The suburban New Jersey multifamily marketplace is an anomaly in today’s challenging real estate environment. Located between our nation’s sixth largest city, Philadelphia, and our largest, New York City, New Jersey’s multifamily sector is insulated from the more dramatic economic swings of its neighboring cities to the east and south. As a result, the demand for housing in the region remains robust. But beyond pure geographic location, there are several key reasons for this.

First and perhaps foremost, New Jersey has among the most severe barriers to entry of almost any state in the US. Zoning for multifamily development is very limited statewide, especially in Northern New Jersey. In recent years, multifamily-zoned land, to the extent it was developed at all, was developed as for-sale, condominium housing. Consequently, very little new rental housing has been added in recent years.

In addition, the nature of multifamily ownership is somewhat unique to New Jersey. In the early 1970s, with the advent of rent control, New Jersey quickly established itself as the state with more rent controlled municipalities than existed within the other 49 states combined. As a result, the national players tended to shy away from ownership here. What we wound up with was a cottage industry comprised of local investors–individuals and small groups alike–who set out to own apartments for the long-term and who could chart their own destiny by also playing a role in managing the assets. Today, only a very small percentage of New Jersey’s apartment housing is owned by national firms or REITs.

Previously known as “syndicators,” some of these individual investors or small groups of investors borrowed money (typically financed at 75% of the purchase price) and methodically continued to acquire multifamily properties as they came on the market. Consequently, their portfolios grew considerably, leaving a relatively small group of individuals, families and companies owning a fairly large chunk of New Jersey’s multifamily real estate. A high percentage of this group buys but does not sell their real estate, preferring instead to hold it for future generations. This further limits investment opportunities.

The apartment brokerage community here, too, has had an impact. Brokerages comprise a highly professional, competitive community that historically has really worked the product in New Jersey when it does become available.

As a result, New Jersey’s multifamily investment market has been driven purely by supply and demand. With little product on the market and the majority of it being held by a relatively small group of investors, apartments in New Jersey have always traded at a higher price and lower cap rate than comparable product in other suburban markets.

Two exceptions that come to mind were the Kushner Cos.’ acquisition of the WNY portfolio of approximately 7,300 units for $280 million in 2000 and the subsequent disposition in 2007 by Kushner of almost 20,000 units, including more than 16,700 units in New Jersey, New York and Pennsylvania for a reported amount of approximately $2 billion.

It seems unlikely that these pricing levels will be replicated anytime soon. But in the year since the latter transaction was closed, owners have continued to expect premium prices for their buildings as compared to the reflected cash flow value, unlike owners in other areas of the country where the more traditional constraints of supply and demand have tempered sales prices.

Today’s troubled economy has further tightened the market for multifamily investment in New Jersey and is impacting the rules of engagement. There finally seems to be some resistance to the high prices these properties have commanded to date, and as a result, there is now some pushback from potential investors, and the volume of transactions in New Jersey has slowed considerably. Further, lenders are simply making less debt available and only time will tell what the changes in underwriting standards will look like down the road.

For the next six to 12 months, at least, there will be fewer transactions while sellers and buyers search for equilibrium in New Jersey, where location and product quality demand a premium.

Alan R. Hammer is a partner in the Real Estate Practice Group of the law firm of WolfBlock LLP in Roseland, NJ. He can be reached at [email protected]. The views expressed in this article are the author’s own.

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