Writer: Esteban Pages
3 min read August 2023 — As developers in New Jersey battle higher interest rates and fluctuating demand across asset classes, strategies around redevelopment and primed assets, such as industrial, are more relevant than ever. Industry leaders gathered at the Invest: North & Central Jersey 2022-2023 launch conference to share perspectives on market opportunities while sorting out key challenges.
Moderated by Capital Analytics President & CEO Abby Melone, the opening panel “Cap stacks: How are developers navigating higher rates, higher costs and fluctuating demand in a volatile market?” featured Donald Scarinci, managing partner at Scarinci Hollenbeck, Edwin Cohen, principal partner of Prism Capital Partners and Greek Development Managing Partner David Greek. The region’s density, the attractiveness of industrial sites and the difficulties faced when financing developments or accounting for affordable housing were covered in depth throughout the panel.
“The denseness of the population in New Jersey leads to one absolute conclusion: there’s always a shortage of housing, good housing,” opened Cohen, adding that lending rates “have quadrupled over the past year and a half to two years” and construction costs have skyrocketed over the same period.
In June, Gov. Murphy’s administration signed three bills supporting housing affordability in the Garden State, including the Resilient Home Construction Pilot Program that provides funding for developers to rehabilitate existing homes and construct new affordable homes for sale.
Providing an analysis of New Jersey’s industrial space, Greek linked performance to its density advantage. “Over the last 20 years, as e-commerce has become a bigger portion of the industrial industry, the density of New Jersey’s population has driven the need for industrial space from a labor perspective because we have a great labor force here in New Jersey and it is more available here than it is anywhere else in the country,” Greek noted. “It also presents one of the biggest challenges for developing in general. We need large sites to develop, and there is not a whole lot of that left in New Jersey. A lot of what we’ve focused on is redeveloping older assets instead of finding green fields which are increasingly hard to find.”
The discussion then delved into the state of affairs on development finance and borrowing. “Cost of debt and cap rates are directly correlated. The higher the cost of debt, the higher the cap rates and thus the lower the value of real estate. When we’re talking about a market such as New Jersey, that is so dense and hard to break into from a real estate investment perspective, there is willingness from investors,” Greek added. “People are collecting a cash-on-cash yield on their investment that is lower than the amount of debt service they’re paying their bank. It is a risk they’re willing to take, but they’re betting this market will stay strong, that rent growth will continue. We are investing a greater amount of equity and lower amounts of leverage to build our projects, simply because it has become more expensive to use that leverage.”
Scarinci echoed that sentiment, highlighting the importance of public and private collaboration to move forward quickly and efficiently to solve the housing development needs of the region. “This is a very difficult time for borrowing, but like in every market cycle, there are ways to make money. Many municipalities are struggling with collecting taxes. Until recently, we’ve had a moratorium on evictions for rent nonpayment. The important point here is to educate elected and planning officials and the approval process to the fact that it is not the same market as it was during the pandemic, where rates were relatively flat for years,” said Scarinci. “The opportunity in this market is a different one, to provide that housing, keep people in New Jersey.”
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