By Joshua Burd
For all of the looming questions about federal tax reform, the state’s commercial real estate sector is also facing uncertainty about the impact of a new governor and Legislature.
Some of those questions were in focus recently during a forum hosted by the accounting and advisory firm Sax LLP, where a crowd gathered to hear from four of New Jersey’s top developers and owners. Those executives tackled everything from property tax abatements to affordable housing mandates, plus other policy concerns that could bolster or lessen the state’s locational advantage.
“The first six months of next year are going to be very, very important to watch for the real estate industry,” Russo Development CEO Ed Russo said, as Gov.-elect Phil Murphy is sworn in and as Democrats assume control of both the executive and legislative branches.
For instance, he pointed to possible changes to the law guiding property tax abatements for new developments. In one measure that has been floated in recent months, lawmakers have proposed requiring a project to use prevailing wage — essentially, union labor — in return for receiving a payment in lieu of taxes agreement.
Russo said such a requirement would drive up the cost of redevelopment and could stall future projects.
“We’ve talked about this a lot as a development community over the last couple of months because it’s something we’re very concerned about,” he said, estimating that 80 to 90 percent of redevelopment projects in the state have such an agreement, commonly known as a PILOT. “That’s going to have a big impact on what we’re all seeing.”
Russo and other panelists lauded Murphy’s campaign promises to create economic fairness in New Jersey, but cited the need to marry that pledge with continued economic activity.
“I think the new governor-elect has a great moral compass and wants to do the right thing … but I think he needs to have a very balanced approach,” said Eric Witmondt, CEO of Woodmont Properties. “And I think he is trying to do a lot of things that need to be done to correct a lot of issues we have in our state — pension reform, our infrastructure and our transportation network — but where are all the dollars going to come from?”
Witmondt said it will be “a major challenge,” especially with the uncertainty about reforms at the federal level, to balance fairness with economic growth. For instance, he cautioned that major changes to the state’s incentive programs could deter the creation of new business and stifle redevelopment, as could legislative changes that drive up the cost of construction.
Jonathan Schultz, co-founder of Onyx Equities LLC, said tax credits and other economic incentives will only become more important as the labor force changes. Companies are seeking markets with the richest talent pool, he said, meaning they are willing to consider a wider array of locations than they have in the past.
“The labor forces in each state are changing dramatically, the demographics are changing dramatically,” Schultz said. “I think that just has to be a real cognizant thought when you’re putting together how to be competitive as a state for housing, for office space, for logistics — for everything that makes our great location a great location — because after a while, a great location can also be in another part of the country that will suffice.”
Stuart Berger, partner with Clifton-based Sax and founder of its real estate practice, kicked off the Nov. 14 event by discussing the impact of the federal tax reform measures being considered by Congress. He said the real estate industry has been paying close attention to the proposals, noting that the tax code affects everything from 1031 exchanges and carried interest to the deductibility for interest and the Low-Income Housing Tax Credit program.
To be sure, the real estate industry faces continued uncertainty in both Washington D.C. and Trenton. When it comes to the state level, developers and professionals are also grappling with the newfound mandates for local governments to create affordable housing.
Many towns and cities are now preparing to act on those mandates, more than two years after the state Supreme Court stripped the Council on Affordable Housing of its oversight. Jonathan Schwartz, partner with BNE Real Estate Group, said absorption for new multifamily development has been healthy, but the influx of new requirements threatens to disrupt the balance in many suburban communities that have seen a limited amount of new supply over several decades.
“Once you start hearing that one of these Morris County or Monmouth County towns have a 1,500-unit COAH obligation and they’re going to be forced to build, those markets scare me a lot,” Schwartz said. “I don’t know that the absorption is there like the Gold Coast, and it will be interesting to see what happens in some of those markets and if they’re deep enough renting markets.”
