Brooklyn, the most populous of New York City’s five boroughs, has a storied sports history. Brooklyn’s most famous team, the Brooklyn Dodgers, included Jackie Robinson, who, in 1947, became the first black player in Major League Baseball. Today, however, there’s a different game being played in Brooklyn—the jockeying, fielding, blocking, and tackling of multi-family real estate.
Driving fundamentals in the Brooklyn apartment market is unemployment. Steep job losses dominated the fourth quarter of 2008, and since then, a still-elevated but milder pace of job cuts has underpinned swings in rents and vacancies. In 2009, a total of 103,800 positions will be eliminated in New York City, a 2.8 percent decline. Last year, 27,200 workers were let go in Brooklyn. As job losses continue to weaken renter demand, vacancies in large, market-rate buildings are forecast to climb 60 basis points to 2.4 percent this year, after the rate improved 140 basis points in 2008.
Despite the ups and downs in operations, Brooklyn has a solid future ahead of it. There are several industries represented in the borough, including education and health services as well as government sectors, which are showing early signs of a rebound in hiring. What’s more, thanks to steady housing demand, a vibrant art and nightlife scene, and its proximity to Manhattan, Brooklyn is poised to hold apartment values in the long run.
Slip and Slide
As unemployment rises and apartment demand softens, owners are cutting rents. In the past 12 months, asking rents at large, market-rate properties have receded 0.8 percent to $1,414 per month. For the year, asking rents are projected to retreat 2.8 percent to $1,400 per month, following a 3 percent gain in 2008.
Unfortunately, leasing difficulties and operational decisions are still being influenced by how much rents appreciated during the recent redevelopment boom. In the Bath Beach, Bensonhurst, and Bay Ridge submarkets, for instance, renewal efforts were limited, and rents grew in tandem with demand, rather than with the completion of new, higher-priced units.
As a result, while there are leasing challenges present in those areas, the declines in fundamentals are modest. Conversely, owners in the Prospect Heights, Park Slope, Clinton Hill, and Fort Greene neighborhoods are reducing rents by as much as 15 percent year-over-year to combat potential vacancy spikes from new or over-priced apartment product coming online.
Breaking No Ground
On the development side, construction output will be limited this year and beyond. Multifamily permit issuance has fallen by 90 percent year-over-year, which does not bode well for future supply growth. During the past 12 months, the number of permits requested has fallen to 1,418 units, as developers expect decreased household creation and softer residential demand. The drop-off also is attributable to a high level of permit issuance a year ago, prior to the expiration of the 421a tax abatement program, which had previously provided property tax discounts without developers having to include a minimum number of affordable housing units.
There were no deliveries of large, market-rate apartment buildings in Brooklyn during the 12-month period ending in the third quarter of 2009. In the prior year, one 32-unit complex was added to the borough’s inventory. No completions are scheduled for the remainder of this year, while two-thirds of the units currently under way are expected to come online in 2010.
Currently, developers have three projects consisting of approximately 1,500 market-rate units under construction. More than 500 of those units are under construction at unnamed development sites. Both the 142-unit building at 34 Berry St. in northern Williamsburg and the 365-unit complex at 80 Dekalb Ave. in Fort Greene are slated to be completed in the second quarter of next year. Meanwhile, in the pipeline are three major projects totaling 580 units, though falling rents and a lack of construction capital may make it difficult for these developments to progress.
Overall, apartment deal flow has also been slow, although the deceleration is easing. During the past year, sales activity dropped 30 percent, compared with a nearly 50 percent decrease during the previous 12 months due to limited financing and buyer hesitancy. In the past year, the median price for apartments has ticked up slightly to $114,290 per unit after declining 19 percent in the preceding 12-month period.
Local Flair: Marcus & Millichap is selling 428 7th Ave., a six-unit apartment community with ground-floor retail space, for approximately $500 a square foot.
Credit: Marcus & Millichap
For most of 2009, cap rates averaged in the low- to mid-6 percent range. Now, initial yields are climbing and will likely near 7 percent by year’s end. Unfortunately, many sellers have yet to come to terms with the current market conditions and lower property values. Buyers are more likely to find realistically-priced apartment properties in areas where renewal efforts were fleeting and price escalation was brief, such as in the Crown Heights and eastern Bedford-Stuyvesant neighborhoods.
Although it is unlikely that both velocity and prices have reached the bottom, signs of stability are surfacing in the borough. Among properties with fewer than six units, more stringent lending standards have cut out less sophisticated buyers and owners/operators. As a result, deal flow for those sized assets has steadied over the past 12 months, as experienced local investors with sufficient cash and established relationships with lenders have become more active.
Conversely, sales of properties with six or more units continue to decline in response to credit availability, though values are stable, with the median price hovering near $108,000 per unit over the past 24 months. Investors should note, however, that more than 70 percent of properties on the market in this segment are listed at higher per-unit prices. This persistently wide bid/ask gap likely means that a recovery of the Brooklyn investment market is still a few quarters away.
Condo Cool Down
On the for-sale side of the multifamily business, lackluster sales trends persist for Brooklyn condos. Year-over-year, sales velocity has plummeted more than 46 percent, while sellers have increased the average listing discount from 3.4 percent of the asking price to 7 percent of the asking price. Over the past year, sizable price cuts (at newer developments, in particular) have generated a borough-wide 7.7 percent decline in the median condo price to $475,280 per unit.
Plans have been revived for the mixed-use City Point development on the site of the former Albee Square Mall in downtown Brooklyn. Construction on the first phase may begin as soon as early 2010, and the project could add up to 260 market-rate and 120 affordable units to the borough. The Edge, located in Williamsburg, is the largest condo development under way in Brooklyn, with completion slated for the fourth quarter of this year. Once-robust purchasing activity at the project has moderated, however, and dozens of units remain available. In all, approximately 1,540 condo units will be added to borough stock in 2009, with as many as 360 units coming online in the first half of next year. Given plummeting sales activity and the expanding for-sale inventory, the threat of shadow rental stock will likely persist as potential competition for renters.
Economic headwinds will challenge apartment operations over the short term in Brooklyn. Asking rents will be the clearest sign of job market woes, as owners will need to offer discounts into 2010 to keep and attract tenants. Vacancies, however, will remain near current levels as still-out-of-reach for-sale prices and proximity to Manhattan will maintain occupancy stability.
Meanwhile, investors active in the Brooklyn market will continue to look at apartment assets with below-market-rate rents. Ultimately, the currently affordable rents will provide revenue stability in the near term but offer above-average rent growth potential when the economy rebounds.