For more than a century, Brooklyn has attracted residents with its low rents, larger living spaces, and easy access to both midtown and downtown Manhattan. The borough has provided housing for New York’s middle class, making it the most populous in New York City. In the last 10 years, however, the area has built upon its working class roots and evolved into one of the most sought-after locations in the Northeast.
While rents still lag slightly behind Manhattan, many of Brooklyn’s neighborhoods are becoming destinations in their own right and are recognized for their vibrant food, culture, and trendsetting arts scene.
As a result, institutional investors are aggressively pursuing the opportunity to purchase and construct rental apartment buildings throughout the borough, particularly in transit-oriented locations.
This new demand has helped fuel a large increase in transaction and dollar volume in multifamily investment sales throughout Brooklyn. In 2012, there were 323 multifamily transactions totaling $1.4 billion, nearly a 50 percent increase compared to 2011.
The opening of the Barclays Center indoor arena has transformed the borough, stimulating the local economy and providing both a major sports team and entertainment venue to compete with Manhattan’s offerings. The Barclays Center, along with the emerging affluence of Northern and Eastern Brooklyn, has made the borough a more affordable option to Manhattan, and an attractive one.
Population growth throughout New York City has also driven the economy in Brooklyn. Overall, New York City’s population grew by 161,564 from April 2010 to July 2012, a 2 percent increase, according to data released by the U.S. Census Bureau. As of 2012, Brooklyn’s population had grown to approximately 2.5 million, representing a 2.4 percent annual growth rate. If it continues at that pace, the borough’s population will pass the 3 million mark in the next decade. Meanwhile, Manhattan’s growth rate lags behind Brooklyn’s at 2.1 percent, representative of the strong demand to live in the borough.
Pressure from the increase in population has driven rents up across the city, particularly in Brooklyn. The median rent in Brooklyn increased to $2,590 in February, according to this month’s Elliman Report. While still a bargain to Manhattan’s median of $3,200 per month, the annual percentage increase for Brooklyn’s median rent was 7.2 percent as compared to 3.5 percent in Manhattan.
Additionally, findings from real estate agency Nancy Packes show that in 2006 the average monthly rent for a one-bedroom apartment in Brooklyn was $1,924, which increased to $2,511 in 2012, a 31 percent increase.
Northern Brooklyn, in particular Williamsburg, has led the charge in rent increases in the borough. The submarket is arguably the most popular submarket in New York City. As a result, institutional interest in multifamily assets in Williamsburg is at an all-time high. Analysts predict that prices will continue to climb, forcing renters to consider moving. However, instead of moving outside of the borough, residents are moving to neighborhoods further in.
An influx of residents has rushed to Greenpoint, the northernmost neighborhood in Brooklyn as it is adjacent to the highly popular Williamsburg market. However, transit access has been the deciding factor in the redevelopment of some Brooklyn neighborhoods. As a result, areas such as Bushwick, Gowanus, and Bedford-Stuyvesant, located further in Brooklyn, are also developing along key transit lines that connect it directly with both downtown and midtown Manhattan.
Brooklyn projects in the pipeline are typically much larger than those in neighboring Manhattan. The size difference is due to the 2004 rezoning of downtown Brooklyn, which allowed developers to build residential towers on a bigger scale than in Manhattan. Therefore, more than 70 percent of New York City’s new rental developments are being completed in Brooklyn or Queens, while in late 2000 nearly 70 percent of new developments were located in Manhattan. Part of the increase in development is driven by the preferable tax treatment that Brooklyn and the outer boroughs receive. One of the most important development incentives throughout New York City has been the 421a tax abatement offered through the city’s Department of Housing Preservation and Development. While in Manhattan the declining abatement only lasts for 10 years, in Brooklyn this abatement can last for as long as 25 years depending on the type of certificate received. This enhanced abatement has fortified development in the borough, as there is a significant economic incentive for investors to develop in Brooklyn as opposed to Manhattan. The preferential treatment has resulted in 91 development projects and more than 11,000 units in planning or under construction in Brooklyn.
A substantial amount of these units are mega-projects located in downtown Brooklyn, which makes up 30 percent of the development in the borough. Additionally, Williamsburg, the second most active neighborhood, accounts for 25 percent of the units under construction in Brooklyn. There are four rental projects containing over 500 units each, including Avalon Bay’s 861-unit building in downtown Brooklyn, The Hub; Douglas Steiner’s 720-unit development in downtown Brooklyn; the 700-unit Lightstone Group development in Gowanus; and Douglaston’s 510-unit development in Williamsburg.
Despite the current development market, supply has not yet responded to the new demand in Brooklyn. In 2012, there were 3,353 new residential units filed with the city for residential buildings, a 100 percent increase for the same period in 2011. However, this is a fraction of the 2008 peak of 12,744 units. This will contribute to the growing lack of supply of residential product, as most consider a full recovery to be around 4,000 to 5,000 new units filed with the city per year.
The supply constraints generated during the recession will drive Brooklyn’s future as a multifamily leader and worthy competitor to Manhattan.