CoStar Insight: Attracting Renters to Area’s New Higher-End Inventory May Prove to Be a Waiting Game
New Jersey’s Eastern Union County apartment market saw a decline in demand last year as attracting enough renters to fill new luxury properties in the area’s working-class communities is proving to be a challenge.
Net absorption, the change in occupancy over a given period time, was slightly negative in Eastern Union County, even as the addition of more than 700 new apartment units gave renters plenty of targets. Vacancies more than doubled in 2019 and nearly quadrupled in the higher-end four- and five-star segment. Apartment vacancies increased across the entire northern New Jersey market last year as the supply wave reached its peak. More than 4,000 new apartment units opened, and vacancies increased by about 100 basis points. But no area saw a sharper contrast between net supply and net absorption than Eastern Union County.
Prior to 2019, Eastern Union County had little trouble attracting demand. Net absorption averaged more than 300 apartment units annually from 2014 to 2018, and vacancies entered last year near a record low. As a result, the region caught the attention of developers and gave Eastern Union County one of the largest supply pipelines in northern New Jersey.
While Union County contains some of the wealthiest communities in the state, its eastern portion is primarily composed of densely populated, working-class neighborhoods. The largest city is Elizabeth, while apartment inventory is also concentrated in Union, Roselle, Linden, Hillside and Rahway.
It is proving to be a challenge to fill new luxury properties in these working-class communities. The more-affluent western portion of Union County added far more renters last year, while also adding less new inventory. While average rents are more expensive in Western Union County across all existing apartment stock, that was not the case for apartments completed last year. Eastern Union County apartments that opened in 2019 average about $2.70 per square foot, compared with about $2.25 per square foot for those in Western Union County.
Attracting renters to the Eastern Union County’s new inventory may simply prove to be a waiting game. Booming apartment demand in the New York core-based statistical area transformed many neighborhoods that were once completely off the radar of renters-by-choice. There’s little reason to doubt that the same could occur in Eastern Union County, with its plentiful transit options offering direct commutes to Midtown.
Vacancies compressed to a record low in the New York metropolitan area last year, and New Jersey is often the next target for renter overflow. Chronic net out-migration in the New York CBSA is a concern, but that is largely offset by the huge uptick in residents who favor renting over buying. The New York CBSA’s homeownership rate is down by about five percentage points compared with last cycle’s peak, which amounts to around 1 million extra renters.
Vacancy increases are also common across many markets when large inventory increases occur. Net absorption exceeded net supply in northern New Jersey in each of the three years before 2019, creating a demand standard that was bound to drop off at some point. But that standard also inspired the amount of construction in the pipeline.
The ongoing supply wave may prove to be problematic if demand cannot rebound; and last year was just the tip of the iceberg. More than 2,700 apartment units are under construction, and more than 1,000 units are projected to open in both 2020 and 2021. Underway apartment units represent more than 12% of the existing inventory. More than 70,000 units are under construction across the New York and northern New Jersey markets, meaning developers are also facing stiff competition from outside Eastern Union County’s boundaries.
Negative net absorption is unlikely to repeat in Eastern Union County. Whether demand can adequately support the rash of new units set to come on line, thus preventing long-term vacancy expansion, is a less certain prospect.