Multihousing development through ground-up construction and asset repositioning has eclipsed historical levels of activity within the northern New Jersey and the greater metro New York City areas, given the strong growth in the underlying multihousing fundamentals since the recovery post-pandemic. Given limited developable land, increasing difficult hurdles toward approvals and peaking rental rates, the competition for land acquisition has never been higher, with 2022 seeing some of the highest per-unit land pricing ever.
Since the start of 2023, North Jersey has been the most competitive rental market in the U.S, outpacing the Sun Belt, according to RentCafe. The figures are based on a combination of market data — including days vacant, occupancies, preleasing numbers, construction deliveries and the percentage of leases renewed.
Jersey City, New Jersey’s most recognizable market, has had the largest rental increase year-over-year, with an over 50% increase in rental rates for one-bedrooms among its combined submarkets, totaling an average monthly rent of over $3,000, according to Zumper’s most recent national rent report.
With a less than 4% vacancy rate currently and a net absorption in 2022 that is nearly double the historical annual average, the market has been a new target for fresh capital not historically present in the region, alongside a number of historically New York City-focused builders seeking refuge from the fallout associated with the deterioration of the city’s 421 Exemption program.
Considering current market factors, however, the rise in interest rates has impacted the debt and equity markets with increased costs of borrowing or raising capital for new developments. Fund allocations have been reduced across the board and developers’ yields are being stressed by an inflated interest carry through the project’s construction timeline, and also increased capital requirements due to lower-leverage construction financing.
To combat these challenges, the trend towards cheaper construction types, introducing preferred equity atop senior notes or funding construction projects fully unlevered have produced some success satisfying yields in the current market climate.
The future development trends are just as promising.
Each of the next three years within northern New Jersey are expected to see almost 6,000 units coming to market annually, and, while the construction pipeline remains robustly active, year-over-year construction costs remain up despite a drop in pricing for select materials.
In addition to the stress of rising costs, the extended lead times for specialized equipment has developers assuming far more conservative construction periods toward certificate of occupancy. While items like metal decking, roofing, windows and curtain wall have had a modest decline in pricing, transformers, generators and switchgears are dramatically increasing in scarcity, with lead times in excess of 52 weeks or more in certain cases.
The rapid rise in home prices and the more recent surge in mortgage rates, correlated to the Federal Reserve’s fight with inflation, have also pushed would-be-buyers toward the apartment rental market, creating an opportunity for innovative builders to create urban-like spaces in suburban locations. These mixed-use developments, which emphasize placemaking and a true live/work/play experience, have become the most attractive housing type for both the residents looking for housing and developers looking to construct.
According to the Center for Transit-Oriented Development, “By 2030, nearly 25% of all U.S. households looking to rent or buy will want housing near high-density, transit-oriented developments.”
This trend further pushes large land tract owners, such as mall operators and corporate office users, towards the concept of exploring alternative uses for their assets. Suburban office has also been specifically targeted, given that over 50% of the 6.1 million square feet of office that has been demolished/converted in the past decade has been slated for apartment or townhome construction.
With the increased number of new builders and developers to the market, not all apartments are created equal, however. Since COVID-19, the demand renters have had on their living space has changed, and what will separate successful projects from unsuccessful ones will be those that can balance affordability, quality and space in units. According to Gensler’s 2023 Residential Development Overview, there are four main themes developers will need to consider:
- In-unit experience matters no more than outside amenities;
- Well-designed space is better than more space;
- Developers will continue to balance amenities spaces versus apartment affordability;
- The best residential experience will be one that prioritizes flexibility.
Ryan Robertson is a director with JLL Capital Markets.