A financial consultant who serves clients in the Northern New Jersey/New York City area recently told the Wall Street Journal's James Freeman that his clients ”are fleeing New Jersey like it's on fire.”
The consultant specializes in high net worth individuals and family offices (tax, financial planning, and overall financial consulting offices which tend to focus on one ultra-high-net-worth family) who were increasingly interested in ways to avoid New Jersey's very real estate price and tax environment. Increasingly high-income people were drawn towards renting in order to be able to leave the moment that business necessity no longer compels them to stay in the TriState area.
Moving south generally means more house and even with that, lower property taxes. According to Freeman:
"One hedge fund manager moving his office to a southern state reports that his new home on a golf course will be more than double the size of his house in Chatham, N.J. while generating just one third of the current property tax bill."
The non-partisan Tax Foundation ranks New Jersey 50th out of 50 states in terms of business tax competitiveness, which may be why the state's GDP growth was 1/10th of a percent in 2016.
As I've written about before, the cost of occupying real estate (whether purchase price or rental fees) is limited by the economic productivity of the people who occupy that space. If the cost of the space exceeds the wealth generated by the people who live there, the situation is unsustainable. I worked on U.S. Diversified Real Estate (PPTYX), and index which ranks metro areas by the proportion of GDP which comes from high productivity residents. The following graph contrasts that approach with a cap-weighted approach which ranks metro areas on the aggregate value of the publicly tradeable real estate in that area. This means that as prices rise, the cap weighted index ranks that metro area higher. Whereas in the productivity weighted index, the way to get ranked higher is to either attract more high compensation earners or to get more of your current residents into the high pay zones.
As you see, by this measure, office space in New Jersey would be under-weighted in comparison with a cap-weighted approach (the approach which overwhelmingly dominates the publicly traded large REITS).
Here's an analysis which does the same comparison but focuses on the residential sector, rather than the office space sector.
This shows the same pattern.
The bottom line is that the standard industry REITS are betting that, in general, New Jersey business and individuals will stay put and keep bidding up the price of office buildings. A very dubious bet.
For a deeper dive on approaches to real estate investing without the pro-bubble biases of cap weighting, click here.