Cushman & Wakefield of New Jersey, Inc.
One Meadowlands Plaza, Suite 1100
East Rutherford, New Jersey 07073
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Release Date: Tuesday, April 01, 2014
Media Contact: Evelyn Weiss Francisco (201) 796-7788
Plenty of Capital Flowing to New Jersey Commercial Real Estate
Improving Fundamentals, Opportunities Draw Investors Across Product Sectors
By Andrew Merin, Vice Chairman
April 1, 2014 – With the first few months of 2014 in the books, we are seeing plenty of capital flowing to New Jersey commercial real estate. Strong fundamentals across market sectors are attracting a diverse pool of investors, ranging from private investors taking advantage of attractive financing rates to scoop up distressed properties, to public and private REITs, foreign entities and pension advisors seeking core and core-plus assets.
Healthy tenant demand for New Jersey industrial space resulted in 21.3 million square feet of leasing last year – an impressive 27.1 percent increase over 2012 and the second highest annual accrual in the last six years. The leasing of quality space has pushed vacancies down and net absorption up, and has boosted the asking rental rate 3.6 percent to $5.99 per square foot.
It is no wonder, then, that investor appetite for industrial remains strong. Cushman & Wakefield recently surveyed a large group of national institutional industrial players. Seventy-seven percent of respondents said that New Jersey is their top investment target.
In fact, industrial real estate investment sales in New Jersey reached a record high in 2013, with $1.1 billion in deals closed (besting the previous, $922 million record set in 2006 and nearly doubling the volume closed in 2012). We see no sign of a slowdown heading into the heart of 2014, provided that properties continue to come online.
With its second-highest leasing volume since 2009 (7.9 million square feet), the New Jersey office market ended 2013 on a bright note, with stepped-up demand and rising rental rates. Despite the region’s continued struggle with space absorption, a lack of new office construction and the adaptive reuse of some existing product will help the market turn the corner in 2014.
While slightly below the historical average of $1.5 billion, 2013 office investment sales volume totaled a healthy $1.3 billion, with cap rates 78 basis points below the historical average. Stabilized, institutional-quality product remains the darling of the office sector. That said, during the past several months we have observed renewed investor interest in suburban office space as a contrarian play. Additionally, value-add opportunities are attracting attention, with product trading at less than $80 per square foot.
So far, 2014 is off to a good start for office investment. As of March, $72 million in transactions had closed, with another $324 million in trades under contract.
New Jersey’s multi-family rental market remains one of the nation’s strongest, with a 4.1 percent overall vacancy rate and a year-end average asking rent of $1,131. At the same time, with nearly 24,500 units planned, under construction or recently completed, the state’s impressive multi-family development pipeline raises questions about how this rapidly expanding inventory will impact market fundamentals moving forward. So far, absorption seems to be keeping up with deliveries. And while we may see an interim slowdown in rent growth, it is widely expected that it will be temporary.
Within this context, investor demand for institutional-quality apartments in New Jersey remains exceptional. In turn, competition to acquire these assets has brought out sellers and driven down cap rates. Sales volume in 2013 finished at $672 million – $208 million above the 16-year historical average – and the average per-unit price reached a peak of $316,353.
Abundant capital remains available for multifamily. With rents at all-time highs, vacancies near all-time lows and a generational shift toward renting, the outlook for this sector is nothing but positive.
The New Jersey retail market has rebounded beautifully. During 2013, vacancy rates tightened from 5.8 percent to 5.4 percent, and 184,000 square feet of positive absorption marked a 426% increase from 2012. Well-located centers are re-filling with both traditional and non-traditional tenants, and the construction pipeline remains minimal in this competition-constrained market.
In turn, capital allocations for retail investment are growing. Product supply, however, remains limited. Sales volume in 2013, totaling $464 million, was 40 percent below the 12-year average of $772 million. Within opportunities that are trading, we are seeing an emphasis on value- add plays and, as always, stabilized, grocery-anchored centers. Lifestyle centers that integrate retail with entertainment and dining are particularly popular with the increasingly influential millennial generation. They are beginning to draw more investor attention as well.
Currently, capital for retail investment continues to significantly outstrip product availability. That said, cap rate compression is beginning to flush out sellers. To date in 2014, $223 million in retail sales have closed or are pending.
With the federal budget situation off the table and employment numbers improving, we expect 2014 to be an excellent year for commercial real estate capital markets in New Jersey. Continued improvement in fundamentals and increased opportunities for investors will keep sales activity moving at a healthy pace.
This is especially true for the first half of the year, while interest rates remaining stable – if not down slightly since January. Many economists anticipate a moderate increase of 50 to 100 basis points by year end. Sellers are putting their product out earlier, and buyers are working to lock into properties and financing ahead of the curve. This may well result in a surge of spring and summer dealmaking.