$elling the outer boroughs

A growing block of foreign investors are buying where they wouldn't look before

Nov.November 01, 2014 07:00 AM
The Oosten in Williamsburg, which is the American debut for China's Xin Development Group International

The Oosten in Williamsburg, which is the American debut for China’s Xin Development Group International

News about billionaires from Russia, China, Brazil and other lands dropping tens of millions on Midtown trophy homes may generate yawns these days. But the industry is waking up to the massive sums from overseas pouring into New York City real estate on the building and portfolio level.

Much of that money is finding a home in what just a few years ago was considered the far reaches of the city: Brooklyn and Queens. Foreigners invested more than $600 million in outer-borough real estate through the first half of the year, the most ever, according to data from Real Capital Analytics. Brooklyn received the vast majority of that speculation.

That figure represents a significant turnaround. New York City newcomers have been slower to back residential and commercial developments in the outer boroughs than they have been to embrace the central city. And for good reason, some industry bigwigs said.

In a recent interview with The Real Deal, Sean Ludwick, the BlackHouse Development co-founder and principal, said that on an almost daily basis he lunches with Asian investors hungry to bite off a piece of Manhattan. But when it comes to the boroughs, those investors often pass.

“It’s easy to find investors abroad for Manhattan, less so for Brooklyn, the Bronx and Queens. But those areas have great fundamentals,” Ludwick said.

Expanding on his comment, Ludwick said that Manhattan is simply a safer bet, economically and culturally, for foreigners, especially now that price differentials between Manhattan, and Brooklyn and Queens have narrowed.

“Manhattan is simply the best-quality product for foreigners,” Ludwick said. He argued that wealthy foreigners would rather spend more “to live in the nexus of the city,” and said that they are attracted to the scarcity of the Manhattan market, which keeps prices stable or growing. Moreover, Brooklyn and Queens tend to be inwardly oriented, “which is often lost on a foreigner.” And despite both boroughs’ rapid growth, those basic facts are not likely to change, he contended.

“Williamsburg now has some of the best restaurants in the city, but that is lost on someone who is looking at Google Maps from Shanghai, or Luxembourg,” Ludwick said.

Not everyone in the industry agrees, however. With that in mind, TRD took a look at where the foreign money is flowing in Brooklyn and Queens, and what challenges those rapidly changing boroughs still face in the global marketplace.

Appeal grows in Brooklyn

These days, average rents in Brooklyn are basically at Manhattan levels, and there seems to be no ceiling in sight for Brooklyn home prices. Moreover, so-called creative firms have smiled on the borough, moving their laid-back offices to super-trendy neighborhoods like Dumbo, Williamsburg and Greenpoint.

The world’s hipsters wear Nets T-shirts, dine at Williamsburg-themed restaurants, and even smoke Brooklyn-brand cigarettes, at least in Western Europe. No question, Brooklyn is an international brand with clout, and some foreign property investors have taken notice.

Most notably, the Shanghai-based, government-backed Greenland Group bought a 70 percent stake in the residential portion of Forest City Ratner’s Atlantic Yards project — now rebranded Pacific Park Brooklyn — for $200 million in December.

Perhaps a sign of just how established the borough has become in the minds of some world investors, Greenland passed up Manhattan, making the buy its first New York City venture. However, it certainly won’t be the firm’s last, with the recent announcement that it plans to pump as much as $8 billion into new projects overseas this year — largely projects in the U.S.

“These days, I don’t really have a problem attracting foreign investors to Brooklyn,” maintained Adam Hess, a partner and senior vice president in charge of TerraCRG’s Multifamily Investment Sales Division. He recently sold a six-unit building at 401 12th Street in Park Slope to a private Japanese investor for $4 million.

“Foreign investors are coming to us unprompted,” he added.

To the north, the formerly bohemian enclave of Williamsburg has gone the way of Paris’ Sixth Arrondissement, and has become the epicenter of outer-borough investment for foreign interests.

The lure of the much-touted neighborhood seems almost irresistible for some wealthy Australian, Canadian, Chinese, European, and South American second- or third-homebuyers, brokers said.

Warner Lewis, a Halstead broker, said that just a few years ago, it was significantly harder to attract affluent foreigners to Brooklyn.

“I moved to the Edge [a waterfront condo tower in Williamsburg] in 2011,” Lewis said. “About six months later, I remember that an Italian investor came over with his broker and he said, ‘I looked up Williamsburg. It’s in Virginia. What am I doing here?’”

But, Lewis continued, “Just 12 months after my encounter with the Italian, I never heard anyone question what Williamsburg was again.”

Still, to some true outsiders, the pitch to invest — including buying a pied-a-terre — outside the TV-show Manhattan of “Friends” and “Sex and the City” is a hard sell.

“A lot of the deals that we have seen in Brooklyn from foreign investors are from those who already have a cousin, friend, son or daughter living there,” Lewis said. “They tell their families how great it is, and that becomes their entrée into the market.”

Another disadvantage the borough faces is its housing stock, which largely consists of single-family rowhouses and rentals. In general, investors prefer to live in condo buildings, because of the luxury amenities and the ease with which they can be rented out or resold, brokers said.

But that is a problem that developers, including sophisticated international firms, are tackling.

Among the spate of condo projects underway, the Oosten, for example, a Chinese-backed 216-unit residential development at 429 Kent Avenue, between South Eighth and South Ninth Streets, is scheduled to open in 2016. The project is Xin Development Group International’s American debut — at least for ground-up development. The firm and its partners invested some $250 million into the complex, which will feature a mix of apartments and townhouses.

“These days Williamsburg is looking like as safe of a place to store your money as Manhattan is,” Lewis said. “Plus, room for growth means good upside potential.”

Yet even they admit that, “if it is 2,000 square feet in the West Village, versus 2,000 square feet in Williamsburg, or an equivalent product, people are going to choose the West Village.”

Queens: the new Brooklyn

Even more so than in Brooklyn, Queens, with its vast immigrant communities, attracts foreign investors through overseas networks of family and friends, often crowd-funding their buys.

“It’s very likely that the vast majority of foreign buyers who are coming to Queens already have family there,” said Stephen Kliegerman, president of Halstead Property Development Marketing. He added, “Queens has a different international buyer than Brooklyn.”

Still, the recent explosion of development in Long Island City — some 500 condo units and 10,000 rental units are in the pipeline — promises to place the borough more prominently on the world map.

In fact, last year TRD reported that an Australian buyer paid $3.1 million in cash for a penthouse at The View in Long Island City. At the time, it was the most ever paid for a condo in Queens.

Experts say that they expect to see many more similar deals with internationals in that area, because of its improving housing stock and proximity to Manhattan.

In the third quarter of the year, the average price of a luxury home in Queens leapt more than 18 percent from last year, to $1.11 million, according to a report from Douglas Elliman.

However, with prices at record levels in Manhattan and Brooklyn, many in the industry are speculating that the borough will soon see more foreign interest.

“Flushing particularly is starting to become very notable,” Kliegerman said. “I think we are about to see a lot more development in that area targeting foreign [investors].”

Although there aren’t precise numbers, brokers working in the area report selling roughly half of all homes in Flushing to Chinese immigrants reflecting a shift away from a largely rental culture since the ethnic makeup of the neighborhood began to change in the late 1980s.

But for now, Queens still features a largely working-class culture and a lack of the luxury housing popular with multinational buyers.

“Queens neighborhoods are still less notable, and buyers just aren’t as familiar with the area as they are with Manhattan and Brooklyn,” Kliegerman said.

What Queens does have going for it is affordability, with average home prices at roughly half those of Manhattan.

However, soaring land prices may soon hamper new development from foreign interests, according to Ludwick.

“The other day someone quoted me $300 a square foot for a piece of land in Long Island City,” Ludwick said. “But you can go over and buy land in Manhattan for $500 a square foot. Why wouldn’t you spend a little more and build in Manhattan?”

Manhattan is still king

At least for now, Manhattan remains the hub of international commercial and residential investment, of course.

Overseas investors of all nationalities invested some $5.5 billion into Manhattan office towers in 2013, according to a report from Colliers International. And although fair-housing laws make it difficult to say exactly how much money foreign investors have dropped on residential properties in the city this year, the number falls easily into the tens of billions, sources said.

Of late, Chinese developers in particular have embraced Manhattan, with high-profile projects in the works, like 610 Lexington Avenue, a 61-story condo being developed by China Vanke, China’s largest residential developer, in partnership with Aby Rosen’s RFR Holding.

And last year, the Chinese invested billions into Manhattan commercial real estate, with Fosun International’s notable $725 million purchase of 1 Chase Manhattan Plaza as well as the purchase by Zhang Xin, a Chinese real estate mogul who is head of Beijing-based developer Soho China, of a roughly $700 million stake in the GM Building.

Nevertheless, even Ludwick agrees that luxury developments in prime outer borough neighborhoods are (or are becoming) basically as safe of a bet as anywhere in the city.

“If you are looking at waterfront neighborhoods in Brooklyn, Queens or Hoboken, those areas are effectively Manhattan,” Ludwick said. “It might just take finding a more sophisticated buyer or developer to sell them.”

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