High hopes for investors with apartments in short supplyOwners, builders, sellers scramble to capitalize on state's under-built, booming rental market
Apartment units will remain in short supply for at least another year as rental demand surges in New Jersey, industry experts and insiders say, meaning 2013is quickly shaping up to be another boom time for multifamily owners, sellers and developers.
The state's rental market is poised to reach "virtual full occupancy" this year, said Jeffrey G. Otteau, president of Otteau Valuation Group, in East Brunswick. That would mean that vacancy, which has fallen steadily since its peak of 5.2 percent in 2010, would reach 2 percent for the first time since at least 1970, the start of Otteau's records.
"I have seen it in places like New York City, which is obviously a very hot spot when it comes to the rental market," Otteau said, referring to the low-vacancy benchmark. "But I haven't seen it here in New Jersey before."
He noted that temporary housing needs from Hurricane Sandy are also creating demand. With those factors, and with deliveries for new multifamily construction not expected to pick up until next year, rents are expected to rise 4 to 5 percent in 2013, he said. That would follow the 3 percent rent hike recorded in 2012.
Developers here are now rushing to take advantage of the needs in a market that has been under-built for four decades, Otteau said. In 2012, permits for new apartment projects rose 51 percent in New Jersey, while single-family home permits increased by 15 percent. While the housing market has improved, he called the disparity a "dramatic" reversal of historical trends.
"Right now I think you'd build anything you could absolutely immediately," said Stephen Santola, executive vice president and general counsel of Woodmont Properties, referring to rental projects. He pointed to the favorable interest rates, labor pool and market demand that make it "a great time if you're in the ground."
The Fairfield-based developer in June opened Woodmont Square, a 100-unit luxury rental community in Bridgewater, and later broke ground on apartment projects in Red Bank and Hanover, said Lewis Zlotnick, the firm's president. The 96-unit Red Bank project called for condominiums when the borough first approved it in 2006, but was stalled by the recession and then recently reconfigured to feature rentals.
Woodmont also is in line to acquire and build a transit village in Metuchen, Santola said, noting that for the 50-year-old firm, the level of activity tied to apartment projects has never been as high as it is now.
"Back in the better days of for-sale, there might be two or three communities overlapping one another, but not in the rental apartment world, for sure," he said.
Construction deliveries statewide are not expected to accelerate until 2014, Otteau said, because the rental market first gained its strength in 2010. The "incubation period" for an apartment project is about three years from conception to being ready for move-in.
For real estate investors, the fervent pace of multifamily sales is poised to continue. Mark Scott, a Livingston-based mortgage banker, said "there's a lot of money on the sidelines that needs to be invested" by institutional sources like pension funds and insurance firms, especially earlier in the year.
The state's supply constraints and lengthy approval process are key drivers for multifamily investment sales, he said. Compounding that are stricter lending requirements for developers — lenders are now only willing to finance around 65 percent of a project, he said, as opposed to 80 to 85 percent in 2005 to 2008.
But perhaps the most important dynamic for buyers is the concern that interest rates may start to rise again before 2013 is over.
"At least for the next few months it's going to be a great opportunity for borrowers of all shapes and sizes … to lock in lower rates, because this party could be over in the next six months," said Scott, principal of Commercial Mortgage Capital Corp. He said several of these factors together could lower the capitalization rates for apartments, which have fallen from 2010 and are the best of any asset class.
The demand has led commercial real estate investors to increasingly shift allocations from office and retail to multifamily, said Brian Whitmer, a broker with Cushman & Wakefield. And the northern and central New Jersey market has started to draw funding sources from other parts of the country, such as the West Coast and the South.
"A lot of those who traditionally have stayed within their region are starting to reach out to us to say, 'Hey, I'm interested in development and in learning your market,'" said Whitmer, the senior director of C&W's Metropolitan Area Capital Markets Group.
In turn, the rush to build and own rental assets has trickled down in a big way to older properties and to markets further inland from the Hudson waterfront. Whitmer said "the biggest growth in terms of new investment dollars" has come from buyers who acquire older properties in top locations and then renovate them.
Multifamily trading volume in "primary, secondary and tertiary locations … was just unrelenting" in 2012, said Ken Uranowitz, president of Gebroe-Hammer Associates. The Livingston-based brokerage closed nearly 90 deals last year, spanning all property types — from urban high-rises to suburban garden apartments.
"Those are different-tiered asset classes, but you also have different-tiered investors who own that type of product or are looking for that type of product," Uranowitz said. He noted that activity was strong even at year's end — with Gebroe-Hammer closing three deals a week in December — despite concerns over hikes in the federal capital gains tax.
"There's extremely high demand in all classes, and this is not going to stop," he said.
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