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Investment dollars poured into Brooklyn’s commercial real estate market in the first six months of the year, accounting for a quarter of the $22 billion in commercial property sales across New York City in 1H 2022, second only to Manhattan which saw 53% of the city’s dollar volume.
The dollar volume in Brooklyn totaled $5.56 billion in 1H 2022, a slight dip of 8% from the record $6.1 billion in 2H 2021 which included the $1.3 billion partial interest sale of Starrett City, but was up 213% year-over-year, according to Ariel Property Advisors Mid-Year Brooklyn Report. Transaction volume followed a similar pattern with 619 transactions in 1H 2022, roughly the same as 2H 2021, however, a 55% increase compared to 1H 2021.
Of the asset classes, more development and industrial properties were sold in Brooklyn than in any other submarket, while the borough was number two behind Manhattan in multifamily sales.
Rent and Vacancy Rates Surpass Pre-Pandemic Levels
Brooklyn’s multifamily sales totaled $2.6 billion across 437 transactions. While the total multifamily dollar volume in 1H 2022 dropped 34% compared to 2H 2021, removing the $1.3 billion partial interest sale of Starrett City gets Brooklyn multifamily the same dollar amount as the active second half of 2021. Overall pricing metrics were positive with price per square foot rising to $437 and price per unit rising to $383,488.
“With a massive influx of renters and limited supply of housing, rents in free market buildings have spiked to all-time highs, making multifamily properties particularly desirable to investors,” said Sean Kelly, Partner, Ariel Property Advisors, who has specialized in the Brooklyn market for more than 13 years. “Rental and vacancy rates have not only returned to pre-pandemic levels but have surpassed them with average rents in June jumping 20% year-over-year to $3,822.”
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Brooklyn is the fastest growing borough in New York City, increasing its population between 2010 and 2020 by 9.1%, or 250,000 residents, to 2.74 million, according to a report by NYS Controller Thomas P. DiNapoli. From 2010 to 2019, the borough saw significant job growth, adding 216,460 private sector jobs, and Brooklyn’s recovery from the Covid-19 pandemic was faster than in the rest of the city with over 100,000 lost jobs regained by the third quarter of 2021.
“Institutional buyers aggressively pursued multifamily deals in Brooklyn in the first half of the year with multifamily buildings or multifamily development sites accounting for the borough’s top nine out of 10 sales,” Kelly said. “We’re seeing that institutional capital is no longer bound by the river and bridges and has recognized that there are core-investment grade assets in Brooklyn.”
Avanath Capital Management’s purchase of 38 6th Avenue and 535 Carlton Avenue for $314.5 million was the largest sale during 1H 2022 and the fourth largest multifamily transaction recorded historically in Brooklyn. The three larger trades were two Starrett City Portfolio sales, the $1.3 billion partial interest in 2H 2021 and $904.6 million in 2018, and Atlas Capital Group’s purchase of 28 Stanwix & 123 Melrose Streets for $506 million in December 2021.
While buildings with 10 or more residential units accounted for 70% of the total dollar volume invested in multifamily properties, 80% of the transactions were for smaller buildings, which are attracting the attention of institutional investors like The Carlyle Group.
Developers Rush to Close Deals Before Expiration of 421a
Development sales totaled $773 million across 84 transactions. The average price per buildable square foot increased to $280, the highest level on record in Brooklyn and a full 10% higher than 2021’s average of $254.
Roughly 67% of the development trades occurred during the first quarter of the year as developers rushed to get their shovels in the ground before the June 15th expiration of the 421a tax abatement, which is necessary to offset high construction and operating costs (including property taxes) in New York City. The last time the 421a program expired in 2015, building permits surged before the sunset date and plummeted after.
The 421a tax abatement ended seven months after the city in November 2021 approved the Gowanus rezoning, which will allow residential development in what was primarily an industrial neighborhood roughly bounded by Bond Street to the west, Baltic Street to the north, Huntington, 3rd, 7th and 15th Streets to the south, and 4th Avenue to the east.
So far this year, Kelly has arranged the acquisition of two development sites — one, a $21.6 million joint venture for a property with a 102,035-square-foot zoning floor area at 125 Third Street, and the second, a property with a 142,500-square-foot zoning floor area at 450 Union Street, which traded for $40.65 million or $285 per BSF, a record for a site in Gowanus with a Mandatory Inclusionary Housing requirement. He also has another development site and a commercial office building under contract in Gowanus.
“The New York Department of City Planning’s Framework for the Gowanus allowed owners of development sites to create plans based on the anticipated zoning,” Kelly said. “Some owners and developers even submitted plans to the Department of Buildings prior to the final adoption of the rezoning last year, which enabled them to “commence construction” in order to be eligible for the 421a tax abatement.”
The Gowanus rezoning will enable the development of 8,500 new units of housing in the neighborhood, including 3,000 permanently affordable homes with 2,000 governed by the Mandatory Inclusionary Housing Program. All residences will be needed to help the city meet the projected need for 560,000 new units of housing in New York City by 2030.
“I believe the Gowanus Neighborhood Plan will produce the most popular and dynamic market in all of New York City,” Kelly said. “The new housing in Gowanus will create a real community in this area of Brooklyn and connect the beautiful brownstone neighborhoods surrounding it–Carroll Gardens, Cobble Hill, Boerum Hill and Park Slope. Public access to a terrific greenspace along the Gowanus Canal will be an added community benefit.
In addition to the Gowanus rezoning, Kelly said that multifamily developers are moving farther into Brooklyn along the subway lines.
“The greater the distance from Manhattan, the less expensive the land, which is making rental housing development in these areas more attractive,” Kelly said. “Renters are following and moving into neighborhoods such as Prospect Lefferts Gardens, Flatbush and Midwood in search of more affordable housing.”
Record Industrial/Warehouse Sales for Buildings Leased to Amazon
Brooklyn’s industrial/warehouse sector saw 49 transactions totaling $934 million in the first half of the year, a 66% increase in dollar volume compared to 2H 2021 and 420% jump year-over-year. This asset class benefited the most from the pandemic as demand for e-commerce skyrocketed, attracting institutional investors and owner-users.
The $332 million sale of 640 Columbia Street in Red Hook and the $228.5 million sale of 554- 578 Cozine Avenue in East New York, both of which are fully leased to Amazon, helped boost the industrial/warehouse sales. These transactions are the two largest industrial/ warehouse sales ever in Brooklyn.
For additional information about the investment sales market in Brooklyn, please refer to the research report Brooklyn 2022 Mid-Year Commercial Real Estate Trends.
Brooklyn Mid-Year Investment Property Sales 2H 2016 to 1H 2022.
Ariel Property Advisors