Commercial sales catch the Brooklyn fever

Investment sales in the hot borough rise mightily, both in numbers and in dollars
By Tom DiChristopher | October 01, 2014 07:00AM
From left: the Atlantic Yards site and 470 Vanderbilt

From left: the Atlantic Yards site and 470 Vanderbilt

The Brooklyn investment sales market is well on its way from rising star to fixed point in the firmament. In the first three quarters of the year, overall transaction and dollar volume accelerated substantially and 2014 is on pace for a record number of large deals.

“We’re projecting a little shy of $7 billion for the borough, which would shatter any record in previous years,” noted Adrian Mercado, vice president of research at commercial brokerage Massey Knakal Realty Services.

To provide a snapshot of the bull market, The Real Deal this month compiled a list of the most expensive commercial real estate sales in Brooklyn through September.

At the heart of the boom is what Massey Knakal calls the “Manhattanization of the investment sales market,” said Mercado.

“It’s institutional buyers coming in, really looking at Brooklyn as a viable alternative to Manhattan, or looking at Brooklyn on its own as a viable market,” he said.

That marks a change from just two-and-a-half years ago, said Adam Hess, senior vice president of investment sales at Brooklyn-based commercial brokerage TerraCRG.

“Institutional investors were still kind of checking it out,” Hess explained. “They were exploring it. They were excited about it, but they weren’t jumping in.”

A number of this year’s top transactions are not straightforward deals, in which one party buys a property outright. Instead, many investors are taking stakes in buildings or development sites, a trend that started in earnest last year when Jamestown Properties took a roughly 50 percent stake in Industry City in Sunset Park, said Ofer Cohen, founder and president of TerraCRG.

Perched at the top of the list is the Chinese firm Greenland Holding Group’s purchase of a 70-percent stake in Forest City Ratner’s Atlantic Yards project — recently rechristened Pacific Park Brooklyn — which CoStar and Massey Knakal data place at $383 million.

The borough’s second-biggest deal took place just across Atlantic Avenue: In February, Scott Rechler’s RXR Realty and American Landmark Properties paid $194.5 million for the long-term ground lease on the 710,746-square-foot office building at 470 Vanderbilt Avenue. The deal, RXR’s first of its kind in Brooklyn, was part of the firm’s plan to invest $1 billion in emerging submarkets, primarily in the outer boroughs.

In August, Mack Real Estate Group bought a $120 million stake in Palin Enterprise’s long-stalled 145 West Street residential development in Greenpoint. The plan is to build an 800,000-square-foot tower, with 600 apartments and retail space.

Greenpoint is also home to Brooklyn’s priciest purchase of an existing residential complex this year. HK Organization teamed with investor Jo-Ann Obergfell and real estate private equity firm Brickman to buy the Chocolate Factory lofts at 275 Park Avenue for $68 million, in a deal that closed last month.

The pace of transactions is blistering: the dollar volume of deals completed in the first half of the year nearly matched the deal volume for all of 2013, according to data provided by Massey Knakal. Sales stood at $3.4 billion at the end of June, compared with $3.8 billion for all of 2013.

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In recent years, dollar volume was inflated by large deals, like the 2012 sale of Kings Plaza Mall for $751 million. But now, the large number of deals is behind the blockbuster totals. “It’s definitely transactional volume driven, rather than large price deals driving that dollar volume through Brooklyn,” said Mercado.

In the first half of 2014, Massey Knakal counted 1,086 commercial sales in Brooklyn, up 14 percent from the same period last year.

Williamsburg led the pack in the purchase of development sites, with 31 sales through the first half of the year, according to Massey Knakal. Bedford-Stuyvesant was the borough’s second-most-active submarket for development, with 27 sites trading. Greenpoint came in third, with 21, with Crown Heights trailing just behind at 18.

The average transaction price of deals studied by TerraCRG stood at about $3 million in the first half of 2014, compared with $2.5 million last year. The vast majority of deals in Kings County fell below $3 million, said Cohen.

Yet big deals are on the rise. In 2011, there were only three transactions above $30 million, TerraCRG found. This year, the firm is projecting 25 to 30 deals will close above that level.

If there’s one problem in the market, said Hess, it’s that there is not enough product in Brooklyn to continue fueling those $30 million deals.

For now, though, times are good. Commercial sales prices for core Brooklyn properties — including multi-family, mixed-use, office and retail — saw a 14-percent increase on a price-per square-foot basis in the first six months of 2014, versus the first half of last year, according to Massey Knakal

Insiders say activity remained strong in the third quarter.

Last month, The Real Deal reported that Joel Schreiber’s Waterbridge Capital had entered contract to buy a portfolio of properties on Williamsburg’s North 3rd Street for $100 million, at a per-square-foot price of nearly $1,000. Sam Boymelgreen also put his 126-unit Windsor Terrace rental property, the Kestrel, on the market with an asking price of $90 million.

Going into the fourth quarter, Cohen expects the pace to continue. But, he said, the possibility that the city will reform the 421-a tax abatement program or institute a policy of mandatory inclusionary housing next year creates considerable uncertainty in the market.

“These are things that could potentially affect things long-term, but right now no one has enough clarity on how these things work,” said Cohen.

The direction of interest rates is another factor developers and investors are watching.

But Stephen Steiner of Stratus Capital Advisors, who marketed the Chocolate Factory loft, said even if interest rates rise, the effect will not be significant enough to derail the market’s momentum.

“There is still so much money out there. The market will continue. I don’t think there are any clouds on the horizon,” said Steiner.