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Could Jersey City's Slow Office Market Drag Down Its Hot Multifamily Sector?

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Developers in Jersey City are building apartments as fast as they can to capitalize on New York’s relentless appeal and astronomical cost of living, but a tipping point of one sort or another is on the horizon.

Could Jersey City's Slow Office Market Drag Down Its Hot Multifamily Sector?
70, 80 and 90 Columbus Drive in Jersey City, all developed by Panepinto Properties

Alhough the city’s apartment pipeline is robust, absorption remains healthy among even the most expensive multifamily buildings, according to a Marcus & Millichap second-quarter report on Hudson County. But the opposite is true for the office market, where average rent is down and vacancies are increasing, according to a Savills Studley report on the Gold Coast.

Those diverging trends could be taken to mean that Jersey City’s multifamily market is increasingly dependent on commuters. Panepinto Properties Chief Investment Officer and Director of Operations Gordon Gemma estimates that 60% to 70% of his company’s multifamily tenants are employed in New York.

“The number is higher than I’d want it,” Gemma said. “The amount of residential here, and the price of it in the downtown is [appropriate for] an office worker who’s making a good buck. We should be able to capture and retain those offices here in New Jersey and not have to commute over to New York.”

Gemma expressed concern that the public transit system, which can take residents to New York’s Financial District faster than from most areas, is becoming overloaded at rush hours. That mitigates the convenience benefit, and with the Gateway Tunnel project up in the air over funding, the solution could be a long time coming.

In the absence of better transit access, Jersey City needs to become a more self-sufficient city to maintain its multifamily growth. HFF Senior Managing Director Jose Cruz, at least, believes it has already hit that mark.

“It’s definitely a city on its own terms, no doubt,” Cruz said. “You’ve got apartments, retail, offices, hotels and connectivity. It’s not just a bedroom community to New York like it was 10-15 years ago.”

Cruz, Gemma and the rest of the participants at Bisnow's Future of the Gold Coast event July 26 will be discussing areas on the Hudson Waterfront beyond Jersey City such as Bayonne, which Gemma tabbed as a potential next target for the sort of development that has energized Jersey City in the past few years.

Even for those residents who live and work in Jersey City, New York is often where they go to play. Cruz acknowledges that the retail scene is an impediment to the city standing on its own.

“I think office will continue to grow there because of the value proposition, but I think retail would be more important for turning Jersey City into a 24-hour city,” Cruz said.

Jose Cruz
HFF Managing Director Jose Cruz

Even the most expensive Jersey City apartments are cheaper than most Manhattan units, and the same is even more true of office space. But based on the region’s negative absorption and rent decline in office, it appears that the cachet that comes with a New York address still mostly outweighs the value proposition.

For most of this century, that has been even more true of residents, especially in the coveted millennial generation. The number of 22- to 34-year-olds in New Jersey decreased by 2.3% between 2000 and 2013, according to U.S. census data as reported by Savills Studley — in direct contradiction to the national average of 6.8% growth.

Anecdotally, Gemma and Cruz said they have seen this trend reverse in Jersey City in the years since that data was collected. The persistent population growth of New York City turned Brooklyn from a necessary, cheap alternative to its own hip destination, and it is doing the same in certain areas of Queens.

Gemma believes the same dynamic will eventually lift Jersey City as the boroughs lose all semblance of value, or in the case of farther-flung neighborhoods, convenience.

“It takes any snowball to begin an avalanche, but we’re coming to the point where the value of Jersey City is becoming more known, and it will take a period of time to develop the cachet,” Gemma said. “A few years ago, a Long Island City address would have the same issue [as Jersey City does now].”

In other areas of Northern New Jersey, some developers have had luck creating live-work-play communities out of leftover, sprawling former corporate headquarters. But with no campus of the sort to speak of in urban Jersey City, Class-A office development may need to be more of a build-to-suit proposition, which means waiting on more demand, Cruz said.

While small office users have made positive contributions to the market beyond what some might expect, Cruz said, Jersey City may indeed need to bulk up its retail offerings to become a more enticing proposition to the kind of office tenant that would anchor a new development.

“It needs to have vibrant retail, which it doesn’t have yet. It needs schools, and people are going to demand that," Gemma said. "As developers, we need to respond to that demand or we won’t continue to fill our buildings.”

That is where a crossroads might be just down the road. Jersey City won't be able to sustain its current level of growth in Class-A multifamily if it continues to depend on being a cheap, convenient alternative for commuters only, Gemma said. 

“Unequivocally, you can’t just look at one market and say it’ll be solely residential without understanding and developing more appropriate office,” Gemma said.

Gemma believes that Jersey City could close the gap in reputation with New York's boroughs in five years, or whenever the next development cycle begins. Cruz has a rosier view of Jersey City's present, but was less willing to prognosticate its future.

“I don’t know if there’s a timeline [for catching up to Brooklyn in reputation]," Cruz said. "Again, it’s come so far in such a short period of time, and continues. In terms of apartment deliveries, restaurants, all of it — I don’t know when we’ll be able to say it matches Brooklyn in terms of cachet, but I think Jersey City has its own cachet. It doesn’t necessarily need to compete with Brooklyn; I think they can coexist.”

Come discuss Jersey City, Hoboken and the rest of New Jersey's Hudson Waterfront at Bisnow's Future of the Gold Coast event on July 26 at Mack-Cali Realty's Harborside 3 Development in Jersey City.