New Jersey CRE Grows In Industrial, Multifamily And Retail Financing, While Office Lags Behind
CRE financing remains robust across several asset classes in New Jersey. Eric Seidel, director of Marcus & Millichap Capital Corp.'s New Jersey office, has seen an increase in loans for multifamily, retail and industrial properties in the area.
Multifamily, which performed well nationwide in 2016, continues to be a desirable investment in several North Jersey submarkets. “Multifamily is tremendous in the Bergen, Hudson, Essex and Morris County markets,” he said. “If you are listing a multifamily property right now, it is not a matter of if it will sell, but at what price.” Rising interest rates could potentially hamper some of this growth. "I think we are finally at the turning point where we will see cap rates increase by 0.50% to 1%, which will cause prices to decrease due to the higher rates and the rising cost of capital."
Multifamily vacancies have decreased in major transportation hubs like Hoboken and Jersey City, where a growing Millennial workforce relies on nearby transportation to New York City. In these markets, it is often more cost-effective to rent rather than to buy a home. “The average rent in NJ is around $1,850, which is comparable to owning a $400k home, but you need a 20% down payment to afford the latter,” Seidel said. “Overall, the employment levels and improving demographics only strengthen the CRE market.” Amenities like parking may also play a factor in securing financing. “Many tenants commute to New York City, but on the weekend a car is still needed."
The Industrial market saw record fourth quarter growth in 2016, with Northern and Central New Jersey markets reaching a year end net absorption of 10M square feet, the highest it has been since 2001. “We just closed $5.2M in acquisition financing in Little Ferry, N.J. with a 75% loan-to-value and a sub-3.5% interest rate fixed for five years,” Seidel said. Successful deals have lead to a influx of investors from New York City markets. “Tenants can save a significant amount on rent here compared to New York, and property owners or purchasers can achieve 7%-or-higher cap rates in New Jersey on industrial product.”
E-commerce development has outpaced brick-and-mortar retailers' demand for big-box space, representing 51.7% of leases of this property type in 2016, according to JLL. “Big-box retail properties with tenants such as Sports Authority, Staples and Best Buy may have some trouble in the short term,” Seidel said. While online shopping has become a dominant presence in the market, retail properties in New Jersey have seen significant recovery. The internet cannot replace community mom-and-pop stores, dry cleaners, coffee shops and other tenants that provide physical services within a local reach." That's why retail remains strong, and investors can achieve a better return with retail versus multifamily.
Not every property type is experiencing rapid growth. Suburban office space continues to underperform in New Jersey. “I do not think it is any secret that suburban office remains the most difficult asset type to finance,” Seidel said. “It is certainly the slowest recovering property type.” The exception is medical office space, which continues to grow in popularity.
While rising interest rates have done little so far to shake up the real estate market, appraisers still have significant influence over commercial lending. "Their reports can make or break a deal," Seidel said. "You can have a bank, borrower and seller all on the same page, but if the appraiser is not familiar with a certain product type or submarket, they will use their 'opinion' to determine value over concrete information like comps." Firms like Marcus & Millichap, which have a pulse on the market determined by current data, can help appraisers make an accurate report. Some might not take the advice. In either case, the borrower will be affected. "Borrowers are forced not only to pay for the appraisal but also a review company," Seidel said. "Sometimes the review company helps, sometimes they hurt, but if an appraiser is completely wrong, the review company often does not have the capacity to change the valuation, which results in a problem for everyone except the appraiser."
To learn more about this Bisnow content partner, click here.