New Jersey Multifamily Developers Have No Choice But To Make The Suburbs Work
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For decades, few multifamily projects of any size were built in New Jersey outside of its biggest population centers. Like it or not, that is beginning to change.
Although multifamily development continues at a rapid pace in Jersey City, rent growth has fallen behind what many developers and investors expected five years ago, HFF Senior Managing Director Jose Cruz said at Bisnow's New Jersey Multifamily event last month in Jersey City. Disappointing returns could be among the factors driving some developers to cast their net farther outward.
Philadelphia-based Post Brothers has been eyeing the Gold Coast and Hoboken for the past couple of years, with its focus primarily on extensive redevelopments of outdated apartment buildings or former warehouses. In New Jersey, those sorts of deals "are pretty much gone at this point," Post Brothers Director of Acquisitions Zak Klinvex said.
Cruz named slow rent growth and onerous real estate taxes as the "biggest headwinds heading into 2019" across the Gold Coast, downplaying the interest rate concerns that may have given the industry some pause in the latter half of 2018. But the motivators for building outside of urban centers are not all negative.
In the past 10 years, municipalities across New Jersey have considerably softened their anti-apartment stances, Woodmont Properties CEO Eric Witmondt said. Those stances were, in large part, based on an image of apartment buildings as the hulking public housing projects in Newark and New York City meant for low-income residents, according to Witmondt.
“Towns were concerned with what they considered 'transients,'” Witmondt said. “What’s happened in the past 10 years or so has been a transformation wherein homebuilders like [BNE Real Estate Group principal] Jonathan Schwartz and myself have built modern apartments with homeowner-style amenities.”
The resistance to affordable housing has created a crisis of affordability across the state, one which the state Supreme Court stepped in to address last year. Now, towns that have not reasonably attempted to meet their populations' affordable housing needs are under court orders to do so — creating an opportunity for developers.
“Municipalities come to us looking for ways to keep their workforce housed near downtown, and I think there are a lot of opportunities to do that and ways to mix that with market-rate housing," Genesis Cos. co-founder and managing member Karim Hutson said. "We’re very comfortable with that. The issue is the cost of construction, and tightness in that market.”
Construction costs are a severe issue that affects every part of the real estate industry, but in cases where housing is needed and court-ordered, the state and local governments have been eager to add incentives to mitigate that cost for mixed-income projects.
“I think there are opportunities in smaller cities that are looking for redevelopment and incentivizing developers," FEM Real Estate CEO Mimi Feliciano said. "We've taken advantage of that, and we think there are a lot of opportunities for developers in those areas that are feasible.”
Smaller towns are especially looking to spur development and density near their miniature downtowns with mom-and-pop shops, Witmondt said. Activating the streets to fight against e-commerce's infringement on local business is a priority, one that municipalities often insist upon even where it doesn't make financial sense, according to Schwartz.
"[Municipalities have] forced us to do retail," Schwartz said. “We’ve got empty [retail space] in communities like Neptune, Aberdeen and Bloomfield that don’t have the density. In areas like that, our retail struggles.”
The state is also beginning a serious push to incentivize development along New Jersey's public transit system, with Gov. Phil Murphy directing NJ Transit to identify development opportunities and work with companies to bring them to fruition. Like with downtown retail, there are many places where it won't be an easy fix.
“[Public transit in New Jersey] doesn’t foster growth because it sucks, to be honest," Roseland Residential Trust Chief Operating Officer Gabriel Schiff said. “The ferries are underutilized, and for the PATH tubes into the city, sometimes you have to wait three or four trains just to get on, so we have some real problems to address ... We need a statewide solution to improve infrastructure, because obviously people want to live near infrastructure.”
The lion's share of New Jersey residents who don't live where they work still use their cars to commute, and therein lies another opportunity for developers not as interested in building affordable units. With Amazon HQ2's pending arrival in New York City, that opportunity could become even more enticing in the coming years, according to Witmondt and Cruz.
"We’ve kept our eye on the wealthier suburbs within an hour drive of Manhattan," Klinvex said. "There, the zoning may allow for residential density, but luxury product hasn’t been introduced yet.”
Multiple panelists also noted the dual demographic trends driving people into suburban apartments, between empty nesters looking to downsize and avoid maintenance costs and millennials in well-paying tech jobs who don't feel the need to own a house (another trend that Amazon seems likely to intensify).
The factors pushing multifamily interest in New Jersey was a more urgent topic of conversation at the event than the headwinds and greater economic concerns facing developers in 2019. The rush to build apartments in New Jersey looks poised to continue, more widespread than before.