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Commercial and industrial builders turn to multifamily to diversify holdings and improve profits

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Ed Russo, COO of Russo Development, 
is steering the company to more multifamily projects.
Ed Russo, COO of Russo Development, is steering the company to more multifamily projects. - ()

A knack for commercial buildings and data centers carried Russo Development through its first four decades in business.

As it approached its fifth decade, the Carlstadt-based company turned to multifamily — acquiring a 9-acre industrial parcel in nearby Lyndhurst in 2008 that it would take through the painstaking, sometimes-complex process of redevelopment.

That site today is home to 150 luxury apartments and a swanky clubhouse, plus another 150 units that will open in the coming months. And the firm now owns a half-dozen other pieces of land slated for multifamily projects in North Jersey, with more than a thousand units in its pipeline.

Russo is among the growing number of Garden State developers to enter the red-hot multifamily market in recent years as the firms look to diversify and fight through slowdowns in traditional commercial assets. And the trend shows no signs of waning, despite the challenges of making the jump and the prospects of overbuilding.

The shift coincides with an overall uptick in multifamily construction: Through September 2013, the most recent month available, local officials had issued permits for nearly 6,700 new multifamily units, according to the state Department of Community Affairs. That puts New Jersey on pace to have permitted more than 8,900 units last year, the highest total since 11,300 units were authorized in 2007 — one year ahead of the financial crisis.

And many more are in the pipeline thanks to a push that spans from family-owned developers to powerhouses such as Mack-Cali Realty Corp. The Edison-based real estate investment trust has been among the most aggressive in expanding its platform. It acquired Roseland Property Co., one of the state's top multifamily builders, in 2012 and sells non-core office buildings in order to help fill its apartment pipeline.

"I think development is going to be a very significant part of our growth pattern," said Mitchell E. Hersh, Mack-Cali's president and CEO. "It's the area that we think we can add the most value."

Under a joint venture with Ironstate Development, the company broke ground last week on one of its most high-profile residential projects to date: a 69-story, 763-unit project in Jersey City. And Hersh said the company has development activity underway that's valued at more than $700 million, with plans to build on Roseland's pipeline and the existing stock of Mack-Cali-owned lands.

Despite the appeal of a booming asset class, developers say there are hurdles to building multifamily that aren't as common with traditional commercial projects. Chief among them is local resistance: Many governing bodies and residents are even more unwilling to consider multifamily development, often because they believe it will strain municipal services or because of a negative perception about high-density housing.

Joseph Langan, president of River Drive Construction, said some towns are open to residential projects, especially in urban or downtown settings. But most favor office and other commercial development because "the people go home at night.

"There are no school kids, and it doesn't necessarily tax the services that the town has to provide," said Langan, whose company is based in Elmwood Park. "But housing is a different story."

The development and construction firm, which was founded in 1989, began to consider multifamily about four years ago when demand for corporate office fit-outs began to decline. But its first foray — at an Elmwood Park site previously approved for an office building — only moved forward after a lawsuit forced the town to allow residential development.

In 2012, River Drive completed the first 107 units of what it calls Riverwalk. It's now building a second phase that includes 51 apartments and 17,000 square feet of ground-floor retail space. It also serves as construction manager for a mixed-use project in South Orange.

Moving into the sector can come with a learning curve for commercial developers. While landlords use brokers to fill office, industrial and retail buildings, Langan said apartment tenants find the spaces on their own, mostly through the Internet. That requires market studies early in the development process and hiring the right consultants to reach the renter pool and lease the units.

For Russo Development, completing its first apartment building in Lyndhurst last year has helped inform its future plans. Those lessons touch on areas such as unit sizes, design and demographics of its target audience.

"We have a better understanding of resident preferences, likes and dislikes, the things that drive their decision to rent with us," said Ed Russo, the firm's president and chief operating officer.

"The most valuable lesson is having feedback on minor design details that can be tweaked and improved on future projects."

As it prepares to complete its work in Lyndhurst, the firm this year plans to start construction on its next two multifamily projects in Harrison and Kearny. It's also pursuing approvals for projects in Ramsey and Rockaway.

While apartments have long been considered a safe asset class, demand has soared since the housing downturn stifled ownership and changed the thinking of would-be buyers. That demand is being matched by banks that are eager to put their money into multifamily projects.

"It's really kind of been the kingpin for the last three or four years," said Greg Haines, Provident Bank's first vice president for commercial real estate, pointing to the stable cash flow that multifamily offers through its rental stream.

And while those cash flows sputtered during the recession, they didn't suffer as badly as other property types, he said — and they recovered much more quickly.

Over the last two years, multifamily lending has accounted for about two-thirds of Provident's lending for new commercial real estate, up from about 50 percent in 2010. Haines believes the sector will "remain strong, certainly for the next year or so," as the allure of mobility and fixed payments causes new families to think twice about owning.

Experts say the surging interest may raise concerns about overbuilding at some point, but developers are still far from sounding the alarm. A November report by Marcus & Millichap Real Estate Investment Services, a brokerage firm, said vacancy in North Jersey's apartment market was at 3.2 percent, remaining tight despite an increase in construction.

Still, developers are taking nothing for granted.

"We are cognizant of market cycles in every property type we build," Russo said. "And multifamily is certainly no different to us."

E-mail to: joshb@njbiz.com
On Twitter: @joshburdnj

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