The Metropolitan at 1400 Clinton St. in Hoboken — Courtesy: Advance Realty
By Joshua Burd
As residential high-rise construction continues to surge, developers and investors are keeping a watchful eye on rent growth and capital markets activity along the Gold Coast.
Both were on the minds of industry experts at a recent panel discussion in Jersey City, who noted that renters continue to flock to new apartment buildings along the waterfront, while investors are eager to find opportunities in the booming submarket.
But some experts say a slowdown in New York City — notably, a slowdown in rent growth or the economy — could creep across the Hudson River in the coming years.
“I’m cautiously optimistic,” said Abe Naparstek, a senior vice president with Forest City Realty Trust, “but it’s hard for me to believe that you’re going to see such pressure on rents in New York and have that not impact this market.”
Naparstek’s firm is on the verge of completing its first project in New Jersey, a new 35-story tower in Jersey City that will feature more than 400 units. When the property opens later this year, he said, “I think that will be really telling” as to whether rent growth tapers off in the near term for high-end apartment buildings along the Gold Coast.
“I think, long-term, it will be fine,” Naparstek said, speaking at CapRate Events’ annual New Jersey Gold Coast & Spring Multifamily Summit on March 29. “If you have a 10-year horizon, you’re going to do great. But if you’re really focused on the next two or three years, I have a hard time imagining there’s going to be much rent growth here.”
That growth may already be starting to wind down. Mitchell Berkey, a real estate attorney and member of Chiesa Shahinian & Giantomasi PC, said effective rental rates in northern New Jersey have grown for six consecutive years, but pointed to a 4.2 percent increase in 2016, down from the 6.8 percent gain in 2015.
But he also noted that strong net absorption last year kept vacancy around 4.3 percent, despite the delivery of an estimated 8,500 rental units to the region.
And while millennials are largely driving that absorption, developers say there’s more to the Gold Coast renter pool. Russell Tepper, a senior managing director with Mill Creek Residential Trust, said “we’re spending considerably more time focusing on baby boomers, who are an ever-increasing population for our communities.” The firm recently opened Modera Lofts, a 366-unit adaptive reuse of a historic brick warehouse building in downtown Jersey City.
“And, frankly, the vast majority of baby boomers that are renters by choice in a number of our communities are looking for all of the same qualities and living experience that millennials are,” Tepper said. “So the audience for us has grown dramatically, which only makes the demand for multifamily in these urban settings even greater … (and) allows us to not be as concerned about growing supply in Jersey City or in other North Jersey Gold Coast markets.”
Mill Creek has found that “if you can find good real estate in urban centers like Jersey City and finance it, then there will be a more than sufficient audience for what we’re building,” he added.
Jose Cruz, a capital markets broker with HFF, said his firm has tracked an absorption rate on the Gold Coast of about 53 units per month over the past year and a half. The strength of the market and the attributes of locales such as Jersey City and Hoboken have kept the interest of investors.
“That, to me and to the investment community, signals a very strong market and one that they’re going to look very hard at,” said Cruz, a senior managing director with HFF. “And I think the downside of it is there’s not a lot of product on the market today.”
The lack of opportunities has forced investors to look at different strategies, Cruz said, such as partnership buyouts, joint ventures and 49 percent interest deals. And the investor pool includes a cross-section with everything from existing local developers hoping to expand their footprint to institutions seeking an entrance to the Hudson waterfront.
“We’re looking at a lot of different ways now to move that capital back into the waterfront, but you have to be creative,” Cruz said. “You have to be open to a lot of different types of structures.”
He pointed to the recent $77 million trade of The Metropolitan, a 128-unit residential and retail property at 1300 Clinton St. in Hoboken, which was acquired by a joint venture of Advance Realty and a global investment group. He noted that the buyers underwrote rent growth into the purchase, although HFF said average rents at the property had been about 15 percent below market prior to the sale.
Dave Surti, a principal with Camber Capital, agreed that “there’s certainly a lot of players in the market,” but warned that some of those capital sources are not only creative, but also aggressive. He added that “what worries us is that you have closed-end funds and institutions that need to put out money, so if there’s a deal they like, they’ll figure out how to make it work” and potentially impact how transactions are underwritten going forward.
High-end real estate along the Gold Coast is also facing a changing debt market. Peter Sibilia, executive director for global real assets, acquisitions, with JPMorgan Chase & Co., said it had become increasingly difficult to get nonrecourse financing for multifamily projects. But he added that “we’re seeing a lot of debt funds coming into the multifamily rental construction space” and providing up to 70 percent nonrecourse financing at 5 or 6 percent interest.
“These nontraditional lenders have been filling the voids of the banks like they have been in some other property types and some other strategies that we’ve seen elsewhere,” Sibilia said.
At the same time, developers may be required to invest more equity into a project, especially with the prospect of a long-awaited uptick in interest rates. For Mill Creek’s recent development projects and its pipeline going forward, Tepper said the firm’s underwriting is accounting for both higher interest rates and higher spreads.
“I think that if you’re developing in the right location and are willing to invest a little bit more equity than you’re traditionally used to investing, then you should not have too much difficulty raising debt,” Tepper said, especially if a project is “at the corner of Main and Main” and the developer is comfortable with a loan-to-cost ratio of no more than 60 percent and spreads that are 275 to 300 basis points.