Eli Duke
View of Bedford-Stuyvesant from above. Along with Crown Heights and Bushwick, it’s where real-estate gurus see room for investment now.
The headlines coming out of the Massey-Knakal Brooklyn Real Estate Summit on September 16 concerned the bold, perhaps fanciful, proposal for a new gondola system to link North Brooklyn and Lower Manhattan, and the persistent gap between residential and commercial rents, which limits office development and what boosters call the “innovation economy.”
Bubbling below the headlines was a mix of celebration and nervousness, as a series of real estate players touted their successes and discoveries, while marveling at, and sometimes rueing, a white-hot real estate market that may already be out of control. The event drew some 700 registrants to the Brooklyn Museum.
Very few places have grown in population and income the way Brooklyn has in last 20 years, observed Paul Travis, a developer of the CityPoint complex in Downtown Brooklyn. That’s produced rocketing valuations in neighborhoods like Downtown Brooklyn and Williamsburg, panelists noted, and a feeding frenzy in the “next” neighborhoods seen as coveted by the creative class.
“All these articles that say ‘Brooklyn is over,’ don’t believe it,” observed David Maundrell of aptsandlofts.com. “It’s not over: the demand we’ve seen in the past 12 months is tremendous. It hasn’t slowed down.”
The demand is not just for apartments. Asher Abehsera of LIVWRK, who helped put together the $375 million purchase by three partners of several Jehovah’s Witnesses buildings in an area now dubbed DUMBO Heights, said “we have been approached by some of the top [Manhattan private] schools… looking to get into the Brooklyn market.”
In a city where the prevailing policy buzzword is affordable housing and where the real-estate boom is seen, at best, as a double-edged sword, the conference reflected a very different focus: how to successfully navigate Brooklyn’s increasing valuations and influx of more affluent residents.
Elusive balance
A signature observation came after Andrew Kimball, the former president of the Brooklyn Navy Yard now leading Jamestown Properties’ effort to remake Industry City in Sunset Park, talked about the potential for a live/work community.
Seth Pinsky, a former city official and now an executive at RXR Realty, responded with a caution. “In a lot of ways, it reminds me of the question I was asked when I was president of the New York City Economic Development Corporation: How do you improve a neighborhood without forcing the current residents out as it gets nicer?” Pinsky said. “The honest answer is I’m not sure anyone has ever figured out how to do that.”
Similarly, Pinsky said he wasn’t sure anyone has figured out how to maintain the live/work balance without tipping in one direction.
Maundrell identified newly coveted neighborhoods as Bushwick, Bedford-Stuyvesant, and Crown Heights, and suggested a test. If you go out to dinner and ask the waitstaff—often actors or musicians—where they live, “nine of ten” will identify those neighborhoods, Maundrell said.
Silvershore Properties has purchased more than 60 buildings in Brooklyn, including in Crown Heights and Bushwick. “We discovered some lower-cost buildings in Brooklyn,” principal David Shorenstein said, observing that there are “so many different neighborhoods that haven’t yet been established,” at least from the perspective of the real-estate investor.
His company, Shorenstein said, invests to improve buildings with amenities like granite countertops, Shaker cabinets, and quasi-spa showers: “You have to spend a lot of money to get those quality tenants.”
Those tenants are often newcomers with parental guarantors. Some 85 percent of those renting 200 apartments from his company in the last eight months showed out-of-state drivers’ licenses, he said.
The boom’s next stop
“Four years ago, we did a huge amount of lending in Williamsburg and East Williamsburg,” said David Heiden of the bridge lender W Financial Fund, describing his clients as “typically pioneer developers.”
Such clients have moved to the southern part of Bushwick, the middle of Bedford-Stuyvesant, Crown Heights, and Sunset Park, he said, “following the train lines, moving where they can still get reasonable deals.” Heiden cited a client who, less than two years ago, paid $950,000 for a building in central Bushwick containing four units and a retail store. That same client just paid $1.5 million for a similar building.
Similarly, Joshua Schuster of DHA Capital said he recently visited a property in Bushwick that he passed on a year ago. The price has since tripled.
The mixed-used area of western Crown Heights, said Brendan Aguayo of Halstead Property, offers opportunities for new development. The new rental building 500 Sterling Place, between Washington and Classon Avenues, took just two months to lease 70 percent of the units, with rents above $60 per square foot, a level similar to that in Downtown Brooklyn.
Jason Muss of Muss Development, which built the Oceana condo complex in Brighton Beach, suggested that development will follow subway stops past Prospect-Lefferts Gardens. But Jonathan Landau, CEO of Fortis Property Group, suggested there’s “still significant capacity along the waterfront,” from South Williamsburg to Greenpoint, with interested large investors.
“Until those development sites get taken down,” he said, “I don’t think you’re going to see that much large-scale focus on the perimeter area.”
Asked about his company’s plans for the Long Island College Hospital site in Cobble Hill, which is supposed to become luxury housing, Landau responded vaguely, saying they were “refining the plans, will include new residential,” likely both rental and condo, and potentially some ancillary uses.
“Is East New York going to be the next Bushwick?” came one question, a reference to the notion that development will proceed along the L train.
“Um, no,” responded Aguayo, chuckling a bit. Bushwick is just starting a cycle “where people are paying attention to large-scale development,” he said, which is not happening in East New York.
A motive beyond profit?
This was not the conference for some of the dicey discussions inspired by the boom, such as the potential for unrealistic returns (which doomed the deal for Stuyvesant Town and private equity deals around the city), the tactics some landlords use to dislodge rent-regulated tenants, or the displacement of low-income Brooklynites.
The closest thing to a reality check—more of a gentle prod—came from Karen Brooks Hopkins, president of the Brooklyn Academy of Music, who in her presentation detailed the evolution of the cultural district around BAM “that today replicates the vibe of 21st century New York City.”
“In the next three years, the district will finally—after 40 years of work—be complete,” she said, “and then we will have other problems, like gentrification and keeping the neighborhood diverse and authentic, replacing the former concerns of blight and safety.” (Many might say the gentrification challenge is already at hand.)
Hopkins encouraged developers and builders to “focus on not just what will produce the greatest financial return, but also what you believe will make your buildings great, in terms of design, and in connection to their specific communities.” She encouraged them not to follow the example of the Upper West Side, “now a massive chain store,” and to join boards of nonprofit organizations.
Panelists said relatively little about affordable housing, except for keynote interviewee Deputy Mayor Alicia Glen, who leads Mayor Bill de Blasio’s affordable housing initiative. She said the city needed to be “thoughtful” about providing “a wide variety of affordable options, and making sure to serve the “workforce of tomorrow.”
Asked how to prioritize among the city’s three main tools to spur affordable housing—tax breaks, density bonuses, and direct investment—Glen demurred, saying they were used as needed. She did stress that, when property goes through a rezoning, the city will impose a requirement for affordable housing.
“That is a game-changing notion,” Glen said, though she allowed that many details remain unresolved, including whether the housing must be on-site or off-site, and the targeted income eligibility for units.
Asked what Brooklyn is missing, Glen diplomatically responded by citing gains like the Barclays Center arena and said “Brooklyn sort of has it all,” noting “extraordinary” ethnic and economic diversity. “What Brooklyn doesn’t lack but needs more of is thoughtful growth planning that allows and celebrates that diversity,” she said, and allows longtime residents to stay and reap the benefits of improvements.
Several panelists expressed anxiety about the pending expiration and revision of the state’s 421-a tax break, which sunsets in June 2015. de Blasio’s housing plan, announced in May, noted that a task force “will consider pursuing legislative authority to expand the 421-a Geographic Exclusion Areas” where affordable housing is required in exchange for the tax break.
The administration, Glen said carefully, has been “working with a whole variety of stakeholders” and hopes to have general principles in place before the next legislative session. “For the first time, many people who have been on different sides are coming together,” she said.
Jonathan F.P. Rose, a veteran developer known for green buildings and social concerns, called de Blasio’s focus on increased density/height in exchange for affordability “good news from the macro point of view,” but wondered if the administration “will have the guts” to rezone neighborhoods that have very strong civic associations.
“I’m happy to build” an affordable building, Rose said, “but the land is worth less,” given lower returns, so it may take time before land prices are adjusted to reflect the administration’s emerging guidelines.
Pinsky said affordability pressure is “really a symptom of our success,” noting that historically middle-class households have been able to move to new neighborhoods thanks to investments in infrastructure and public safety. The issue, he suggested, was not merely the price of housing, but the ratio to people’s income. He said he hoped the de Blasio administration, which “has done a great job on the housing side,” makes an equal effort to raise incomes.
The impact of politics
Robert Knakal, co-founder of the Massey-Knakal commercial real estate brokerage, suggested that the current market reminded him of 1988, “the year in which the market hit a cyclical peak, after a bit of a valley.”
The number of properties sold is on track to set an all-time record, he said, though the average price is less than in the previous peak year of 2007, given that more properties are selling in the outer boroughs. “The Brooklyn market has become so strong that institutional capital wants to be here, foreign capital wants to be here,” he said.
Half his clients, Knakal said, believe we’re at a cyclical peak, given that property values have doubled or tripled in the past three years, though underlying fundamental values rose perhaps 15 percent. The rest of his clients, he said, believe the market “has a lot of sustainability in it.”
The future for real estate has much to do with the political climate, he suggested, including how much de Blasio pushes affordable housing and whether de Blasio achieves proposed changes in rent regulation, which require the cooperation of the state Senate, controlled by Republicans for now and a focus of real estate industry contributions.
Knakal cited the push to end luxury decontrol, which takes properties out of rent stabilization; an effort to shift MCIs (major capital improvements) from their current form as a permanent rent increase to a surcharge; and a revision of the Urstadt Law, which gives the legislature, not the city, control of rent regulation. “That could be extraordinarily impactful… on multi-family [building] value,” he said.
He also warned about federal tax reform changes, including in the mortgage interest deduction, tax treatment of carried interest, and 1031 exchanges, which allow investments to grow on a tax-deferred basis. As he’s written, Knakal also said he supports means-testing for rent-regulated housing.
