Wednesday, June 24, 2015

Real estate boom lifts Atlantic Yards/Pacific Park condos: prices 18% over 2009 projections for 2015 (which were aggressive)

It's stunning, a testament to the roaring New York/Brooklyn/Prospect Heights real estate market, as well as the unpredictability of project timing, the entrance of a deep-pocketed partner, and the opportunity to reach a new segment of buyers.

In 2009, Forest City Ratner's projections for future condominium revenues were seen by many (including this writer) as significantly overstated. Now, they seem conservative.

(Update: a reader points out that we should look at the 2006, when the project was first approved, with the unrealistic ten-year buildout.)

For example, in 2009, the developer projected that the B11 tower would open in 2019 and sell for $1,369 per square foot, among the most expensive towers in the project.

Now, the building, known as 550 Vanderbilt, is projected to open next year, and the eight announced sales are pending at $1,436/sf, according to StreetEasy.

That's more than a 4.9% increase. It's a 4.9% increase three years early. As of 2015, the developer was only expecting $1,217/sf for the first condo building. The jump to $1,436 represents an 18% increase.

Should those numbers be reached, and also be reflected in the market-rate rentals, Forest City may well make up the impairment it announced, $148.4 million after taxes, upon selling 70% of the project (excepting the Barclays Center and B2) to Greenland Holdings last year.

After all, the subsidized affordable rental apartments also will rent for higher prices than projected.

Forest City also originally gains a 5% development fee, which if maintained by the developer--rather than split with Greenland--would mean some $200 million.

Greenland not only offers deep pockets but--surely not projected a decade ago--access to some deep-pocketed potential condo purchasers. Hence the marketing materials in Chinese.

The 550 Vanderbilt units

Streeteasy's page for 550 Vanderbilt cites:
  • Apt. 202, 1-BR, 1-BA, 637 sf, $800,000 ($1255/sf))
  • Apt. 327, 1-BR, 1-BA, 672 sf, $870,000 ($1294/sf))
  • Apt. 621, a studio, 461 sf, $625,000 ($1355/sf))
  • Apt. 331, a studio, 414 sf, $565,000 ($1364/sf))
  • Apt. 328, 2-BR, 2-BA, 1,177 sf, $1,615,000 ($1,372/sf)
  • Apt. 730, 3-BR, 2-BA, 1,358 sf, $1,960,000 ($1,443/sf)
  • Apt. 1119, 3-BR, 3.5 BA, 1,919 square feet, $2,890,000 ($1505/sf)
  • Apt. 1317, 2-BR, 2-BA, 1,004 sf, $1,655,000 ($1,648/sf)
Looking for context

Some thought those numbers high--one Brownstoner commenter pointed to a resale in DUMBO at under $1200/sf.

But they're not out of line for the most expensive luxury condos in the area. At One Prospect Park, there's a listing for $1823/sf. Units recently sold for $1104/sf, $1270/sf, $1173/sf, and $1459/sf.

The latter unit, listed at 9/15/10 for $1,950,000 and then re-listed 1/17/12 for $1,775,000, finally sold more than 18 months later, on 4/18/12, at that new ask. It was re-listed two years later, on 4/8/14, at $2,849,000, it sold at that ask less than four months later. That's an astounding price increase of 60.5%.

At Newswalk, 535 Dean Street, there's a unit on sale for $1090/sf, and another for $1002/sf. (This latter was priced at $799,000 in 2009, and is now listed at $2,099,000, an increase of 162.7%.) Sales at Newswalk's Phase 3 average $1004/sf.

Active sales at 388 Bridge Street in Downtown Brooklyn, the borough's tallest tower, average
$1,494/sf, while previous sales averaged $1,335/sf, according to StreetEasy.

Downtown Brooklyn, according to StreetEasy, averages $1,340/sf. Prospect Heights averages $1013/sf, including townhouses. The difference in price may be one reason why Corcoran--violating its own stated boundaries!--classifies 550 Vanderbilt as being located in Downtown Brooklyn.

The predictions in 2009


In 2009, Empire State Development, the state agency overseeing and shepherding the project, commissioned a report from KPMG that said it was not unrealistic to expect the project to be built in ten years, given the continuing demand for affordable housing as well as the expected increase in demand for market-rate units.

KPMG cited Brooklyn demographics:
If the above given projections turn out to be evenly reasonably accurate, the Brooklyn residential marketplace will demand more luxury apartments and condominiums over the next ten years.
KPMG noted the predictions were generally in the range of $1,200 to $1,400 per square foot--and I discovered the actual numbers, which were not fully redacted, including the $1,369/sf prediction for 2019.

But KPMG's statistics about condo sales, as I pointed out, were exaggerated and incorrect.

Note that the project, in fact, was not built out in the next ten years, as developer Forest City Ratner spent several years researching modular construction, aiming for cost savings. But it looks to be built out in eleven years after joint venture partner Greenland entered the picture in 2014. That means a 16-year buildout after 2009.

What's changed

With Greenland in the driver's seat, they're building conventionally--though in 2011, developer Bruce Ratner told the Wall Street Journal that "existing incentives" don't work for high-rise, union-built affordable housing.

What's changed? First, it's quite possible that Greenland, in its desire to make a splash, is accepting a lower profit margin. More importantly, the market is booming even beyond KPMG's assessment. KPMG stated:
Given the timing of the Subject Property’’s entry into the market place, with what was described earlier in this report about the vacancy and absorption rates, the market data supports that the high-end/luxury nature of these properties, coupled with the number of building amenities that will be provided, such as proximity to transportation, the fact that the buildings will be brand new, the amount of retail surrounding the property, etc, will create a higher demand for the Subject Property and allow the units to be absorbed more quickly than other comparable properties, as well as, obtain a premium on asking sales price.
What might that premium be? As noted in the graphic above right, condos in 2009 were averaging $450/sf as a minimum and $970/sf as a maximum, with the anomalous $1225/sf likely attributable to One Prospect Park.

Even that number wasn't trustworthy; the KPMG report claimed that building was 75% sold; however, the Times quoted the developers as saying half the units have been sold and that StreetEasy.com documented only 25% the units as sales.

Looking back at the critique

As I wrote in 2009, the Kahr report commissioned by the Council of Brooklyn Neighborhoods--a group set up to respond to the environmental review--was skeptical of even the $850/sf (in 2006 dollars) assumed for condos in a 2006 KPMG report.

Given recent price drops in Manhattan, "the Brooklyn properties should be in the $600 PSF range," Joshua Kahr wrote.
From 2006 predictions

Kahr was both right and wrong.

He was absolutely correct in casting huge doubts on the official timetable, saying it "would be extremely difficult to finance the project within the next 36 months and to build the project over the next ten years."

That should have been enough to give state overseers pause.

But Kahr also said "it is much more likely that the development will take at least 20 years to complete." That was a not unreasonable conclusion, given that Forest City Ratner restructured payments to the MTA to last more than 20 more years. But it also didn't allow for market changes.

Also, hindsight suggests that Kahr should have provided much more of a range of projected condo prices, depending on the level of economic recovery.

While it may have been reasonable to project a recovery, few were projecting the furious rise in real estate dollars, even in the past few years, as noted in the sales at One Prospect Park.

Nor was anyone projecting how Forest City (with Greenland) would raise $349 million via the EB-5 program--essentially selling visas--to lower costs and help pay for the project. (This was on top of $228 million raised during the arena construction phase.)

Or that a deep pocketed developer from China would join the project, and have access to wealthy Chinese buyers.

Atlantic Yards, as I've said before, is a "never say never"project.

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