Northern New Jersey Area Fourth Quarter 2013 Office Market Report

Investors Scour Northern New Jersey for Acquisitions

As Manhattan occupancy and rents climb, operators in Northern New Jersey will begin to benefit from the migration of tenants in search of quality space at lower rates. This year started on a high note as Depository Trust & Clearing Corp. relocated 1,600 workers to Jersey City. Most employment sectors in the six-county northern New Jersey region added jobs in the first six months of the year, and local payrolls have increased in four of the past five quarters. Investors throughout the New York metro are keen on the region’s local office properties due to the area’s strengthening economy. At the end of 2012, sales velocity in northern New Jersey accelerated as investors rushed to close deals prior to an increase in capital gains taxes. At that time, buyers were more likely to meet sellers’ price expectations due to the low interest rates. Since the beginning of the year, however, trading has slowed as owners have chosen to hold onto their assets and benefit from strengthening operations. Buyers, meanwhile, are becoming more cautious and re-evaluating asset prices due to uncertainty surrounding the future of interest rates.

Office investors will remain bullish on Class B/C assets in Northern New Jersey this year. Owners who bought during the height of the market are facing a few hurdles when bringing assets to market. Specifically, sellers seeking to capture prices based on pre-recession rents will be disappointed as banks underwrite deals based on current, lower market rents. A few operators will turn to private capital for recapitalization, while those who must divest will be forced to sell at a discount to avoid a potential default. Opportunistic buyers have re-entered the market to target lower- to mid-tier properties near major highways, seeking to perform significant renovations to attract tenants and boost rent rolls. Overall, cap rates averaged in the high-7 percent range through the past 12 months. The best-in-class properties in Northern New Jersey traded just above a 7.5 percent cap rate, while Class B properties were slightly higher just over 8 percent cap rate.

2013 Annual Office Forecast

• Employment: Total employment will expand with the addition of 30,000 new jobs though out the year. Office-using employment sectors will create 12,000 positions, a 2.5 percent increase. In 2012, payrolls increased 1.6 percent with the 29,700 jobs.
• Construction: Approximately 1.8 million square feet of space will be added this year, representing a 1 percent increase in inventory. In 2012, roughly 440,000 square feet came online.
• Vacancy: By year end, office vacancy will tick up 40 basis points to 20 percent; a 60-basis point increase was recorded in 2012.
• Rents: In 2013, asking rents will increase 0.4 percent to $24.59 per square foot. During the previous year, a 2.9 drop was recorded.

New York Metro Area Fourth Quarter 2013 Apartment Market Report

Deal Flow Jumps as New York Operations Remain Solid

The pace of job creation in the five boroughs has eased from one year ago, but the rental housing market remains healthy. Strong demand drivers will persist through the end of this year, while supply growth will also accelerate. With employment rising and other economic indicators providing encouragement to builders, the city is in the midst of a development cycle. Groups will continue to push projects through the approval process as 2013 winds down in advance of a change in the Mayor’s office in 2014. Notably, the city council is expected to vote on a massive re-zoning of the 73-block Midtown East area before the end of 2013. In the boroughs, development is booming in Queens, especially in Long Island City, a location that offers residents a relatively short subway ride to Midtown Manhattan employers. Roughly 8,000 units of housing are anticipated to come online in the borough over the next three years.

The investment market continues to flourish as significant gains were recorded in transaction velocity and dollar volume over the past year. A rise in long-term interest rates early in the third quarter had little effect on deals, and a more significant move in long-term interest rates will have to occur to trigger a broader and more profound re-pricing of assets. Until then, a keen bidding climate will persist. More than three-fourths of all transactions in the city over the past year took place in the $1 million to $20 million price tranche, a segment of the market dominated by private investors, including many local parties. Attractively priced acquisition debt and heightened competition among lenders will sustain a robust level of property purchases within this pool of investors in the months ahead. In the midst of a period of solid economic growth, the market remains supple, constantly shifting shape as new neighborhoods come to the fore. An extension of the 7 train to 10th Avenue next year, for example, will open up a new area of the city for developers and investors, while the ongoing development in Queens will also elevate the borough’s appeal.

2013 Annual Apartment Forecast

• Employment: Employment in the five boroughs will expand 1.8 percent in 2013 through the creation of 70,000 jobs, primarily in education and health services, and leisure and hospitality. In 2012, 78,200 positions were created in the city.
• Construction: In 2013, developers will bring online approximately 7,000 rentals in the five boroughs, an increase from more than 5,000 units last year. The building cycle will continue, as more than 15,000 units of multifamily housing are on track to receive permits this year.
• Vacancy: The vacancy rate in the New York metro will rise 10 basis points to 2.6 percent in 2013; a decrease of 10 basis points was recorded last year.
• Rents: Average rents will advance 2.5 percent in 2013 to $3,455 per month. A gain of 11.5 percent was registered during 2012.

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