Growing appetite for apartments [NJBIZ (NJ)]

Investors increasingly prefer multifamily properties to office buildings

THE APPETITE FOR multifamily properties is growing in New Jersey's investment sales market, brokers say drawing new investors to the state and leading some longtime players to shift more of their resources toward apartment purchases.

The demand was evident in 2011, when multifamily properties traded as frequently as office buildings, counting sales of at least $5 million, according to Real Capital Analytics, the research and consulting firm. Both asset classes recorded 23 sales of that size during the year, while in 2010, the 27 office sales were nearly double the amount of apartment trades, according to statistics compiled by the brokerage firm CB Richard Ellis.

"Typically, you would have many more office properties sell," said Jeffrey R. Diurne, vice chairman at CBRE. "It just shows you that apartments still are the ones in favor. Offices are less in favor - better than they were in '10 and ?9, but still not blowing you away."

The state's multifamily sector, which historically has been dominated by family owners, has seen greater investment from institutional sources since the late 1990s, said Brian J. Whitmer, director of dish man & Wakefìeld's Metropolitan Area Capital Markets Group. But that became even more pronounced in recent years, he said, and investment funds are increasingly shifting their real estate funds toward apartments.

"Fast forward to today, and you see money that would traditionally have been chasing more commercial, industrial and retail-type assets has shifted over to multifamily," Whitmer said. "When that happens across the board, you have a lot of money coming into the multifamily space."

The trend has been building since early 2010, when New Jersey's investment sales market saw an infusion of fresh capital, Whitmer said. The interest has come from household names, like Prudential Real Estate Investors and JP Morgan Asset Management, but also from out-of-state firms, such as Heitman LLC. In November, an affiliate of the Chicago-based real estate investment manager purchased Ravens Crest, a 700-unit housing complex in Plainsboro, from Equity Residential for $100 million.

"I would say that whole real estate investment sector is putting more toward multifamily, and allocating more of their resources and funds toward it," Whitmer said. Banks, he added, are increasingly willing to finance investment in rental properties.

The shift in strategy by old and new real estate investors in New Jersey has caused demand to swell across all sizes of rental properties, said Ken Uranowitz, managing director at Gebroe-Hammer Associates. He said demand in 2011 was "unrelenting."

The demand is being seen by Prudential Real Estate Investors, which buys and sells residential assets, said Susan Mello, principal at the firm. Prudential in 2010 sold two large complexes in the Garden State, including the $1 12.5 million sale of the Highlands at Plaza Square, in New Brunswick, to an arm of Manulife Financial Corp., the Canada-based life insurance company.

The group is "much more likely to spend dollars on a multifamily asset in New Jersey," than something like a suburban office property, she said. But she noted that the firm's acquisition strategy in recent years has focused on new construction, rather than purchases of existing apartments, because of the high demand and short supply.

"When we see opportunities to do them in very good locations in New Jersey, we like those opportunities," Mello said, referring to new multifamily construction. "And they don't come along frequently."

New Jersey's multifamily investors include second- and third-generation owners who are adding to their portfolio or upgrading, Uranowitz said. The firm is seeing interest from value-seeking New York-area real estate funds, along with "the investors who got burned in the stock market in years past who want to go to something more stable."

But the demand also is expected to drive up prices of multifamily investment properties, Uranowitz said, "because there's just not enough product to go around." He said Gebroe-Hammer has brokered about 120 apartment building sales in the past two years.

Dunne said the market for other investment properties, such as offices, has improved and will continue to do so going forward. But demand for multifamily could continue to outpace other asset classes, he said.

"You'll have a plethora of office available for sale and fewer apartment projects," Dunne said. "So apartments will remain in high demand, in part because there's not a big supply and in part because people like the safety that they bring."

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