Thursday, October 08, 2009

"Different opinions," different facts; finding more gaps in the KPMG market study of Atlantic Yards

"Different opinions," Empire State Development Corporation (ESDC) Senior Counsel Steve Matlin said on September 17, contrasting the KPMG market study commissioned by the ESDC (and just released yesterday) with a report, commissioned by the Council of Brooklyn Neighborhoods (CBN), that was far more pessimistic about the prospect of the Atlantic Yards residential towers being built in the promised ten-year timetable.

Yes, different opinions, but also different facts. Below I'll discuss some major omissions in the KPMG report, but first consider that KPMG's facts regarding the sales/pre-leasing percentages of several major buildings were wildly off the mark--and easily checkable online.

"Affordable" units above market rents

As noted in the Kahr report from CBN, 450 of the 2250 subsidized "affordable" units were to rent at $40/sf, while another 450 were to rent at $32/sf. The KPMG report ignores these numbers, so there's no attempt to assess their chances--a legitimate question, especially given that the subsidized units likely would not have the amenities present in the market-rate units.

Both of those figures are well above the minimum rent in the three surrounding neighborhoods, according to KPMG, and the $40/sf figure actually exceeds the $39 maximum rent/sf in Prospect Heights. In other words, some of the subsidized units, as we've long known, wouldn't be that affordable.

"Modest inflation factor"

Yesterday I pointed out that KPMG said that only a "modest inflation factor" could lift the average of $950/sf high value for condos (in three neighborhoods) to the $1217/sf Forest City Ratner expects in 2015.

Well, first consider that the $950/sf may not be a fair comparison, given that it's skewed by the stratospheric prices of the not-so-well-selling On Prospect Park, by Richard Meier.

Second, consider that an inflation factor of 5%--not so modest--would bring $950/sf to $1212/sf over five years. (It would actually be five years and nearly four months until that first condo building opened on 2/1/15.)

Increasing demand--but for what?

The KPMG report states:
Available market data indicates that upwards of an additional 1,500 units will be available over the next two years. In addition, despite the challenging economic environment, there are three apartment complexes totaling more than 580 units in planning. Below is a graph showing the relationship between construction, absorption, and vacancy for New York City.

The following table shows historic and projected Brooklyn Class A and B apartment data. Of particular interest is the projected absorption levels starting in 2010 and continuing through 2013. Reis is projecting that there will be sufficient demand to result in increasing rental rates, albeit modest, combined with reduced vacancy.


(Click to enlarge)

However, note that the asking rent by 2013 would be little over $1500.

Of course there's a demand for such units. The question is whether there would be less demand market-rate rental units, which would rent for $45/sf (or $2677/month for 714 sf, as FCR once projected) in 2011.

Such projected rents, KPMG allowed, were "moderately aggressive," but realistic, given average maximum rents of $43/sf in the three surrounding neighborhoods and the benefits such as proximity to transportation and nearby retail--both mentioned as boosting condo prices, as well. (I pointed out that KPMG did not discount for the presence of an arena and regular nearby construction.)

Kahr, on the other hand, used a $35.50 average, looking somewhat farther afield,including Carroll Gardens and DUMBO.

I think that KPMG made a reasonable argument that new construction near a transit hub would command higher-end prices, but, as noted, the arena and regular construction would produce a discount. So perhaps some number in between KPMG and Kahr might be more accurate.

Perhaps more importantly, and unmentioned in the KPMG report, Kahr observed that, while the citywide vacancy rate was 2.88% in 2008, for high-end units, it was 7.2%.

The Jeffries list

Kahr (but not KPMG) cites a Crain's article that quoted Assemblyman Hakeem Jeffries as concluding that 65 "residential buildings in central Brooklyn are financially troubled, on the verge of distress or struggling to sell out remaining units."

However, that article was corrected on The Local August 28, which explained that the list contained new residential market-rate buildings in Jeffries' district that are either uncompleted, or completed but partially or totally vacant, with a “significant number”--but not all of them— financially troubled, on the verge of distress, or struggling to sell the remaining units.

While Jeffries' initial conclusion was obviously overstated, the list still raises questions.

KPMG vs. Kahr

KPMG concludes:
Given the information provided in this report, it is probable that when the Subject Property’s units are schedule to come online it will be the ideal time for apartment renters/condominium sellers in the market place. Historical data and future projections show that the vacancy rate in 2011 and onward will be below 3.0 percent in New York City and market rents will be on the incline as units are absorbed in supply of new units’ decreases. Coupled with the projections of increases in New York City and Brooklyn population, there will be a strong need for housing in the next three plus years.


Kahr concludes:
It is extremely unlikely that the full project can be financed and completed within 10 years at a profit by a private sector developer without substantial subsidies in excess of what has already been currently proposed. Based on the state of the market, the current plan, and the collective experiences of other large scale projects, it is much more likely that the development will take at least 20 years to complete. Most important of all, the likelihood of this time frame has been essentially acknowledged by the developer... In addition, the timing of the payments [to the MTA] has now been stretched out to 2030 – the new timing of the payments clearly indicates that the developer expects the timeframe of the development to stretch beyond ten years.

Kahr notes that things would have to go very well for the ten-year timeline to be met:
The larger issue is that the development timeline assumes almost continuous development, and of course, continuous development assumes a continuously healthy economic environment."

Kahr takes aim at a statement in the ESDC's recent Technical Memorandum that competition from other projects would be minimal because the overall market would affect all projects similarly:
The problem with this statement is that it's just not true... A mixed-use development of this scale cannot be simply compared with a developer that is building a much smaller 100-unit residential building... Financing for any construction project in today's market is extremely difficult to obtain; for a project with any level of complexity to it, such as a large scale mixed-use multi-phase development, it will be almost impossible. To put it simply in today's market, banks can choose to put their limited capital to work on only the safest, easiest to understand projects and the Atlantic Yards project is neither.

The KPMG report does not address this question.

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