Grass and trees grow from the concrete of Pier Six in Jersey City, N.J., one of the last developable sites in the heart of Newport, “the most successful mixed-use community in the world,” according to developer Jamie LeFrak. His company, The LeFrak Organization, is now looking for a commercial tenant for the pier and offers to develop a building to suit their needs—with anywhere from 350,000 to 1.5 million sq. ft. of office space.
Just a few dozen feet away, on another pier lined with yachts, LeFrak delivered the keynote address at the New Jersey Real Estate Conference, hosted by Jonathan A. Schein, practice leader of NREI on June 19 at Michael Anthony’s Restaurant. Over 200 real estate professionals from throughout New Jersey and the New York metropolitan area attended.
LeFrak’s story would repeat itself throughout the conference. The best communities, like Newport, fill with tenants and attract a flood of capital from investors. Commercial real estate development is also picking up, as investors look for higher yields and builders dust off plans shelved during the crash. However, the U.S. economy is still waiting for a real recovery and strong job growth—and LeFrak is still waiting for a tenant for Pier Six.
In the meantime, times are undeniably good for Newport and the LeFrak Organization. Despite uncertainty in the national economy, the market for real estate in New Jersey is strong—particular in the Gold Coast across from New York City. “Despite all the trouble, our submarket has remarkably outperformed,” said LeFrak. He quotes numbers from Cushman & Wakefield that put the commercial vacancy rate on the Hudson waterfront at 6.5 percent, compared to 7.1 percent for the rest of Hudson County and in the double-digits for much of the rest of the state.
There is also a new word for the strongest properties in the strongest markets, according to the panelists: “Hyper-core.” In top markets, investors will accept returns under 4 percent for class-A real estate with long leases, credit-worthy sponsors and access to mass transit. These strongest markets include downtown Boston, the “Golden Triangle” in Washington, D.C. and Midtown Manhattan. Conference panelists also gave a nod to their hosts: “I would say Jersey City is one of those markets,” said Kevin Welsh, senior vice president for CBRE, New Jersey Capital Markets.
These core properties benefit from healing capital markets. “The past six months have been better than the last four years combined,” George Jacobs, president of Jacobs Enterprises. “If you can get it, capital has never been cheaper.” However, banks often ask real estate investors to contribute significant amount of equity before they will lend. They also want information. “The level of disclosure is shocking,” Jacobs said.
High prices for the best properties are pressing investors to look for higher yields. Commercial real estate is drawing new investors frustrated by low yields in other vehicles such as, for one example, sovereign debt from the U.S. or Germany. These new investors may bid for the safest “Hyper-core” real estate properties, driving traditional real estate investors further afield. “All the core assets have traded,” said Shannon Hill, senior vice president and director of acquisitions for KBS Realty Advisors. “It’s very challenging to figure out the next deal.”
That drives prices up. “There is very aggressive pricing for desirable properties such as grocery-anchored retail,” said Jose Cruz, senior managing director of HFF, New Jersey. “There is a shortage of deals.”
With more money to invest that there are properties in core markets, investors are looking toward recovering markets like Southeast Florida and Phoenix, Ariz., where investors can achieve higher returns. “Today people are moving out on the risk spectrum,” said CBRE’s Welsh.
Developers are also now able to start projects even in brand new—or at least newly rediscovered—commercial real estate markets like downtown Newark, N.J. “There is a lot of capital chasing opportunistic scenarios,” said Ron Beit, founding partner and CEO of the RBH Group LLC, which broke ground this February on its $150 million Teachers Village project in Newark, helped along by a tall capital stack with many small funders. “It is a better market for capital … though not a great market.”
While real estate experts spoke about the market in New Jersey, in Greece the winners of this weekend’s parliamentary election formed a “government of national salvation” to attempt to keep the country in the European Monetary Union. That was just the latest in a run of worrying headlines. The U.S. could benefit for a little instability overseas, if that drives foreign real estate investors to the U.S. But serious trouble in Europe or elsewhere could be a serious drag on our economy, according to several panelists.
Others, including LeFrak, worried about the potential for new regulation, taxes or simply more gridlock out of Washington, D.C. “We have our fingers crossed that the economy holds,” said HFF’s Cruz.