By Joshua Burd
With 2019 underway, competition among commercial real estate investors has only intensified in New Jersey, largely around properties that offer some level of safety in the later stages of the economic expansion.
The Garden State is by no means alone in that regard, but brokers and other experts say they expect demand to stay robust in the near term, citing everything from Wall Street volatility to the continued arrival of buyers from other markets.
“For the right deals, there is real demand out there and I don’t think that’s stopping any time soon,” said Jose Cruz, a senior managing director with HFF, who noted that top-flight offerings in New Jersey are still drawing investors from New York, Chicago and other major markets. Some are seeking in-place yield or simply a high-quality property, while others are looking for upside.
For instance, stabilized industrial assets have caused buyers to “show up here very aggressively from all over the country” in recent years, Cruz said. Meantime, savvy investors of all sizes continue to covet well-located multifamily deals in New Jersey, seeking to add value or to lock in the stability of a newer Class A property.
He cited two deals from the past year: San Francisco-based Carmel Partners’ acquisition of Hunters Glen, an 896-unit garden apartment complex in Plainsboro, and Spirit Bascom’s purchase of a 37-unit property in uptown Hoboken. In each case, the buyer was making its first foray into New Jersey with a value-add deal in a strong submarket.
Other property types are drawing increased competition, at least when it comes to assets that provide greater certainty and security. Kevin Welsh, an executive managing director with Newmark Knight Frank, noted that most buyers at this point in the cycle have taken a more cautious approach to the office sector, seeking properties with higher occupancy and in-place income, rather than taking a chance on a value-add deal.
“It means that you now have buyers who are looking for durable cash flow with upside,” Welsh said, “and that type of a buyer is income-driven with some opportunity for capital appreciation.”
Those types of deals, known as core-plus, typically involve a well-located building with occupancy in at least the low 80s and an attractive average lease term, Welsh said. For instance, NKF recently brokered the $17.2 million sale of 3 Becker Farm Road, a 115,422-square-foot complex off Interstate 280 in Roseland, where an international real estate fund known as Westwood Properties was making its first investment in the U.S.
“Core-plus is really what we’re seeing more of and it’s where we’re seeing more depth and people competing for deals,” Welsh said, noting that the properties must also have other attractive features, such as a strong amenity base.
In recent months, Cruz’s team has seen demand intensify for medical office buildings. HFF is in the final stages of selling a roughly 75,000-square-foot medical office property in northern New Jersey that drew more than a dozen offers, with three finalists that included a pension fund adviser, a private equity group and a private real estate investment trust.
“Historically, there had not been enough opportunities to purchase or finance this product type in New Jersey and the surrounding markets,” Cruz said, noting that buyers are drawn to the involvement of well-heeled health systems with longer-term leases that include annual steps. Those factors result in higher renewal probabilities and have attracted investors across the spectrum, with some deals commanding more than $300 per square foot.
“Investors seek the stability of these tenants within the office buildings and will underwrite projected upside as health care continues to evolve,” he added. “Proximity to hospitals is also a driving factor in the investment decisions along with the types of medical practices that are found on site.”
Brokers say investor appetite is strong at every level of the market, including individuals and smaller private investors who are looking for greater certainty. Jonathan Kristofich, NAI James E. Hanson’s associate director of capital markets, pointed to the recent swings in the stock market as a driving force for those who have sought alternative investments.
He believes that uncertainty “gives more conviction to the people that have been migrating to real estate as a security asset to continue to do so and increase that investment,” rather than investing in a real estate investment trust or a fund.
“I think people want to say, ‘This is my asset’ and they can go touch and feel it,” Kristofich said. “And even if the market goes up and down, they feel like they can go visit it and talk to their tenants and they feel like they have some kind of personal connection to their investment versus just getting a statement … and feeling like they have no control over that investment, per se.
“I think it’s more psychological than reality,” he added, “because the reality is, if things really go bad, even your piece of real estate can go bad, too. So I think it’s just being a prudent investor. Understanding your risk-adjusted returns no matter what asset you invest in is important, but I think the volatility on Wall Street will definitely continue to push capital into stabilized or quasi-stabilized commercial real estate.”
He also noted that the growth of technology and the availability of information have “really opened up real estate to the nontraditional investor,” such as those who make a living in another industry but are looking for a place to put their excess cash.
“You have that push of cash from the bottom end of the market and you have the big institutional cash from the top of the market,” Kristofich said. “And it has really crowded the investor universe for your traditional New Jersey owner-operators of real estate and this continued staying power of demand has kept cap rates compressed.”
But for all the demand from buyers and investors, experts are also keeping an eye on interest rates to see how they will impact commercial real estate financing. While the Federal Reserve has pledged a patient approach toward rate hikes, Kristofich noted that even some movement will cause both buyers and lenders to take a more conservative approach in the back end of the expansion.
“It’s always hard to predict exactly when it’s going to happen, but I think as the debt gets more expensive, you’re going to start seeing buyers get a little less aggressive in terms of what they’re willing to pay for properties,” he said.
He added: “I think the seas are getting choppier with this volatility in the marketplace, so they’re going to flock to credit quality, meaning they’re going to lend money to people who have a past history of performance.” That could spell difficulty for newcomers to real estate.
“It’s a crowded environment,” Kristofich said. “There’s a lot of people chasing too few deals … but it’s just a question of how the debt markets influence that on a going-forward basis this year in 2019.”