In its recently released Q4 2017 Local Apartment Report for northern New Jersey, brokerage firm Marcus & Millichap said it expects the boom in multifamily to continue through Q4 and into 2018.
A 30 percent increase in rents for this decade and a vacancy below 5 percent are slated to continue driving demand for the asset across the region and particularly in Hudson and Essex counties.
“Development costs can be up to three times higher in Manhattan and Brooklyn, leading developers to increase activity across the Hudson as rental demand holds strong in the region,” according to the report. “Hudson County remains the focal point of construction for its transit connectivity into Manhattan and a more walkable environment than other parts of the region. More than 14,000 units are underway across the county, including the largest project in the region, the Riverbend District, (Harrison) a multiphase mixed-use development that will total roughly 3,000 units upon completion.”
Cap rates in Bergen, Hudson and Union counties appear to be the lowest in the region – between 5 and 6 percent. Higher first-year yields can be seen in Essex, Morris and Passaic counties and can reach 7 to 8 percent at times, the firm reported.
Midcentury mid-rises in Paterson, Hackensack and Passaic are proving to be profitable value-add opportunities, the firm said.
“The average effective rent climbed to $1,815 per month in the third quarter, outpacing a 3 percent increase that was posted one year earlier,” said Marcus & Millichap. “In Jersey City, Class C complexes posted a 6.9 percent increase to the average effective rent, climbing to $2,333 per month. Class A apartments here registered a slight decline of 0.5 percent to $3,061 monthly.”
The 0.4 percent increase in employment year-over-year has added to the demand for multifamily product in the region, too.
According to the firm, the leisure and hospitality sectors added 11,200 out of 12,500 jobs in the last three quarters. And the education and health services sectors expanded their workforce by 4,500 workers.
“Deal flow surged 39 percent during the past 12 months in comparison with the previous period,” said the firm. “In Hudson County, transaction velocity jumped 82 percent on strong buyer demand. On a per unit basis, the average price climbed 1 percent to roughly $155,700. In Bergen and Hudson counties, properties averaged $209,000 per unit, an 11 percent jump in Bergen County and a 2 percent drop in Hudson County.”
And in looking into the future, William Hughes, senior vice president, said he sees Washington playing a more significant role in the capital markets.
“Despite the Fed raising its benchmark short-term rate three times in seven months and signaling another rise before the end of the year, long-term rates have remained stable,” he said. “The yield on the 10-year U.S. Treasury bond remained in the low- to mid-2 percent range throughout the third quarter of 2017. The Federal Reserve wants to normalize monetary policy and, in addition to raising its funds (or overnight lending) rate, has announced it will begin to taper its balance sheet by allowing an initial $10 billion in securities to mature without reinvestment. By reducing its acquisitions of securities, 10-year Treasury rates should drift upward, thereby widening the spread between short- and long-term rates.
“While commercial real estate fundamentals remain strong, rising costs associated with debt financing will tighten the spread between cap rates and lending benchmarks. This environment could weigh on transaction activity as investors evaluate their yield options. Cap rates have remained relatively stable over the last year, but upward movement in Treasury rates has amplified the expectation gap between buyers and sellers.
“Government agencies continue to consume the lion’s share, just slightly over 50 percent, of the apartment lending market. National and regional banks control approximately a quarter of the market. Growing uncertainty about federal policy and global geopolitical concerns are keeping long-term interest rates down with pricing residing in the 4 percent realm with maximum leverage of 80 percent. Portfolio lenders will typically require loan-to-value ratios closer to 75 percent with interest rates in the high-3 to mid-4 percent range. As uncertainty remains regarding the possibility of tax policy revision, rental demand remains strong with the national apartment vacancy at 4.5 percent.”