With multifamily properties still maintaining their reputation as one of the safest returns on investment, and the supply pool continuing to shrink from lagging construction, competition among investors for New Jersey apartment buildings heated up in the fourth quarter of 2012, though a local multifamily expert said sales activity will cool down at the start of 2013 — especially if the capital gains tax rate spikes from 15 percent to 23.8 percent on Jan. 1.
"Sellers have been extremely aggressively pushing us to get deals closed before the new year, with the possible expiration of the (George W. Bush-era) tax cuts coming into play then," said Thomas McConnell, a senior associate at the Elmwood Park office of Marcus & Millichap. "With the low-cost leverage that sellers have right now, and the construction pipeline being suppressed, this velocity is exactly what I expected to see. But if the tax rates increase, I think next year's first quarter will be much quieter."
According to the firm's fourth-quarter report, sales activity in the state's multifamily market surged 50 percent from a year ago — a jump from the 40 percent year-over-year increase that was reported in the third quarter.
Despite the looming fiscal cliff, McConnell said that sales pace could continue through 2013 if interest rates on multifamily loans are held at today's extremely low levels, though "if they tick up even a little bit, I think sales and sales prices will drop."
Though 2,000 more rental units were delivered to the market in 2012 than the previous year, McConnell said demand continues to severely new development, especially in the northern part of the state, where prospective investors and renters increasingly are seeking out opportunities.
That strain on the supply side, coupled with falling vacancy rates, has given landlords enough leverage to drive rents above pre-recession levels, and squeeze the gap between asking rents and effective rents tighter. The report projects effective rents will reach $1,313 a month by Dec. 31 — a 4.2 percent increase from the start of the year, compared to the 2.3 percent increase in 2011.
However, McConnell said rental rates "have to be coming to that point where they're maximized, because if they continue to tick up, people will start to look harder at the 'rent verses own' scenario."
"While the newer class A product built near a transit hub has a different rent margin altogether, the majority of the product out there are older garden communities that have been in existence since the '60s, and haven't been updated in years," McConnell said. "So, for the market as a whole, I think rents are now as high as they'll get."