunities in growth markets. Minimum YOC for new development or value-add recaps: 6.25 percent.
In New Jersey’s retail space, a lack of investment opportunities has resulted in a slowdown of year-to-date transaction volume. Grocery-anchored and necessity-based retail remain the preferred product types while development opportunities have become increasingly limited. Demand is strong for newer construction with reputable anchor tenants, brand name grocers and/or a national tenant mix. Investors are eager for opportunities to implement value-add business plans and are less inclined to pay premiums for fully-stabilized product. Minimum YOC for new development or value-add recaps: 7.5 percent.
New Jersey’s office market continues to attract an increasing amount of employees and employers due to its proximity to New York City, educated employment base and diverse economic landscape. Demand for highly specialized, amenity-rich work space has driven a trend away from multi-tenanted corporate buildings and toward build-to-suit transactions commanding top-of-the-market rents. Firms are increasingly seeking modern, personalized space with transit access in an effort to attract and retain top talent. Minimum YOC for new development or value-add recaps: eight percent.
Cautious optimism is the theme of 2017 as growth expectations moderate, commercial real estate allocations increase and investors focus on placing capital in markets with sound fundamentals.
Jon Mikula is a senior managing director and Co-Office Head in HFF’s New Jersey office and a member of the firm’s leadership committee. He has more than 20 years of experience in commercial real estate finance and is primarily responsible for arranging debt and equity placement transactions, as well as the day-to-day operations of the firm’s New Jersey office. During his tenure at HFF, Mr. Mikula has completed in excess of $7 billion in commercial real estate transactions.
Mr. Mikula joined the firm in May 2000. Prior to HFF, he spent six years with the David Cronheim Mortgage Corporation in Chatham, New Jersey, where he served as Managing Director. He also spent two years at James R. Poole & Company in Newark, New Jersey.
Originally published in Real Estate NJ.