Brooklyn Booms as Record Rents Drive Construction
Since Douglas Steiner transformed the Brooklyn Navy Yard into Hollywood-style studios in 2004, productions from “American Gangster” to “Boardwalk Empire” have been filmed there. The New Jersey native says he’d have been better off if he’d focused instead on buying and building properties in New York’s most populous borough.
Steiner, 51, plans to break ground on his latest residential project in 2013, 720 units in downtown Brooklyn, to benefit from rents that have risen 9 percent in the past year. He already bought a 44-unit rental property in the Williamsburg neighborhood this year for $38 million, and has two other buildings in the area he plans to renovate.
“Everybody said we were crazy to be developing in Brooklyn, that nobody would ever come,” said Steiner. “From a financial point of view, I probably would have been better off buying up all of Williamsburg instead of building the studios.”
Invesco Ltd. (IVZ), Sam Zell’s Equity Residential and American Realty Advisors are acquiring their own Brooklyn apartment buildings amid record demand for rentals in New York City as would-be homebuyers struggle to get mortgages from banks with stricter credit standards. That’s encouraging American International Group Inc. (AIG), New York Life Insurance Co. and other lenders to provide new construction financing again after loans dried up following the September 2008 failure of Lehman Brothers Holdings Inc.
The New York Department of Buildings has issued initial construction permits for 256 new buildings in the borough this year through Sept. 12, the highest number since 2008.
“One of the key drivers of the rental market, whether Brooklyn or nationally, has been tight credit,” said Jonathan Miller, president of appraiser Miller Samuel Inc. in New York. “Residential mortgage lending is one of the only forms of credit that has not seen measurable easing since the financial crisis began.”
Real estate investment trusts that own apartments, including the largest, Chicago-based Equity Residential, have returned more than 260 percent since March 2009. The Bloomberg Apartment REIT index gained 6.2 percent this year, including reinvested dividends, as investors speculate the pace of rental growth will slow as more Americans benefit from record low mortgage costs to purchase homes.
So far, there are few signs that increases are slowing in Brooklyn. The average monthly rent for a two-bedroom apartment in the area, home to about 2.5 million people, was $3,083 in August, up from from $2,824 a year earlier, according to brokerage MNS. That's the same 9 percent increase seen in Manhattan for non-doorman buildings. In Manhattan, the average is $4,366 a month.
“The rents that we are getting in Brooklyn have continued to go up,” David Behin, president of investment sales at MNS, said in a telephone interview. “It’s no longer a little sister to Manhattan where you can get a lot more for a lot less.”
The apartment developments being built now are a far cry from the warship and aircraft carrier construction that took place on the Brooklyn waterfront about four and a half decades earlier. Steiner Equities Group started developing the Navy Yard site in 1999, when buildings were still being used by the New York Fire Department for smoke drills and packs of wild dogs were running around the yard, Steiner said.
The production complex offers studio space, parking and sound stages for movies and shows such as the Prohibition-era HBO drama “Boardwalk Empire,” which started its third season this month. Other businesses at the yard include photography and art studios, as well as construction and food service companies.
The city rezoned the Brooklyn waterfront in 2005, creating opportunities for residential development in almost 200 blocks of the Williamsburg and Greenpoint neighborhoods. Cheap credit in the years following helped spark a construction boom, with more than 880 initial permits issued for new buildings in 2008, according to the Department of Buildings. That was curtailed by 76 percent in 2009, after Lehman’s bankruptcy.
Jeffrey Levine, chairman of Douglaston Development, experienced anxiety with his Williamsburg Edge condo venture, which was backed by a $440 million construction loan from Eurohypo AG. After the building was completed in 2008, sales come to a halt when debt markets globally froze and financial services firms cut about 432,000 jobs in the following three years, according to data compiled by Bloomberg.
“When you are a developer and you sign personal guarantees on construction loans you are always nervous,” said Levine.
After the economy emerged from the worst recession since the 1930’s, sales resumed in late 2010. At the Edge they accelerated to $44 million in the second quarter this year, according to MNS, the brokerage firm that handles its sales. All except for seven of the original 565 units have sold in the property, which features Frolic!, a children’s “rock ’n’ roll” play space, and a wine shop.
“New York City has come back with a vengeance after looking very bleak in the post-Lehman environment,” said Levine.
Brooklyn’s resurgence also includes the Nets professional basketball team, which spent the past 35 years playing in New Jersey. They’ll compete at the Barclays Center, where the new arena, part of a $4.9 billion, 22-acre project, opens for sports next month.
Jay-Z, the multimillionaire rapper who’s an investor in the franchise, will perform at the stadium this week. Bruce Ratner, chairman and chief executive officer of Forest City Ratner Cos., which is developing the Atlantic Yards project, has said it plans to break ground on an apartment building as early as this year.
Less than 3 miles away in Williamsburg, skyscrapers covered in glass dot the waterfront on Kent Avenue and steel frames are permeating surrounding streets, the center of new development. In Brooklyn, total construction permits, which include renovation and demolition projects, grew by 10 percent this year through Sept. 12 compared with a year earlier, Department of Buildings data show.
The three largest new condominium developments in the borough, in Brooklyn Heights and Williamsburg and which all started selling units before 2008, sold $82 million worth of property in the second quarter. Median sales prices rose 16 percent to $621,000 compared with a year earlier, according to MNS.
Even as condo sales increase, lenders and builders are choosing to develop rental projects amid concern about mortgage availability.
“It’s certainly easier to get financing for a rental today than a condo building,” said Levine. “If you have the misfortune of coming out when buyers aren’t there, it’s hard to hold on to condo units.”
His Douglaston Development broke ground on a 510-unit rental project in Williamsburg last month after obtaining a $185 million loan from Northwestern Mutual Life Insurance Co. and New York Life Insurance to build on the waterfront overlooking the East River across from Manhattan. Insurer AIG is providing some of the equity, he said.
L&M Development Partners, whose chief executive officer and chairman is Ron Moelis, last month bought a 40,000 square-foot warehouse in Williamsburg to develop into a $20 million rental project. It’s in the process of securing financing to convert the building, which has hosted concerts, into apartments, said Lisa Gomez, vice president of development for L&M.
This follows an American Realty acquisition of a 62-unit luxury Williamsburg building in May and Invesco Real Estate purchases including a nine-story condo conversion in Brooklyn Heights in January, and the 12-story Arias Park Slope building in December. Zell’s Equity Residential (EQR) bought a 113 unit luxury rental building in January. In another rental project the company is a partner in developing the tallest residential building in the borough, the Brooklyner.
“With rental, if you do it right you can ride out any downturn and the demand is virtually infinite,” Steiner said. “Williamsburg, Greenpoint, Dumbo, Boerum Hill and Fort Greene - - we see them all just continuing to evolve and improve over the next 5 to 10 years.”
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