The Real Deal New York

Bronx real estate remains warm,
even as NYC market cools

While developers and lenders have grown more conservative and some are pulling back in the borough, lower costs are still buoying investment interest

April 01, 2017
By Gabrielle Paluch

From left: Michael Weiser, Adam Mermelstein and Jonathan Adelsberg

The South Bronx — a cluster of neighborhoods including Mott Haven, Melrose and Woodstock — distinguished itself last year as one of the only parts of New York City where rents grew, according to a study released by the rental listings website Zumper. The borough’s erstwhile reputation for poverty and urban decay is old news. Investment in the Bronx has indeed picked up rapidly in the last few years. And commercial and retail projects like the redevelopment of the General Post Office into an open-air food market are transforming the borough’s southern tip, which has also seen numerous new affordable housing and luxury residential buildings. Starchitects have even started showing up: Bjarke Ingels is designing the new stationhouse for the NYPD’s 40th Precinct. These rapid changes have been cause for concern for some who have watched the tide of gentrification — and displacement — wash over other boroughs. “Most of the inventory coming up is ground-up construction, so nobody is being displaced, yet. But I don’t know how long that’s going to last,” said longtime resident and residential and commercial broker Jason Shand Edwards. That’s especially after the New York Times named the South Bronx one of the 52 hottest destinations travelers should plan to visit this year. But developers and lenders are reviewing projects more cautiously and pulling back a bit on investment amid the citywide market softening. We turn to the experts for a closer look at how real estate in the Bronx is transforming.

Michael Weiser
President, GFI Realty Services

While the Bronx has attracted a lot of investment and development in the last few years, investment dollar volume and transactions were down in 2016 year over year, according to a recent market report. How is activity compared to a year ago? We are seeing less acquisition of development sites, where activity was spiking in the recent past.

Bank loans for NYC real estate projects and acquisitions have become a lot more conservative. Is the Bronx viewed as more or less risky than Manhattan and Brooklyn in 2017? The Bronx is less risky than Manhattan and Brooklyn because underwriting is all about making sure you can weather the storm. As a rule, basis per unit and rent levels are lower in the Bronx. So absolute rent levels in the Bronx are more sustainable in a downturn than in the other boroughs.

What type of investment makes the most financial sense in the Bronx right now and why? If NYC attracts enough jobs, developing market-rate housing will make the most sense. A recent study showed that even though tech employees make more in NYC than in other locations, the cost of living here is much higher. We need to create cheaper market-rate housing, and the numbers just work better in the Bronx.

Major developers and investors such as the Related Companies and Savanna started investing in the Bronx in the last few years. Are institutional players and big-time developers still looking for opportunities? I think they’re pausing. The Bronx is still somewhat of a pioneer ground for new market-rate development, and some of the institutions and big names want to see demonstrated success before they jump in. Then again, land costs in the Bronx are still among the lowest in the boroughs, so if you believe in the city long-term, you’re going to buy if you come across the right deals.

What type of returns are investors looking for in the Bronx, and how does that compare to last year and to other boroughs? Most of the investors we advise are buying existing assets and are targeting returns in the mid-teens, doubling their equity over a seven-year period.   

While the Bronx has shaken off its “Bronx is Burning” reputation, it is still the poorest borough in NYC. What are the biggest challenges to investing there today? We need some of the stuff that was announced to actually be built and occupied. Nothing says change like seeing something in real time.

Adam Mermelstein
Managing member, Treetop Development

What impact have falling land prices had on investment opportunities in the Bronx? Land prices have dropped throughout NYC over the past year, and this includes prices in the Bronx. The decrease in pricing has resulted in a greater opportunity for developers to acquire land in the Bronx at low cost and develop multifamily rental properties to hold on to for the long term.

What’s going on with residential rents in the Bronx, and how is that influencing developers when it comes to pulling the trigger on new projects? Rental prices for high-quality new residential construction and nicely renovated apartments in the South Bronx have now broken the $30 per-square-foot mark. Low land prices coupled with higher rents afford the opportunity to develop new rental buildings. And if a new 421a agreement is reached, we expect to see many new multifamily projects.

Is there concern about an oversupply of inventory in the Bronx like there is in Manhattan and other boroughs? I don’t believe that there’s a concern about oversupply in the Bronx. Most developers going into the Bronx are catering to entry-level buyers, or renters who are looking for quality apartments in an emerging neighborhood. Quality housing in the Bronx is still extremely affordable compared to the other boroughs.

Back in late 2015, sources told TRD that they believed the rest of the city was further along in the economic cycle than the Bronx. Where is the Bronx in the cycle now? In this past economic cycle, Queens was the borough that caught up to Brooklyn and Manhattan. Although the Bronx still lags behind the other boroughs, pockets like the South Bronx are becoming destinations for new multifamily properties and residents, as well as for new restaurants, bars, nightlife and coffee shops. In addition, the Bronx’s access to public transportation is key. Even though the Bronx is still a long way away from being on par with the other boroughs, certain neighborhoods will begin to catch up in terms of pricing.

Given all of the hype around investing in the Bronx, is the market for new projects getting too crowded? Not at all. There’s a huge market for quality, accessibly priced condos and apartments in NYC. Due to the low cost of land in the Bronx, it’s virtually the only place where developers can make that happen right now.

Within the Bronx, the South Bronx has clearly been the biggest magnet for investment. Which neighborhoods have the biggest potential upside, and which are beginning to feel overvalued? I don’t believe that any Bronx neighborhoods are overvalued, especially after the downtick in land pricing over the past year.

Jonathan Adelsberg
Partner, Herrick Feinstein

What are you seeing in terms of activity levels in the Bronx? The entire market is experiencing a readjustment, so any changes in the borough have to be viewed through that lens. You have market conditions where people are pulling back, which is probably a healthy thing. A reality check needs to happen to get pricing to where it needs to be. But I don’t think a shifting market will sideline the Bronx’s revival. It will remain attractive to skilled investors.

What are the best neighborhoods for investment? I think our clients will continue to find upside in the borough, especially in areas like Mott Haven and those that are close to subways and the new Metro-North stations.

Your firm organized a “trolley tour” to take developers around the Bronx. Was it a success, and do you plan to do more? It’s hard to pinpoint whether someone did a deal based on our tour. But what people saw was that the Bronx is so alive — anything within the five boroughs is. Look at the transformation in Brooklyn and Long Island City, which is a new city unto itself. What is the next thing? All components of urban life that you need to attract people are in the Bronx: entertainment, food and vertical living. Pricing is expensive, but nothing is cheap. We’re doing another tour like that around Astoria, Queens.

What are some of the big projects and other game changers in the Bronx when it comes to spurring development? Accessibility to public transportation — subways, buses or Metro-North stations — that’s going to be attractive. The Related project at the Armory is a game changer, as is Chetrit’s project, and the new Metro-North train stations.

Jason Shand Edwards
Residential and commercial broker, Bloom Real Estate Group

What do you think has been the catalyst for change in the Bronx, and what is changing, exactly? I started doing real estate here in 2003. This little pocket of South Bronx, Port Morris, has always been gentrified, but it has taken a long time for the amenities to follow. What used to be called “Antique Row’” was all antique shops, there were no bars. But it wasn’t a dangerous area. That was 25, 30 years ago. When I moved here in 2000, it was safe. Now the secret is coming out, and the amenities are coming. You’ve always been able to get a huge apartment for a fraction of the price it would cost in Manhattan. It used to be that nobody went east of the Willis Avenue Bridge, but now there are things there.

How do you see the borough’s reputation evolving in five or 10 years? I see the South Bronx more like a Dumbo. It’s like a Dumbo meets Long Island City meets Williamsburg. I hope it stays that way — I personally don’t want to see Starbucks here. I like that it’s Filtered instead of Starbucks. But they’re building all this new construction, and with the new construction and new apartments that will be here, there will also be more amenities. How long will it be before we have an Equinox here? I don’t know, but I have a feeling that’s where we’re headed.

What kind of rental growth are you seeing on the ground? In 2000, a huge 1,100- or 1,200-square-foot apartment would go for $1,000 a month. That’s a long time ago now, but those prices have more than doubled. New-construction apartments are now in the $3,500 range — that’s certainly kind of pricey, but there are no comparables, so that’s the top end of the market.

What kinds of renters and buyers are you seeing that you weren’t seeing before? The tenants I was getting were people relocating from Brooklyn and the Lower East Side. Now I’m also seeing people from the Upper East Side. They’re all professionals looking for more space. Even though rents have gone up significantly in the last five or six years, it’s still a great deal compared to Manhattan. I’m the broker for JCAL Development Group, and we just rented two huge two-bedroom units. A $3,500 apartment in the Bronx a few years ago would have been considered outrageous, but it’s not such a surprise anymore. They have washers and dryers in the apartments, floor-to-ceiling windows. Over the last few years, landlords have started fixing up apartments, making them more luxurious: more granite and stainless-steel kitchens with dishwashers. They were always big, but the high-end aspect wasn’t there.

What’s supply like now? What are the game-changing multifamily projects? There’s a lot of new construction in the pipeline, but it’s not really a market for buyers, it’s mostly renters. There’s only one or two buildings with lofts for sale, and the townhouse market is really tight still. There’s new construction coming online soon, including 91 units in a year from JCAL. There is also the Carnegie Management Clock Tower’s 100-plus units and then there’s the food hall.

David Walsh
Northeast Division Manager, Chase Community Development Banking

Who are the most active lenders in the South Bronx? Is there more of an appetite among local and national banks? Or are you seeing an uptick among nonbank lenders charging higher rates? It really depends on whether we are talking about stabilized multifamily properties or new construction. Stabilized properties continue to attract a significant amount of attention from banks such as Chase and [government-sponsored enterprises]. While the underwriting on deals is more conservative today than a year ago, if a property has had good historical performance and the basic fundamentals make sense, an owner should be able to receive multiple permanent financing proposals. From a construction lending perspective, times have changed dramatically. Higher land values coupled with high construction costs and limited rent growth prospects have made it more challenging to pencil out a deal. Traditional construction lending institutions are pulling back, and nonbank lenders are beginning to fill the void.   

As you noted, bank loans for NYC real estate projects and acquisitions have become a lot more conservative in the past year. Is the Bronx generally viewed as more or less risky than Manhattan and Brooklyn, and why? Based on what we hear from our developer clients, the Bronx continues to attract a large swath of professionals that are being priced out of Brooklyn and Manhattan. As a result, we have seen larger-scale developers acquire sites over the past couple of years with the idea of developing mixed-income, mixed-use developments to address the population growth. While the easy answer is to say that Manhattan and Brooklyn are a safer bet in 2017, our clients are growing increasingly bullish on the Bronx.

What type of investment makes the most financial sense in the Bronx right now, and why? Is that calculus changing? And how feasible is market-rate housing? Mixed-income and mixed-use developments make the most financial sense right now. Demand significantly exceeds supply for both traditional affordable housing units as well as middle-income housing units in the entire metropolitan area, so the residential lease-up should not be a problem. From a market-rate perspective, due to increased land values and high construction costs, it will be challenging to make the numbers work on a new transaction.    

Back in late 2015, sources told TRD that they believed the rest of the city was further along in the economic cycle than the Bronx. Is that still true? The Bronx has been behind than the rest of the city over the past few years — it didn’t experience the same explosive growth that Brooklyn and parts of Queens did. That being said, the investments being made in the Bronx today are significant. The retail landscape has changed dramatically, and new restaurants are moving in. Neighborhoods are being transformed, and opportunity abounds for investors and developers with a longer-term time horizon.

Given all of the hype around investing in the Bronx, is the market for developing new projects there getting too crowded? Developers are taking a long-term view. The folks who might encounter challenges are the private equity funds that move in and out of the market with opportunistic acquisitions. Rents simply aren’t growing fast enough for funds to realize the types of returns they want.

Within the Bronx, the South Bronx has clearly been the biggest magnet for investment. Which neighborhoods have the most potential upside in the borough, and which are beginning to feel overvalued? Clearly the South Bronx has been the biggest magnet for development, because land values historically were lower than other areas of the borough. That is no longer the case — the focus on transit-oriented development has resulted in the South Bronx exploding. The northern areas of Bronx, such as Riverdale/Kingsbridge, Fordham and Wakefield have all experienced growth as well.

Ruben Diaz
Bronx borough president

While the Bronx has been attracting a lot of investment and development in the last few years, investment dollar volume and transactions were down in 2016 year over year. What is happening in terms of activity on the ground? Our early research is actually showing that investment and development have gone up. We continue to see a tremendous amount of interest in new development in every corner of the Bronx. I speak to people from all walks of life — business people, developers, community leaders, nonprofits, elected officials — and what I hear from them is that they are excited about the activity and proud that our borough is seeing positive change. But it is our responsibility to make sure that new development works for everyone.

While the Bronx has shaken off its “Bronx is Burning” reputation, it is still the poorest borough. What are the biggest challenges to investing there, and how do those challenges differ from the past and from other boroughs? The stigmas of the past do still have an effect on our borough, but we are moving in the right direction. And people are taking notice — the public is learning a new story of the Bronx, one that not only values our past and our current transformation but anticipates greater growth in the years to come.

Besides the Bronx General Post Office conversion and the Kingsbridge Armory, what other projects will be game changers for the market? The One South Bronx site in Port Morris, where we’ve joined with the Empire State Development Corporation to examine building a platform over a 13-acre area above the Harlem River Yards. We could create thousands of housing units at all income levels and new amenities to complement them. We could use this space to bring a tech incubator or medical school to our borough while also creating union jobs, new waterfront access, parkland and recreation facilities. The Metro Center is also an incredible project, especially with the forthcoming biotech center.

What are your goals for the borough’s affordable housing development? And given all of the hype around investing in the Bronx, do you think the market for developing new projects is getting too crowded? Our goal is to not only continue creating affordable housing but to find the right balance where all Bronxites, regardless of tax bracket, can afford to stay here. We want to draw new people into the borough, but we must not do that at the expense of people with roots here. We have seen how other boroughs have handled their housing issues, and we believe that we can learn from what they have done, including preventing an oversaturation of the market.

Which Bronx neighborhoods have the biggest potential? Which are attracting the most investment? Port Morris in the South Bronx has seen considerable interest from developers and businesses. Further north, Kingsbridge is beginning to attract attention, given its proximity to Manhattan, Riverdale and Westchester. But every Bronx neighborhood has potential for growth, and it is our job, as elected officials, to manage that growth and make it work for people at every income level.