By Joshua Burd
After treading lightly for much of the past year, institutional investors appear poised to accelerate their commercial real estate spending in 2021. New Jersey and other suburban markets could benefit in the near term as buyers await the return of New York City — especially in an apartment sector that is regaining its footing after stumbling during the pandemic.
A group of industry executives said as much recently during a recent program hosted by the Urban Land Institute of Northern New Jersey, noting that they planned to deploy both debt and equity capital in the year ahead. Sourcing deals is not nearly as simple, they said, citing the intense competition for industrial assets and unease about office and retail property.
For multifamily assets, however, there are opportunities for savvy, long-term investors who can see past any recent uncertainty.
“(With) the bid-ask spread in multifamily deals that are constructed — core, core-plus and value-add — it’s difficult to transact on,” said Alex Cocoziello, a principal with Advance Realty Investors, speaking during ULI’s virtual Emerging Trends program in mid-January. “So if you have land for development, it’s difficult to bet against New York City coming back within your typical five-year, seven-year hold period.”
Cocoziello added that “all of us are very familiar with the effect and, really, the social fabric of New York City, so with the vaccine rollout coming in 2021, right now seems to be a great time to take advantage of land development in transit-oriented corridors” such as Harrison, the Hudson waterfront, Montclair and Morristown.
Erin Beitz, vice president of asset management with Carmel Partners, said the investment advisory firm is “definitely expecting more activity” this year after an uptick in late 2020. Much of last year’s activity came from “continuing to tie up and close on land for future development, she said, adding that the company is “very bullish on the need for housing in major gateway markets.”
In the immediate future, however, she said she expects to see many of those opportunities come from “second-tier gateway markets and just outside” major cities on both coasts.
“We are well aware of what’s happening in San Francisco and New York City in our portfolio and market-wide,” said Beitz, who oversees Carmel’s East Coast portfolio. “It is difficult to make deals work unless there is a premium for knowing that you’re going to have to go through the short-term pain to get back to the market fundamentals that we all think we will revert to on a long-term norm.
“So I think that we’re staying in metro areas, of course, (and) looking at more emerging areas and things with suburban connectivity into the urban core.”
Multifamily investors and lenders are also grappling with the prospect of limited rent growth and continued concessions to tenants, at least for the first half of 2021, but the panelists predicted a substantial rebound in 2022. Cocoziello noted that Advance had seen “a noticeable uptick” in occupancy and velocity from late last summer to mid-January — the time of the ULI program — especially in the firm’s higher-end buildings in Hoboken, as renters return to the market.
And while first-half activity would hinge largely on other factors — such as the vaccine rollout — he expected to see demand continue to grow from the 22- to 30-year-olds that account for so much of the luxury multifamily renter pool.
“They obviously modified their lifestyles, but you’re talking about the lowest-risk group there is,” Cocoziello said, adding that Advance is proceeding with a new 400-unit development in Harrison. “So we’re making that bet that, in the second half of this year and really the first half of 2022, that pent up demand comes back and it comes back in a big way.”
Beitz said Carmel Partners spent part of 2020 managing its expenses and getting many of its buildings “back to stabilization.” But there will be assets that were not able to recover, she said, creating additional value for would-be investors.
“For most of our deals, I firmly believe that we’re past the bottom,” Beitz said. “I do think that in the market we’re going to be looking at deals that are stuck at the bottom or deals that maybe have some pain that’s coming — and those are deals that are probably going to make the most sense for us.”
Other product types come with different challenges for investors. Cocoziello, whose firm has several large industrial projects under construction in the state, pointed to the “extraordinary” competition from investors and lenders seeking opportunities in the asset class. That bodes well for anyone who can pin down a deal in a market like northern New Jersey.
To that end, JLL Senior Managing Director Jose Cruz said the firm recently brokered the sale of a suburban New York industrial building at roughly $400 per square foot, in a sign of continued growth in the sector and demand “across buyer pools.”
“That industrial market has a lot of room to run,” said Cruz, who leads JLL’s investment sales group in New Jersey. “And those metrics don’t seem to be frightening too many people because of the upside.”
Cruz, who led the ULI panel discussion, also said it was important to not lose sight of the office and retail sector. His Morristown-based team is “spending a lot of time on well-leased, well-located” office and retail properties with credit tenants on long-term leases — “and those are trading and they’re trading at aggressive cap rates.”
Essentially, the asset classes do still provide upside in the near term to investors.
“There is a little bit of a negative connotation these days with retail and office, but there are some real bright spots in those product types,” Cruz said.
Rockwood Capital’s Charlie Leonard agreed that buyers who “really focus on the right markets” — those that will adapt to post-COVID work trends — could find worthwhile deals in the New Jersey office sector.
“I think there are some interesting plays and there’s still some really good credit tenants that are out there and willing to sign leases,” said Leonard, a director with the firm. “Net-effective rents are not horrible relative to what you’re seeing in Manhattan, so I think you might see a little bit of a shift where people start to poke their heads into the office side and a little bit more into New Jersey and select markets, more so than we’ve seen.”