The Commercial and Residential Real Estate Connection

BY MICHELE LERNER

While some real estate agents handle both commercial and residential transactions, most specialize in one market segment. Even within the commercial real estate industry, many agents focus on one property area. However, there are synergies between commercial and residential real estate and trends in each market that can influence others.

“Residential and commercial real estate are connected,” said Peter Bronsnick, executive managing director and managing principal for the New Jersey market at Cushman and Wakefield. “We watch trends in residential real estate that help us track labor migration that would impact commercial development.”

Typically, commercial real estate trends trail residential real estate by 18 to 24 months, said Bronsnick.

“Residential real estate agents may have more insight into migration patterns than commercial agents,” said Bronsnick. “For example, we saw a big migration into suburban New Jersey from New York when COVID-19 started, which brought next generation talent and executives to the outer suburbs who are now figuring out what they want to do next.”

New Jersey’s residential real estate market has been robust since the pandemic began despite low inventory and a lack of new development, said Raki Desai, Realtor® with Vantage Residential Real Estate in Cherry Hill.

According to the June housing data reports from New Jersey Realtors®, residential closed sales dropped 12.9% compared to this time last year. “Homes are taking a little longer to sell since mortgage rates began to rise. That’s leveling the playing field for buyers, but inventory is still extremely low, especially in Cherry Hill, Voorhees and Camden and Gloucester counties,” said Desai.

“Development of residential areas drives retail development,” said Ken Richardson, executive director of Vantage Commercial Real Estate in Cherry Hill.

“When you see a new 55+ community under development, investors will look at purchasing a nearby shopping center and switching it to medical tenants who can serve the residents of that new community,” said Richardson.

Inflation and rising mortgage interest rates are impacting all parts of the real estate market. Here’s a look at several commercial real estate sectors.

New Jersey’s strongest property sector– and the most attractive commercial real estate sector for investors has been the industrial market.

“We’ve seen unprecedented growth in rents, high demand, and low vacancy rates,” said Bronsnick.

However, supply chain issues and recession fears are impacting the industrial sector.

“The news that Amazon scrapped their plan to build a regional cargo hub at Newark Airport has pumped the brakes a bit on the industrial sector,” said Michael Schipper, senior executive director of The Blau & Berg Co. in Short Hills. “We’re also hearing that companies like Target have inventory they can’t sell so they won’t be ordering more.”

Schipper thinks the U.S. is already in a recession and the oversupply issue will exacerbate the cooling off in the industrial sector.

“More tenants will push back on rent increases, especially in the secondary and tertiary markets,” said Schipper. “However, we have tremendously low vacancy rates in warehouses in New Jersey and a densely populated, affluent region, so investors are still extremely interested in the industrial sector here.”

There’s a backlog of clients who want to purchase industrial properties, said Richardson. Ninety percent of Vantage’s commercial business is within a 30-mile radius of Cherry Hill.

“We sold three industrial sites in the past 18 months, but we could have sold 30,” said Richardson. “There’s more supply of industrial space in Northern New Jersey, but it’s still limited in our area.”

There’s a shift in focus from larger warehouses to smaller distribution sites that provide “last mile” services and address demand for same day delivery, said Bronsnick. Meaning more warehouses are needed close to residential areas.

“The New Jersey industrial market is cooling a little, but that only means it’s shifting from white hot to hot,” said Bronsnick.

The office market is struggling because many employees still prefer to work at home.

“Employers need to find innovative ways to improve the culture and environment in their space so the office becomes a place where employees want to be,” said Bronsnick. “The suburban office market is a little more active than urban locations because of labor migration to the suburbs. The challenge for urban locations is that people are still hesitant to use public transit.”

Office vacancy rates are up to 9.3% in southern New Jersey, said Richardson.

“Investors are staying away from the office sector until companies figure out how to get workers back into the office,” said Richardson. “There’s a disconnect because workers want to be at home 100% and companies want them in the office, so some are compromising on two days a week.”

Working from home has had a big impact on the residential market, increasing demand for larger apartments and homes with room for more than one office, said Desai.

“We’re likely to see more vacant commercial real estate properties converted to residential use,” said Desai.

Despite the competition from e-commerce, retail in walkable areas or near dense residential neighborhoods is doing well, said Schipper.

“Shopping areas with a strong anchor tenant and service-oriented shops such as nail and hair salons and dry cleaners have low vacancy rates and good values,” said Schipper.

Bronsnick said retail markets in downtown areas in markets such as Ridgewood, Summit, Chatham and Red Bank are thriving.

“Mom-and-pop retail is strong and we’re also seeing some larger shopping center sites converted into use for dental offices and even event spaces,” said Richardson. “Since COVID-19 we’re seeing more demand for event spaces for 75 people or less. The business model for some of these places is just a space with tables and chairs. The event planners need to bring in everything else.”

Shopping malls are a different story. Bronsnick anticipates seeing more malls repositioned as owners try to monetize their real estate and convert malls for multi-family or hospitality use.

“Regional malls are suffering throughout New Jersey because of competition from e-commerce, so owners are looking to create experiential retail as a reason to shop,” said Bronsnick. “Some of them are turning over some space for medical outpatient use to create some synergy for people to come in for a doctor visit, have lunch at a restaurant and shop.”

The lack of inventory for homebuyers, high prices and rising mortgage rates combined to increase demand–which was already high–for rentals, said Chris Cervelli, a broker and Realtor® with Cervelli Real Estate and Property Management in North Bergen.

“The problem is that we still lack enough quality rental properties in Northern New Jersey,” said Cervelli. “And now with interest rates up, there’s a disconnect between buyers and sellers of multifamily properties. Sellers still think they’ll see multiple offers and higher prices, but buyers are pulling back a little.”

Sales of multi-family buildings have slowed because of higher rates, but Cervelli is optimistic once mortgage rates stabilize in the 4% to 5% range, the velocity of the market will ramp up again.

“The demographics are strong for multi-family purchases because we have baby boomers selling their buildings to pass their money on to their heirs and 25 to 40-year-olds who are raising capital to buy them,” said Cervelli. “There’s also elevated demand for rentals because of the lack of homes to buy.”

In southern New Jersey, the investor market for duplexes and triplexes continues to be strong, said Desai. “We have a lot of buyers who will live in one unit and rent out the rest as well as some who buy a building and rent out all the units,” said Desai.

Taxes are a big issue for landlords, along with increased operational costs, said Cervelli. In Jersey City, for example, property taxes will rise 26% in the third quarter of 2022, according to Cervelli.

“Rent growth is likely to continue but it won’t necessarily cover higher taxes and insurance, rising interest rates, higher utility costs and wage increases for staff,” said Cervelli.

Rising interest rates and supply chain issues are also increasing development costs.

“We’re seeing a narrower group of institutional investors and high-networth individuals in multifamily development because of these higher costs,” said Bronsnick.

A good broker or agent should be tied into their market and keep up with all the local development news, said Richardson.

“You need to be networking every day so you know what’s going on in your market,” said Richardson. “Agents should be looking at things with a vision for the possibilities, including converting commercial space for other uses.”

When inventory of homes is low, Desai recommends staying connected with builders and thinking outside the box for opportunities.

“People may not appreciate the correlation between the realms of residential and commercial real estate,” said Bronsnick. “Both sides need to know about demographics, communities, migration patterns and development.”

While both sides of the real estate market may be buffeted by inflation and higher mortgage interest rates, Bronsnick is bullish on the future of New Jersey real estate.

“There’s plenty of money out there to invest in real estate, but people are waiting for a correction,” said Bronsnick. “Investors see a correction as an opportunity to buy property. 2023 is anticipated to be a difficult year for business, but I expect it to plateau rather than for prices to drop. After that, real estate will continue to flourish because it’s a hard asset that people can rely on to build and preserve wealth. Real estate lends itself to a stability that can’t be replicated in the stock market.”