From the December issue: Home sales in Brooklyn have reached a pre-recession high. The number of residential sales in Kings County shot up 31 percent in the third quarter of this year from 12 months earlier — the borough’s strongest quarter since 2008, according to the Corcoran Group. Condominiums are selling at a faster pace than in Manhattan: Units stay on the market an average of 84 days in Brooklyn compared to 101 days on the island, according to Douglas Elliman. Builders filed for 2,839 residential units in Brooklyn during the third quarter of this year — twice as many as in Manhattan. Meanwhile, Brooklyn’s population grew twice as much as its neighbor across the East River between 2010 and 2016, adding 124,000 residents, city figures show. “Brooklyn is just a different real estate animal,” said Ideal Properties Group founder Aleksandra Scepanovic. “It’s not an appendage of Manhattan.” However, although the borough is outdoing its neighbor in sales and population growth, it’s not all wine and roses. The latest Elliman report shows that when concessions were taken into account, rents in Brooklyn fell for five straight months between April and September. And amid an overall slowdown in the investment sales market, the dollar volume of multifamily sales dropped nearly 40 percent between the third quarters of 2015 and 2017. To get a better idea of what’s going on, we spoke to three pros who have their fingers on the pulse of Brooklyn’s residential and multifamily markets.
Andrew Barrocas
Andrew Barrocas
Founder and CEO, MNS
Why has the rental market weakened over the last year or so? There’s a lot of people who have caught onto Brooklyn — you have existing owners who upgraded their units, you have new buyers that mostly operated in Manhattan who came out to Brooklyn for value-add type of product and you have new construction. In June 2015, everyone was racing to get a shovel in the ground on the new development side to take advantage of the 421a [before the tax abatement expired]. So now, two years later, you have a lot of inventory coming to market.
Didn’t developers who were racing for that deadline know there would be a glut of new housing coming online all at the same time? The discount in pricing is insignificant compared to [missing out on the tax break]. Taxes make up, let’s say 25 to 30 percent of your operating budget, so a 5 to 10 percent drop in rent is insignificant compared to the tax savings.
What’s been most successful in attracting renters at the projects you’re working on? [Douglaston Development’s] LEVEL at 2 North 6th Street has a super-impressive amenities package. There’s an indoor/outdoor pool that overlooks the city, so it’s definitely getting a lot of attention.
Are you changing your approach given the market conditions? Absolutely. At the end of the day, a lot of the stuff that we work on is about certain absorptions. When we’re working on a 554-unit rental, we’re projecting to rent 40 apartments a month. We adjust incentives and pricing. We adjust how we pay and how quickly we pay the co-broker community. We adjust everything on the fly to get to that 40 deals a month. We also have some owners who want to achieve certain rents, so we have a different strategy there, too.
Aleksandra Scepanovic
Aleksandra Scepanovic
Founder and Managing Director, Ideal Properties Group
In the third quarter, plans for 525 condo units were approved in Brooklyn — nearly twice as many as in Manhattan. Why is there such a difference between the two boroughs? There is an unwavering sense of value when it comes to ownership in Brooklyn. There’s a higher sense of safety, cleaner streets, a less pronounced homeless problem. Brooklyn is a brand synonymous with progressive design [with a stronger sense of community]. Obviously, the pricing is a little more palatable and the monetary difference between a rent check and a mortgage payment in Brooklyn is closer than in Manhattan.
Residential sales, except in the high-end luxury segment, are strong in Brooklyn compared to Manhattan. Do you expect to see things slow down in the next few years? We may see a leveling off in sales pricing in prime Brooklyn submarkets, but not a nosedive. When you look back, the Brooklyn market didn’t dive like Manhattan’s did during the recession. It recovered at a slower pace through 2010, leveled off, then started to take off in a frenzy. Brooklyn was really discovered by those small “mom-and-pop” buyers who gobbled up townhouses and created these beautiful rentals, so Brooklyn seemed better insulated than Manhattan.
What price points are clients most interested in? For clients, the $500,000 to $1 million range is traditionally the most attractive, especially when it comes to brownstones. Demand has risen, so that bracket has moved towards $1 million. The bracket below that is continuing to shrink, although what’s interesting is you’ll find an occasional co-op in that bracket. Also, we’re seeing the price point above $2 million expand and generate more interest.
What kind of product are you seeing the most demand for? Because the market has been constrained for so long, there’s a massive demand for townhouses and a limited supply. If 10,000 townhouses came on the market tomorrow, you’d probably have 10,000 people try to buy them. As always, a well-staged townhouse or a condo in a new development [is] in high demand. There’s also demand for established co-ops.
What should developers build in anticipation of the market conditions a few years from now? We’re talking about a lot of shareable space, amenities and luxury products, and multiple bedrooms where a few friends share in the cost. Even now, we’re always more likely to rent a two-bedroom in the heat of rental season in a week, while a one-bedroom isn’t going as fast.
Aaron Jungries
Aaron Jungries
Founder and President, Rosewood Realty Group
The volume of investment sales in Brooklyn dropped 8 percent between the second half 2016 to the first half 2017. What do you attribute that to? It’s harder for landlords to make money with all these tenant organizations out there, [rates on deals] have climbed, though not by much. Costs, such as taxes, have gone up.
What properties are you finding clients are most interested in? For us, it’s still multifamily. It’s still strong, but not like it was two years ago — there’s definitely less interest for the reasons I mentioned. You also have all these [buildings with J-51 apartments that worry buyers]. If a J-51 apartment went to the free market, someone could say it’s still stabilized and that the paperwork wasn’t done correctly, so I know there are some people concerned with buildings that have those units.
Are returns lower, and are buyers having to borrow more to fund their purchases? Yes, and I think that’s part of it too. It’s not like financing has collapsed. Banks are still lending, but all these little things add up and have an effect on buyers.
What kind of properties can an investor find the most value in at this point? I think land is pretty cheap, in part because financing [for development] is hard to come by. I know that a lot of guys are looking out of town, although that’s not something we’re doing. In general, it’s going to take a lot of time for guys to come back and have that same confidence. You have all these guys who’ve been in the paper or been fined or even gone to jail. It’s been very tough for landlords.
In what neighborhoods are you seeing a lot of value and activity? It’s still Midwood, Kensington, Brooklyn Heights, believe it or not, and we’re still seeing activity in Flatbush. There’s much less [activity] in Crown Heights.
What are your predictions for the next few years? I’m not a doomsayer. Things have slowed down, but I don’t see deals crashing. I think next year is going to be similar to this year and that things will start to pick up in 2019 and 2020. On the flip side, the long-term market in New York is always going to be strong. If you buy something that’s worth $10 today, it might be worth $9 the next month, but in a few years, it’ll be worth double. There’s so many people coming to New York that there’s still going to be a very strong tenant demand.