A Rental Market Surge In Brooklyn
The market for multifamily buildings in Brooklyn has been heating up over the last year. But the recent sale of 111 Kent Avenue in Williamsburg was stunning even in a hot market.
The buyer, American Realty Advisors, paid $55.5 million, or more than $895,000 for each of 111 Kent’s 62 apartments. The price paid per apartment is a record for such properties outside Manhattan, according to the data company, Real Capital Analytics.
“It was an eye-popping number,” said Douglas Steiner, a developer and investor and the chairman of Steiner Studios. Mr. Steiner most recently acquired a 60-unit rental in Carroll Gardens for $24.5 million, or $408,000 a unit, and is in contract to buy another rental building in the borough.
Several factors are behind the trend, including a strong rental market and low interest rates. Rents in the borough increased by 10 percent in 2010 and were estimated to increase by 7 percent last year, according to a market report by TerraCRG, a brokerage firm based in the borough, citing research by Marcus & Millichap Real Estate Investment Services. Ofer Cohen, the founder and president of TerraCRG, estimates Brooklyn rents will climb another 5 percent to 10 percent over the next 12 to 18 months.
“Just two years ago, buyers in Williamsburg faced trouble closing on their condominiums because banks saw the Brooklyn market as declining,” said David Behin, a partner and president of investment sales and capital advisory at the brokerage firm MNS. “There has since been a dramatic shift from stalled construction sites and concern that there was too much inventory, to significant demand from investors.”
In the case of 111 Kent, the original developer had intended the building to be a condominium, but after constructing the majority of the building, financing dried up and Stellar Management and its partner Largo Investments acquired the property for $24.6 million. Stellar invested $8 million to finish the building and quickly rented out the units, some for as high as $70 a square foot, said Mathew Lembo, a vice president at Stellar. Then, earlier this month, Stellar sold the investment to American Realty Advisors, which plans to hold the property for the long term.
Another factor that is attracting these investors to Brooklyn is that the bulk of the stalled condominium sites come with 15-year tax abatements as part of the 421A tax program. The tax program allows landlords to pay less real estate taxes over the life of the program. In return, developers are allowed to charge market rate for the rentals, but they can only increase those rents by a limited percentage each year, as set by the New York City Rent Guidelines Board.
Since many of the projects were originally intended as condominiums, there is also the possibility that should the market shift they could be converted back into for-sale units. In many cases, the projects already have condominium plans filed with the attorney general’s office or have condominium-level finishes and amenities.
But like any hot market the buying binge will come to an end, and there are already signs that it could be winding down. The chief factor is the diminishing supply of stalled condominium sites. “We are moving into the later innings of the distressed cycle,” said Dan Fasulo, a managing director of Real Capital Analytics. “With this game, there is only a finite amount of opportunities left, and the lack of supply is driving values through the roof.”
At the same time, land prices have begun to creep up and condominium prices are also showing signs of strengthening. If land prices and condominium sales reach a certain point, then developers may begin pursuing condominium developments rather than rental projects.Magazine · Newspaper