While the first half of 2008 saw many would-be home buyers opt to rent apartments instead, the trend slowed down as the year progressed and the pace of layoffs rose. More than three-quarters of the positions lost last year occurred in the fourth quarter, he points out. "As renters became more cautious about their employment prospects, shared living arrangements emerged as the preferred option, especially for distressed tenants and recent college graduates living in the most desirable locations," he states. "As the employment sectors responsible for driving the Northern New Jersey's luxury rental housing--financial services and pharmaceuticals--have shed workforce, landlords are reporting a slowdown in leasing activity and resistance to rent increases." Concessions, he adds, have become more common and lease-up at new developments has slowed.

All of this has impacted multifamily vacancy and rental rates. After hitting a low of 2.4% in 2006, the vacancy crept up to 3.1% in 2007, and negative absorption numbers pushed it even higher last year. And while the annual vacancy rate for seven of the past 10 years has been below the area's average for the past decade, 3.9%, Cruz expects the vacancy to continue to tick upward this year as employers shed more jobs.

The good news is that landlords have been able to push rents up in each of the past 10 years. Though rents grew at a slower pace last year than in 2007, when the annual growth rate was 4.8%, they were still positive. A look at past years shows the variety of the region's rental rate expansion--the highest annual increase of 8.5% in 2000 was 720 basis points more than the low of 1.3% that was recorded for 2005. Back then, landlords aggressively sought out tenants to fill the 9,000 units that were delivered to the market between 2001 and 2004.

Cruz observes that for the first time since then, landlords on the Hudson waterfront--long considered one of the "safest" markets in the state--are offering concessions. "The suburban submarkets proved to be initially buffered from the effects of Wall Street's troubles, due to less of a direct reliance on Manhattan commuters," he explains. "However, the effects of the slowdown are expected to permeate their way inland as the fallout impacts back office and support services staff."

The economic meltdown has also kept investors away from the market--some 75% of the $596 million in apartment building sales last year in Northern New Jersey closed between January and July. "Many of the 14 multifamily transactions we tracked that were higher than $10 million can be attributed to a spillover of deals cut in late 2007, when the financing spigot was not nearly as constricted as it was toward the end of 2008." He adds that sales volume, with the exception of the Kushner portfolio sale, was down 32% over the past year.

A tighter financing climate will most likely bring investment volume back to the levels the market saw before 2005 in most of the region's major markets. But unlike many other markets along the coast, points out Cruz, Northern New Jersey will see few distressed sales since it didn't have a rampant condominium overbuilding or conversions. "In fact, only three major fractured condominium opportunities have been offered, and all of them were in the vicinity of the Hudson Waterfront and eastern Bergen County," Cruz notes. "The majority of for-sale developers with partially sold projects are choosing to wait it out for buyers and resort to rentals."

To balance out declining sales prices, owners are revamping larger units into several one-bedroom residences. What's more, developers that already have projects rising are still moving ahead with construction, but they are also switching to rentals.

With CMBS gone, expect the sales deals that will be closed this year to involve more traditional lending sources, and even the government-sponsored entities, Fannie Mae and Freddie Mac, are being tighter with their underwriting standards. Investors interested in buying assets in this market will have fewer options to choose from. "However, the high book values of the properties that are offered are creating a psychological hurdle for sellers, which is inhibiting their acceptance of market-bearing pricing," Cruz says.

Indeed, cap rates for institutional-grade assets have hovered around low to mid-5% range for some time. As long as rents rose and occupancies remained high, investors could accept such low numbers. "The average cap rate for the past year inched up 10 basis points to 5.5%," relates Cruz. "With a lack of data points and a wide bid-ask spread, it is hard to determine where cap rates will reset in 2009. Our collective mindset is of low 7% cap rates, while buyers are seeking a return 50 to 75 basis points higher, depending on the submarket and asset condition."

As for developers it isn't the best time to hit the market. There are only five communities with more than 100 units under way in Northern New Jersey, aggregating 1,552 units. There will be even fewer groundbreakings for new assets, says Cruz, "as all but the longest-tenured developers will find construction financing elusive." So far, some 3,000 to 4,000 units were added to the Northern New Jersey apartment market year, marking a 3.5% growth in inventory.

Also worthy to note, adds Cruz, is the forecasted break in the construction pipeline between 2009 and 2012. "It is during this timeframe that economists are predicting a stabilization of the economy--in 2010--as well as a boost to rental housing from the coming of the age of the echo boom generation--around 2011," he explains. "This should help buoy Northern New Jersey's near-term fundamentals and provide sure footing once the recovery begins, as positive absorption will be focused on existing inventory."