Why Landlords are Selling in Downtown Jersey City
June 21, 2018 | Dwell JC
To understand why landlords are selling in downtown Jersey City, I turned to the MLS database. I’ve always been comfortable with numbers and analyzing data. By looking at the data, you can often spot trends that help anticipate what may happen in the future. Although no one can predict the future, several months ago I observed that listings were increasing and wrote an article suggesting the recent property tax increases, which dramatically increased the cost to own and manage investment property in downtown Jersey City, were a contributing factor. Nationally, reductions to property tax deductions have also had a negative impact.
At that same time, the City has well over 37,000 units in the pipeline and more than 9,000 currently under construction. This year the development map also shows that these developments have spread beyond the downtown area to the entire City. So, in addition to the additional tax burden faced by landlords who own in downtown, landlords throughout Jersey City will also be facing increased competition from a rapidly increasing inventory of new housing.
The current trends
Compared to last year, we are continuing to see significantly more listings entering the market on a monthly basis. Beginning just after the tax revaluation data was released in January, listings increased by 40% over the previous year and each month since then, the number of new listings has been up between 55% to 90% over the previous year.
Although average list prices had a “blip” in March-April, where the average dropped below last year’s average, the past two months have seen those averages bounce back up to near record levels, averaging 10% above last year.
Despite the surge in listings, it remains a seller’s market
Wait — if supply is increasing, why is the average list price continuing to rise? With increased supply, demand should decrease and prices along with it, right? Well, when the economy is this strong and unemployment is this low, folks have good jobs and people tend to stay where they are. So, despite the surge in listings and tax increase, inventory is still at historic lows, and demand remains high.
As property taxes increase, capitalization rates decrease
With property values high and taxes increasing, I’ve been working with more landlords who are evaluating their investment properties in Jersey City. I recently reported on one of these transactions where a client sold in downtown Jersey City using a 1031 exchange for a property in Bergen Lafayette. In that case, we compared different investment opportunities using the capitalization (cap) rate. The cap rate is your net operating income divided by the current investment value, so a significant increase in taxes will reduce the return on your investment. In most cases, landlords are realizing they can get a better return by shifting their holdings to other markets, such as Bergen-Lafayette.
Are you considering your options?
If you are considering your options, please feel free to contact me with any questions about current market conditions, the value of your investment property, or your cap rates. Evaluating potential investments using cap rates and market conditions is the best way to understand your options, develop a long-term investment strategy, and shift assets into a new market when the time is right.
Again, if you have any questions, please do not hesitate to reach out to me. If you want to read more articles like this you can sign-up for Dwell JC’s monthly newsletter.