According to recent data from the U.S. Census, 69 percent of New York City households are renters — the highest of any metro area in the country. But because New York City condos go for much higher prices than rentals — in the third quarter, the median sales price in Brooklyn was $510,000 — developers have historically preferred them to rentals, especially during the mid-2000s real estate boom.
But today’s shaky economic climate, combined with strong demand for Brooklyn rentals, has caused them to see things differently, brokers said.
For one, developers feel confident they’ll be able to lease out new buildings in a matter of months, as opposed to the years it can take to sell out a condo project.
“Condos produce a higher gross return, but it takes longer,” said Falsetta. In this market, he added, “any decent-sized rental project can expect to absorb at least 20 units per month.”
Additionally, some Brooklyn rental buildings are now commanding rents high enough to make the profit margin on them more appealing than in the past. The brokerage MNS estimated that the average one-bedroom apartment in Brooklyn rented for $2,299 in October, up from $2,073 in the same month of last year.
At 184 Kent, apartments rent for just over $50 per square foot per year, according to Halpern. In Downtown Brooklyn, the Addison at 225 Schermerhorn Street goes for $51 per square foot, brokers said, while the Brooklyner at 111 Lawrence Street in Downtown Brooklyn is commanding about $56.
“When you’re getting the $50s, then, yes, [developers] can do rentals,” said Alan Miller, a senior director and principal at Eastern Consolidated, though he noted that many developers still prefer condos.
Bigger increases ahead?
The strong rental market is also popular with another key player — banks.
“Primarily, the development today is going to be rental, because there’s going to be financing for rentals,” said David Eyzenberg, managing director and head of commercial real estate at NewOak Capital. He’s seen an increasing number of requests for financing on deals along the Fourth Avenue corridor in Brooklyn at prices around $75 per buildable square foot — “lower than it used to be, but above two years ago,” he said.
Banks are still cautious in their lending and condo developments still carry the perception of risk, he said. Still, he expects that banks will eventually green-light condos and that will lead to an even bigger increase in land prices.
“When you’re going to see a real pop in [land] value is when you’re going to see condo developments.” said Eyzenberg. “Condo guys can pay more for the land. Right now, today, everyone is still pricing out land as if it’s going to be rental.”
Still, JMH’s Halpern cautioned that prices in Brooklyn — especially in Williamsburg — may already be too high. Some developers are currently “underestimating their construction costs and overestimating what their rents will be,” he said.
Halpern said while he’d like to continue building in Williamsburg and is “a big believer” in the area, he’s already moved on to other areas. Land in Williamsburg, he said, is “overheated.”
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