Real estate indicators by HFF Senior Managing Director Jose Cruz in HFF's New Jersey office.
Looking back on 2017, the year was much more active than initially expected. Transaction volume was up over 2016 levels. The overall number of deals for the top four "food groups" of office, industrial, multi-housing and retail trended above 2016 by more than 10 percent. It was no surprise that both multifamily and industrial led the way. There were more than 100 multifamily transactions over $10 million completed during this year compared to 80 during 2016. We saw more Class B deals close as investors continued to chase the renovation plays, driving cap rates into the sub-five percent category. Class A multifamily deals were not as hotly sought after given the lack of institutional interest for suburban assets. We expect that trend to reverse over the next 12 to 18 months as demand for Class A multifamily will outpace the older, value-add product, given how capital intensive the latter is and the pricing sensitivity of the tenant base.
Industrial continued to shine during the year as 2017 volume surpassed 2016 by over 25 percent. The institutional demand for well-located New Jersey industrial product drove the volume increase. The pricing for certain assets surpassed $200 per square foot with cap rates continuing to fall below the five-percent mark. Despite the fact that most funds are underweighted in industrial, at the current pricing, we are well above replacement cost and the exits that are being used in pro formas are staggeringly high at more than $250 per square foot. This could start to slow down the demand until pricing falls back to historic average levels.
This was the year we saw the highest number of office deals trade since the recession; however, the overall volume was lower since pricing continued to be weak for most of the suburban locations. Infill locations in the state are starting to achieve more rental pricing power with demand from tenants increasing. The office sales market in New Jersey was driven by opportunistic buyers looking for yield and relatively low per square foot numbers, but we are starting to see increased competition develop for some of the more well located suburban office assets and expect to see pricing move up with additional buyers bidding on the value add suburban office deals.
As expected, retail saw a pullback from the investment community in 2017. All sectors within retail including grocery-anchored have seen some weakness in cap rates and per square foot pricing. The demand for retail was stifled by the uncertainty in the grocery market as competition has increased and margins remain thin. The uncertainty also reflects how much space retailers need for junior boxes given the popularity of e-commerce. The recent rash of bankruptcies over the last 18 months has also contributed to more conservative underwriting by the investment community. Despite these concerns, we had over $800 million of retail transactions trade in the state; while this was below 2016 levels, there were plenty of buyers showing up on the bid sheets. We expect retail pricing to remain tempered for the traditional suburban center; however, for the best grocery-anchored center in any given market, we still expect premium pricing as some of the institutional core funds remain underweighted in retail.
Overall, we deem 2017 to have been a very good year with some of the state’s most significant transactions on record taking place, such as the $368 million RXR portfolio, the $150 million Hampshire Industrial portfolio and several notable multifamily trades in Plainsboro in excess of $70 million. In 2018, we anticipate continued interest in investment from all buyer types including private, institutional, and overseas. We also forecast 2018 transaction volume to surpass 2017, and base that prediction largely on the early transaction pipelines for next year and the cooperating debt markets.
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 $25 billion of office, industrial, retail, multi-housing and land sales. Mr. Cruz joined the firm in March 2010.