Brooklyn Condo Boom Cooled by Manhattan-Like Rents
The last time Douglaston Development built something big in Brooklyn, New York, it was a 565-unit condo project across two towers in Williamsburg that debuted in 2008, when credit markets were freezing and mortgages were hard to get. Now, Douglaston is taking a different path, building a 510-unit luxury rental tower right next door.
“The velocity at which the economic cycle moves and the fear of interest rates moving up made it very prudent to do a rental,” Jeffrey Levine, chairman of Douglaston, said in an interview. “Greed is always tempered by fear.”
About 15,300 new rental units are under construction or planned in the next two years for Brooklyn, compared with just 1,700 planned condos, according to New York brokerage MNS. Developers see rentals as a safer bet in a market where rents are climbing faster than in Manhattan and neighborhoods such as Bushwick, Greenpoint and Crown Heights are gentrifying, drawing professionals seeking more space and tree-lined streets.
The median apartment rent in Brooklyn, the most populous of New York’s five boroughs and once a refuge from Manhattan’s sky-high costs, was the highest in at least five years in August, rising 4.6 percent from a year earlier to $2,850, according to appraiser Miller Samuel Inc. and broker Douglas Elliman Real Estate. In Manhattan, rents gained 1.8 percent to a median of $3,150.
The condo units being built in Brooklyn today are smaller, lower-rise properties, as developers shy from large-scale towers that could take years to build and might be finished at a time when mortgage rates are higher and they are more difficult to sell, said Michael Falsetta, a new-development specialist with appraisal firm Miller Cicero LLC.
In Manhattan, where builders are paying about $750 per square foot for land -- more than the equivalent price for a completed condo in Brooklyn -- constructing rentals is less attractive.
The pipeline of rental properties under construction in Manhattan is 5,850 units, about a third of what’s coming in Brooklyn, according to MNS. Developers such as Naftali Group, which is building “ultra-luxury” condominiums in the Chelsea neighborhood and on the Upper West Side, have more than 4,000 planned condos in the borough.
In Brooklyn, Naftali is developing rental units.
Brooklyn condos are a “more risky proposition,” compared with rentals, Andrew Barrocas, chief executive officer of MNS, said in an interview.
“You’re getting almost as much money for a fully leased rental building selling it as a whole than you are selling individual condo units in the market,” he said. “You can do the greatest condo, and all of a sudden the timing changes and you lose money. Rentals are a great play -- and it’s steady growth.”
AvalonBay Communities Inc. (AVB), the second-largest publicly traded apartment owner in the country after Equity Residential (EQR), said rent growth for its Fort Greene rental tower climbed six percent in the second quarter from a year earlier.
The Arlington, Virgina- based company has begun construction for another rental project in downtown Brooklyn after acquiring land parcels for it since 2008, according to AvalonBay spokesman Jason Reilley. The 57-story, 830-unit tower will be the tallest residential building in Brooklyn, he said.
The roots of Brooklyn’s resurgence can be traced in part to the 2005 rezoning of the waterfront, 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 city’s Department of Buildings.
While that was curtailed by 76 percent in 2009, after the bankruptcy of Lehman Brothers Holdings Inc., construction in the borough has rebounded. This includes the 2012 opening of the Barclays Center, home to the Brooklyn Nets basketball team, and this year’s MTV Video Music Awards.
Brooklyn is “probably the hottest real estate market in the country,” Bruce Ratner, chairman of Forest City Ratner Cos. and developer of the sports and entertainment arena, said in a Bloomberg Television interview in August. The firm is now building rental housing as part of its Atlantic Yards development.
Douglaston’s Levine is being more cautious after building The Edge, a two-tower condo building in Williamsburg that took years to sell after the credit crisis. He acquired the land where he is constructing 1 North 4th Place, his rental project, after Toll Brothers Inc. (TOL) didn’t exercise an option to build another condo tower there. Now Levine is designing another 575-unit, 40-story rental project near the Edge to start construction in the first quarter of 2014 and be completed in 2016.
Toll, the largest U.S. luxury homebuilder declined to exercise its option after introducing its own two-tower condo project, Northside Piers, in 2008, amid a standstill in the sales market, which forced it to lower prices.
“The days of 400-, 500-unit condominiums are behind us at the moment,” Levine said. “Not only are you subject to changes in the economy but also changes in mortgage rates, which often dictate the supply of buyers.”
The average rate on a 30-year mortgage is 4.22 percent, according to Freddie Mac. While that’s up from a near record low of 3.35 percent, it’s less than the 6.32 percent average during the past two decades.
Levine said it’s more than just the direction of mortgage rates. There’s a limit to how much the newest Brooklyn rental properties will sell for relative to Manhattan, making it riskier to develop condos in the borough, he said.
The median price of a new-development condominium in Brooklyn was $704,918 in the second quarter, about 50 percent of the median in Manhattan, according to Miller Samuel and Douglas Elliman.
Investors eager to capitalize on Brooklyn’s popularity are also buying existing buildings, which offer opportunities to collect higher rents after renovations.
Purchases of multifamily properties in the borough totaled $1.17 billion in 2012, up 23 percent from the previous year and the most since 2006, according to research firm Real Capital Analytics Inc. Sales this year are on pace to match that, with about $897 million of buildings changing hands this year.
The average deal size is $10.1 million -- 24 percent larger than in 2012, according to Ben Carlos Thypin, director of market analysis for New York-based Real Capital.
One advantage of developing rentals over selling condos is the ability to benefit from rapidly changing neighborhoods.
In 2010, Hudson Cos. completed a condo project in Bushwick called the Knick, which featured 49 loft-style apartments and 10,000 square feet of retail space on the ground floor. The condos took two years to sell, at an average price of $475 per square foot, said Alison Novak, vice president of Hudson.
During that time, Bushwick has evolved into a destination for young professionals, along with the opening of more art galleries and restaurants, with tour companies taking visitors on guided walks showing public art such as graffiti installations. The average price per square foot for a new condo in Bushwick is now $664 per square foot, according to MNS.
“When you’re building in an emerging neighborhood and you do a condo project, you’re sort of capturing your return on that project at a certain point in time,” Novak said. “With a rental project, when the costs of rental go up, it will pay off to have that long-term rental income stream as opposed to doing a condo next year, and the neighborhood changes and we say ’Too bad we didn’t do that project two years later.”
For now, the firm is only doing rental projects in Brooklyn. “We love the ongoing income,” Novak said in a panel discussion at Massey Knakal’s Brooklyn Real Estate Summit on Sept 17.
“These neighborhoods are about to change and we want to be there,” she said.
The company is planning two “highly amenitized” buildings near the southeast side of Prospect Park, including a 23-story tower that will feature a community dog-washing room, and on the top floor, a private dining room and kitchen with views of the park, and stocked with cooking tools for entertaining large parties, Novak said.
A new artisanal food market and Play Kids, a toy store cited by New York Magazine in 2012 as the “Best Toy Store” in New York, have opened on the block since Hudson agreed to acquire the site at 626 Flatbush Ave, in the Prospect Lefferts Gardens neighborhood. The eventual tower will have 254 units, 80 percent of which will be market rate.
“There are people who are comfortable living in Brooklyn and know it’s not a disaster to live one more subway stop down,” Novak said.
The proliferation of new buildings with Manhattan-style amenities has raised rents high enough that the gap between Brooklyn and Manhattan is about the narrowest it’s ever been.
Renting an apartment in North Brooklyn in the second quarter was 22 percent cheaper on average than renting in Manhattan, according to data compiled by Miller Samuel. That compares to a discount of 32 percent in the first quarter of 2008, when the firm began tracking rents in the borough. The only time the spread was narrower was the end of 2011, when it was 21 percent cheaper to rent in Brooklyn.
“The perception that you can get more for your money in Brooklyn is being challenged,” said Jonathan Miller, president of Miller Samuel.
“If you were priced out of Manhattan and looking for something affordable, it’s that much harder to find something in Brooklyn because the difference between the two markets has compressed,” he said.
Rebecca Causey, who left Manhattan eight years ago for Atlanta, assumed she’d have more options to choose from in Brooklyn with a budget of $4,000 a month.
Her two-month search, which involved three airplane trips north and sharp-elbowed competition for older walk-up properties, ended at Landmark Park Slope, a new apartment tower developed by Naftali Group.
Causey, a hot-yoga instructor, and her husband, who teaches psychology at Adelphi University, agreed to lease a two-bedroom unit of about 900 square feet (84 square meters) there for $4,363 a month, with a free month’s rent, more than their initial budget and about the same as an average similar-sized apartment on the Upper West Side, according to rental data from Citi Habitats.
“There’s a Whole Foods opening up one avenue away, there’s a farmer’s market directly behind us -- this is exactly what we wanted,” said Causey, who has an 8-year old daughter.
Naftali Group began leasing the newly constructed 104-unit Landmark Park Slope in mid-August, raising rents four times in the first three weeks as demand soared, said Miki Naftali, CEO of the developer. The building is now 60 percent leased.
The company underwrote the 104-unit project a year and a half ago, assuming rents of about $47 per square foot. At the beginning of September, leases were being signed at an average of $60 a square foot, he said. A one-bedroom unit rents for as much as $3,425 per month and a two-bedroom apartment there is available for $4,675, according to current listings.
The company is building another 84-unit rental in Boerum Hill, and acquired two other existing multifamily buildings in Brooklyn last year.
While the pace of construction may eventually slow, the demand to rent in Brooklyn shows no signs of abating as it evolves into a destination with a separate identity from Manhattan, said Aaron Appel, managing director of Meridian Capital Group LLC, an advisory firm that arranges debt and equity financing for commercial property investors.
“There’s a long list of people who want to live in Brooklyn no matter what the price is -- it took the world 50 years to realize that,” he said.
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