Two Brooklyn markets: their recovery and future

BY SEAN R. KELLY, ESQ.

Downtown Brooklyn and Williamsburg are two very different marketplaces, catering to different clientele seeking the same thing: a less expensive alternative to Manhattan, without sacrificing convenience. This was the conventional thought process and holds true for many residents today. However, more and more residents, retailers, restaurants and other businesses are choosing Brooklyn over Manhattan because of preference, not pricing. Brooklyn has its own place on the map and the recovery and resurgence of Downtown and Williamsburg are, and will continue to be, the driving factors behind the Brooklyn boom.

Currently, Williamsburg is the hottest market in New York City! Historically a neighborhood of warehouses and loft buildings, most development sites have large footprints, and the zoning off of the waterfront only permits low density. This offers developers the ability to keep construction costs down and deliver efficient buildings with loss factors below 15 percent.

While the market lagged, long-term players like L&M, AREA, LCOR, Heatherwood Communities and Silverstone Properties remained confident in the neighborhood and struck deals for sites between $100 and $125 per buildable square foot. In the past six to twelve months, land prices have nearly doubled, reaching $200 to $250 per buildable square foot. Williamsburg accounts for seven of the eight largest land sales transactions in Brooklyn in 2012. Two Trees purchased the Domino Sugar Factory site for $185 million, while Chinese developer Xinyuan Development purchased 418 Kent Avenue for $54.2 million. A partnership between Michael Cayre, Alex Adjmi and Bobby Cayre closed on 242 Bedford Avenue, the future site of Whole Foods, and Richard Kalikow’s Manchester Real Estate took back 44 South 8th Street.

This surge can be attributed to the lack of inventory, record pricing for condos and rentals, and simply the demand to live in Brooklyn’s version of SoHo. The rental market is over $60 per square foot and condos have surpassed $1,000 per square foot. Most surprisingly, smaller buildings are achieving rents and sale prices similar to full service buildings such as 111 Kent and the Edge. Aside from just being cool, Williamsburg offers a less expensive alternative to Manhattan, with the added ease of being in Union Square in 15 minutes via the L train.

I expect continued growth in the retail market as tenants like American Apparel continue to take space on side streets as a less expensive alternative to Berry Street and Bedford Avenue. With significant growth and even more demand for office space from the tech, fashion and design, architecture and design, and professional service sectors, expect to see a ground up office building be constructed in the near future. Last but not least, look for over 500 hotel rooms to come on line in the next three years.

While transactional volume and dollar volume in the Downtown Brooklyn market lagged behind Williamsburg, Brooklyn’s Central Business District has seen six major deals in the last six months alone. In November, The Carlyle Group purchased a 315,000 square foot mixed-use development site located on Smith Street, while The Lam Group acquired 231 Duffield Street, a 128-room hotel, for $31 million or $240,000 per key. Originally slated as a boutique, the building is now flagged as an Indigo by InterContinental Hotels Group. Lodgeworks purchased 125 Flatbush Avenue Extension for $165 per buildable square foot; down the street, The Chetrit Group is building a mixed-use condo and hotel. LaLazerian, builders and owners of Brooklyn Gold, purchased the Oro 2 site on the corner of Gold and Johnson Streets for $19 million. At the end of 2012, my Development & Conversion Sales team at CPEX Real Estate completed a ground lease transaction for a proposed 116,000 square foot hotel located in heart of the BAM Cultural District.

Full service rental buildings such as Forrest City’s DKLB, EQR’s Brooklyner, Northend Equities’ The Addison, and Avalon Fort Greene are fully leased with rent costs in the mid-fifties. The Oro, a delayed condo project, recently closed on it last unit with prices reaching $900 per square foot. In the next two years, Avalon Bay, Stahl Real Estate, The Dermot Company and the Oro 2 will add 1,600 units. Following shortly behind, Steiner Studios’ “The Hub” will add another 720 units.

Acadia Realty’s City Point project is a game changer, with the addition of tenants such as Armani Exchange, Century 21 and Alamo Drafthouse Cinema. While retail around the Barclays Center is still struggling, we are still in the infancy stage. Expect vacancies along Flatbush Avenue to fill in over the next twelve months.

With more than 8,000 condo and rental units already in the pipeline for the next ten years, national retailers will continue to expand along the Fulton Mall and will eventually make their way to Willoughby and Livingston Streets, less expensive alternatives to the Mall. Ten years ago, my colleague, CPEX Managing Partner Brian Leary, called Livingston Street “the Sleeping Giant.” In 2010, we could not find a buyer for the Hub site, which was previously in contract for $75 million. In 2011, the site sold for $30 million and is perhaps one of the best acquisitions during the downturn; in terms of buildable FAR, the property traded for approximately $50 per square foot. The awakening will take time, but over the next five to ten years, the “giant” will arise.

In short, Downtown Brooklyn is rapidly becoming a 24/7 housing and retail destination City Planning envisioned with the rezoning.

Now that the market has stabilized and development projects have been revived, I expect steady long-term growth in Downtown Brooklyn as it continues to develop as a central business district.  Williamsburg will see slower growth in the long term, due strictly to the neighborhood’s limited large scale development opportunities, but the “Burg” will never lose its edgy luster or hipness.