At 88 Willoughby Street in Downtown Brooklyn, for example, the real estate investment trust AvalonBay Communities is developing an 861-rental-unit apartment tower. A few blocks away on Schermerhorn Street, developer Douglas Steiner is building a 720-unit rental. Meanwhile, Jeffrey Levine’s Douglaston Development, the company behind the Edge condominium, is planning a 40-story, 510-unit rental tower at 1 North 4th Place in Williamsburg, the third Northside Piers building.
Sources say the pipeline for new Brooklyn developments is far fuller than it’s been in recent years, due to the revival of stalled projects and the increasing willingness of lenders to finance projects in the outer boroughs.
The construction of these mega rental projects in Brooklyn offers a clear contrast to Manhattan, where high-end condos make better financial sense for developers faced with ballooning land prices. In Brooklyn, where land is cheaper and lending for condos is still tight, the economics of rentals are more attractive right now, industry experts said.
In Brooklyn, “you buy land for 65 percent less than you could in Manhattan, but the rent [you’re collecting] is not 65 percent less,” explained Andrew Barrocas, CEO of residential and investment sales brokerage MNS. “It might be just 15 or 20 percent less.”
In the recent past, about 70 percent of the city’s new rental development occurred in Manhattan, according to a report by the real estate marketing and consulting firm Nancy Packes Inc. But for projects slated to hit the market in 2013 and 2014, it’s a different story. Indeed, 70 percent of the city’s new rental developments launching this year and next is actually slated for Brooklyn and Queens — with a strong emphasis on Brooklyn.
This month, using data from real estate website StreetEasy, building permit applications from the city’s Department of Buildings, news reports and our own research, The Real Deal culled together a compendium of new residential projects with 20 or more units in prime Brooklyn neighborhoods. According to our analysis, there are approximately 100 of these buildings — with at least 14,000 units — slated to hit the market in 2013 or later (see accompanying chart).
The flood of new inventory will be concentrated predominantly in Downtown Brooklyn, where, in addition to the projects by Steiner and AvalonBay, the Stahl Organization is building a 378-unit condo-and-rental tower at 388 Bridge Street, and the Dermot Company is developing 326 rental apartments at 66 Rockwell Place.
Williamsburg, of course, also remains a prime location for new development, with at least 3,000 units slated to come online in the next several years. The Chetrit Group, the Manhattan-based developer, is planning a 234-unit residential building at 500 Metropolitan Avenue in that neighborhood. And after securing a $50 million construction loan last year, the investment and development company LCOR is now erecting a 232-unit rental building at 250 North 10th Street.
The Brooklyn projects in the pipeline tend to be substantially bigger than what’s being built in Manhattan. That’s partly due to the sweeping 2004 rezoning of Downtown Brooklyn, which allowed developers to build residential towers on a scale impossible in Manhattan, where few viable development sites remain, and the ones that do exist have largely been largely picked over.
In wake of the rezoning, developers gobbled up prime sites in the neighborhood quickly and, in many cases, cobbled together lots that can accommodate hundreds of residential units. To assemble its Willoughby Street site, for example, AvalonBay, which is headed by CEO Tim Naughton, paid United American $125.5 million for 11 properties in a series of sales between 2008 and 2012.
“Bigger projects are happening more and more [in Brooklyn] because of the [lower] price of dirt [compared to Manhattan] and the scale of what you can build there,” said Ken Copeland, a partner at development firm FLAnk, which is building a 200,000-square-foot residential building at 71 Smith Street in partnership with private equity firm the Carlyle Group. “Also, the city seems to be a little bit more pro-growth [in Brooklyn], allowing for [zoning] variances.”
While the flood of inventory in Brooklyn may please frustrated renters by slowing the steady uptick in rental rates, it will do little to satisfy the increasing appetite for Brooklyn condo product.
“I could sell out a 30-unit building overnight at record prices if I had a building to do it with,” said David Maundrell, founder of Brooklyn-based brokerage aptsandlofts.com.
Betting on rental
Market-rate rents in Brooklyn have been on the rise for years. In 2006, the average monthly rent for a Brooklyn one-bedroom in a non-doorman building was $1,924, the Packes report found. In 2012, that figure had jumped to $2,511.
Over the past several years, that rental market strength, combined with low interest rates, has prompted Brooklyn developers to build rentals rather than condos, especially since banks are still reluctant to finance condo projects in the outer boroughs. (With the economy improving, lending standards for Manhattan condos have loosened, but banks are still somewhat wary of large projects in Brooklyn, sources said.)
“Banks are just more comfortable with rentals on the large-size scale,” said Barrocas. “With construction loans over $100 million, it does become a lot more challenging to have the numbers make sense on a condo basis [in Brooklyn], especially when it comes to putting in the amount of equity that is required in today’s market.”
Meanwhile, some developers of Brooklyn projects that were originally intended as condos switched to rentals after the recession, many with an eye toward selling their leased-up buildings to REITs or institutional investors, which have been snapping up rental projects in the borough. These big-time players have been scouring the market to purchase completed rental buildings in the city, viewing them as a safe haven for capital, experts said. And they see Brooklyn rentals as likely to appreciate over time.
In 2011, for example, the Dallas-based investment management firm Invesco paid $57.5 million for a 95-unit leased-up rental building called Arias Park Slope at 150 Fourth Avenue, said Ofer Cohen, founder and president of Brooklyn commercial brokerage TerraCRG. Then in March 2012, Invesco bought a 74-unit rental at 75 Clinton Street in Brooklyn Heights for $50.8 million. (Invesco bought the building after it went from condo to rental and was leased up.) And in May 2012, American Realty Advisors bought a 62-unit rental project at 111 Kent Avenue in Williamsburg from developer Laurence Gluck of Stellar Management for $55.5 million, or $895,000 per apartment — a record for a multi-family building in Brooklyn. Gluck had purchased the stalled condo project from Garrison Investment Group for $24.6 million in 2011 and put the finishing touches on the building, launching it as a rental.
Given the appetite for these types of properties, it’s not surprising that trading volume for multi-family properties was heavy in Brooklyn in 2012.
Indeed, there were 323 multi-family transactions for the year, totaling $1.4 billion, according to investment sales firm Ariel Property Advisors. Compared to 2011, that’s a jump of nearly 50 percent in both dollar and transaction volume.
Multi-family properties in prime neighborhoods such as Williamsburg and Park Slope saw prices reaching $1,000 per square foot — around the same prices condo buyers pay in those areas, according to Ariel’s data. Deals for Brooklyn development sites also nearly doubled year-over-year in 2012, with 109 transactions totaling $523 million.
For developers, the fact that these transactions are yielding roughly the same profit as selling individual condos is an added incentive to build rentals.
“If you can sell the rented buildings for the same price or close to the same price for which you would sell the condos, and you can exit your investment much quicker, why would you even bother [with a condo]?” Cohen said, noting that renting a 100-unit building in Brooklyn takes around three months, but selling out a building of the same size usually takes more than a year.
Maundrell said Brooklyn condo prices would need to increase significantly for this trend to stop. “Until the end-user starts paying a lot more, developers are going to continue to build rentals,” he said.
And of course, some developers simply prefer to build rentals. For example, longtime Brooklyn developer Two Trees has “an internal philosophy to build as many rentals as we possibly can,” said Jed Walentas, a company principal.
“We like to own our real estate long-term,” he added. “Wherever we can afford to do rentals, that’s what we’re going to do. That’s our strategy in general and it’s not related to the market.”
Major national and Manhattan-centric developers have ramped up their involvement in Brooklyn in the last year.
Sources attribute that to high Manhattan land prices and the greater availability of large parcels in Brooklyn.
“Larger developers don’t want to do 30,000-square-foot buildings,” Maundrell said. “They want to start at 100,000 square feet.”
Manhattan developers FLAnk and the Brodsky Organization, as well as national players like the Lightstone Group, are gearing up to launch their first Brooklyn projects in the next two years, joining established Brooklyn players like Douglaston Development, the Hudson Companies, Two Trees and Forest City Ratner.
FLAnk — the developer behind Manhattan projects like the Abington condo in the West Village — is still determining whether to do condos or rentals at its newly acquired Smith Street site, Copeland told TRD. The company had been considering entering the Brooklyn market for more than five years before partnering with Carlyle, he said.
“We’ve naturally become more aware of Brooklyn,” he said. “It has emerged as a cultural touchstone. Kids are moving straight to Brooklyn as opposed to Manhattan.”
Brodsky is currently constructing an ultra-luxury condo on Manhattan’s Upper East Side at 135 East 79th Street. But entering the Brooklyn market offered a way to return to its core business: rentals.
“Our primary business has been rental housing for decades,” said Dean Amro, a principal at the company and the grandson of company founder Nathan Brodsky. “We felt that in the last 10 years, it has been getting harder and harder to find what we viewed as good rental sites” in Manhattan.
Brodsky plans to break ground on a 440-unit rental project at 336 Flatbush Avenue Extension in Downtown Brooklyn in the first quarter of 2014, and is currently scouting out other opportunities in the borough.
Meanwhile, Manhattan-based developer the Naftali Group closed on a 90,000-square-foot development site at 316 Bergen Street in Boerum Hill last May, and is slated to build an 85-unit rental there in partnership with real estate investment management firm AEW Capital Management. And Lightstone, which has been ramping up its presence in New York over the last year, is awaiting approval to bring 700 residential units to a site at 363-379 Bond Street near the Gowanus Canal (see related Q&A, “Gowanus gets ready”).
Despite increased competition, industry experts said local players may still have an edge in the Brooklyn market.
“The players that are currently in the market understand it better than anyone else and they have a huge advantage,” Barrocas said. “You have a good core of developers who have grown and been very successful in Brooklyn.”
Two Trees, for instance, spent 10 years assembling one of the three sites it’s currently developing in Brooklyn: the 17-story mixed-use project on Dock Street in Dumbo, which will include a 300-seat school. The company is also planning a 100-unit residential development at 30 Washington Street in Dumbo, as well as a 300-unit rental near Fort Greene’s Brooklyn Academy of Music (see related story, “The next Lincoln Center?”).
Two Trees is developing the 11-acre former Domino Sugar Factory site in Williamsburg, where it has recently floated a plan to build 630,000 square feet of office space plus residential units and open space.
Longer term, also, Forest City Ratner has more than 6,400 residential units coming down the pike at Atlantic Yards over the next two decades, with its pre-fabricated B2 project on Dean Street being the first tower to rise, with 363 rental apartments.
With few condos in the Brooklyn construction pipeline, would-be homebuyers are growing increasingly frustrated by the inventory shortage.
“We’ve opened five condo buildings in the last five months or so,” Maundrell said. “Each building has had no less than 250 people attend the opening night. Every building has sold out. For the most part, they were sold out within 24 hours of opening.”
Even all-cash buyers are making offers above the full asking prices in order to secure units, Maundrell said.
“People are very frustrated because you have viable buyers — 25 percent down-payment buyers — who can’t find a deal,” he said.
While the end use for a lot of in-the-pipeline projects has yet to be determined, there are a few known condos in the works. Many of those projects tend to be small — usually less than 20 units — so they didn’t make TRD’s list. The lower-unit count is likely due to the lack of financing available for larger for-sale projects.
At 72 Poplar Street, for instance, the Daten Group is converting a former police station in Brooklyn Heights into 13 condo units, ranging in size from 1,500 to 4,000 square feet. And at the former home of newspaper the Brooklyn Daily Eagle at 30 Henry Street, Fortis Property Group is developing a condo building with five large full-floor units asking $3.39 million to $4.95 million.
More developers are also likely to consider building condos again as land prices start to climb in Brooklyn and lenders become more comfortable with the idea of for-sale product outside Manhattan, experts said.
“There’s a finite amount of land, and people want to hold on to it while land values and pricing in Brooklyn catches up to where it could eventually be,” said Barrocas.
Some are dipping their toes in the water by building hybrid towers — which include both condos and rentals and were popular in Manhattan in 2010 and 2011. Hybrids, Barrocas said, “give developers the flexibility with the bank to make it make sense.”
Stahl’s project at 388 Bridge Street, for example, will have 234 rental units and 144 condos.
Amro said he would consider building a Brooklyn condo as the market continues to evolve. In hindsight, he said, one Williamsburg conversion opportunity he passed up in 2009 now seems attractive.
“As a rental, the price of the building was such that it wouldn’t have led to a good return,” he said. “To make the numbers work, we would really have had to do a condo. This was in 2009, when the world was looking a little more bleak than it is today. If that same building were available today at that same price, I probably would buy it and do a condo.”