By Nat Gambuzza and Gene Pride
Apartment investment in the United States, including the New York metro area and New Jersey specifically, continues to experience increased interest from global capital sources. Market fundamentals are sound as the volume of new renter households entering the market outpaces the rate of new apartments being built. The result is a housing shortage, particularly in the older, more affordable product that continues to drive rents higher. Several distinct trends illustrate the differing market fundamentals among new Class A luxury communities, 10- to 20-year-old “value-add” opportunities and older, more affordable “workforce housing” apartments.
At first glance, one might assume that new, luxury apartments are receiving the most interest from investors. While a steady pace of construction can be seen in Northern New Jersey with an average of 5,900 apartments delivered annually, this product is trading infrequently. The majority of investors focused on new construction are institutions that prefer a “build-to-core” strategy over asset acquisition and non-institutional players are unwilling to pay the premium for new development. Thus, the majority of new luxury construction is being held long term.
At the other end of the apartment-product spectrum is workforce housing. This is a broad term used for market-rate apartments that are generally affordable to residents in jobs such as healthcare, education, law enforcement and entry level office positions. This product is seeing increased investor interest as rent growth since 2012 has been 3.4% annually with occupancy at 98.7% in Northern New Jersey.
The trend of more new renters entering the market than new housing being built is especially apparent in the moderate-income sector served by workforce housing.
CBRE has several workforce housing assignments for sale in the market. The first is a portfolio of seven assets with 1,035 apartments in Essex, Mercer and Monmouth counties that were built in the 1960’s. Competition was fierce with over 40 offers submitted. A second assignment is a two-property workforce housing portfolio in Bergen County with 338 apartments; more than 275 groups requested the sales materials.
On Long Island we’re selling assets in Central Islip and Bay Shore where a bidding frenzy pushed pricing above expectations. This unprecedented demand is being driven primarily by the realization that workforce housing has the most durable and reliable revenue stream with the strongest prospects for rent growth.
As investors look for ways to grow revenue, “value-add” opportunities are a consistent target. Renovating kitchens, baths or upgrading amenities that justify rental premiums is a key strategy.
Investors typically underwrite a 20% or higher return on the capital invested in upgrades. Pricing on value-add offerings has increased significantly as more demand for this product has emerged.
For example, in 2016 an investor would be the successful bidder with the ability to achieve a 16% to 17% leveraged internal rate of return (IRR). Today, that same winning bidder is looking at a 12% to 13% leveraged IRR due to the increased competition for each offering.
Investing in apartments today can be highly profitable given the backdrop of strong demographic fundamentals with an increasing number of renter households entering the market. Investors from around the world are buying multifamily communities in New Jersey which is driving down yields. We expect this trend to continue given the relatively stable interest rate environment and lack of attractive alternative investments.
For more information, visit CBRE Northern and Central New Jersey.