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.