Saturday, May 07, 2016

Forest City: B2 opens by October; sites for sale include market-rate rentals (?); residential market can be timed (updated)

Updated 5/19/16 with correction/clarification/speculation on 50/50 buildings.

During a conference call with investment analysts yesterday, Forest City Realty Trust (formerly Forest City Enterprises) CEO David LaRue answered questions about the B2 modular tower (aka 461 Dean Street), the potential sale of three building sites in Atlantic Yards/Pacific Park, and the Brooklyn apartment market.

Regarding B2


LaRue said, regarding B2, they were "still pushing to have that open in the third quarter this of year," but it could be "potentially early October." He said there had been "thousands of registrations" for the 181 affordable units--though presumably a large proportion are for the low-income ones.

He said they also felt equally comfortable about demand for the commensurate market-rate units in the 50/50 building. He cited the continued demand in the market, "proximity to transportation and other amenities," which should prove success as leasing starts in late summer and "through the balance of the year."

"It's going to be good to get to the end of the B2 process," he said, in a backhanded reference to significant delays, cost overruns, and pending lawsuits. "And get that asset turned on and income being generated."

He wasn't asked about vexing issues like the integrity of the building, about reports of leaks and mold, or about the impact on the building from arena operations. Investment analysts are not journalists interested in accountability; they like access and are generally pretty chummy. Sometimes other parts of their company work for Forest City.

Regarding Pacific Park


He acknowledged that Greenland Forest City Partners has engaged CBRE "to recapitalize the project, taking advantage of demand for residential buildings," marketing particularly "our market-rate rental opportunities, two that have 421-a tax benefits entitled at this point."

In other words, it's positioned as a way to take some profit, not--as some thought--evidence of Greenland's reticence of investing more. LaRue noted that Forest City's sale of the 625 Fulton property produced "superior value creation."

"The partnership between Greenland and Forest City is committed to creating value and this recapitalization would allow us" to do it through a full or partial sale, he said.

Note that the three building sites for sale include the planned--as far as we knew--B12 and B13 condo sites, as well as B4, which was once condo and rentals but is now said to be switched to office space. 
Black arrows point to sites for sale; note that program and timing are subject to change

None of them, according to the latest information, were supposed to be rental buildings. But Atlantic Yards/Pacific Park is a never-say-never project, so we should assume some of those buildings are switching.

However, if a condo building becomes a market-rate rental and is built soon, that could throw a further wrench into the requirement that a 35% ratio of affordable housing is maintained up until a threshold.

Updated: The impact on affordable plans

Perhaps B12 and B13 will not simply become market-rate rentals. After all, if they're built in the sequence as described below, that would still frustrate the requirement that a 35% ratio of affordable housing is maintained up until a threshold of 1,050 units.

After, some 270 affordable units would be needed to reach that 1,050 threshold. Perhaps one of both of those buildings would be 50/30/20 buildings, thus delivering sufficient number of units.

But that would lower the value of the buildings, making them tougher to sell to investors. Something doesn't quite compute.

Tentative plan as described in 2014

The question of supply risk

Asked about the risk of too much competing supply forcing down rents, LaRue acknowledged that, in the next year, Brooklyn has some 12,000 units (!) that are "highly amenitized" should be coming online, comparable to the 300-plus units Forest City has (presumably in the 550 Vanderbilt condo tower).

However, he cited the growth in technology jobs in New York City, which has 350,000 such jobs. The "the tech working class"--he meant the class of tech workers, of course, not the "working class"--who are 25 to 34 years old often choose Brooklyn, which "bodes well" for both office and residential demand.

The supply "will clearly impact rent growth" for 12 to 18 months, he said, but after that, in part related to the non-renewal of the 421-a tax break, there will be a drop-off in supply, leading to increased demand.

But what if the job growth flattens?

First, responded LaRue, "we’re delivering two fully affordable building" (535 Carlton Avenue and 38 Sixth Avenue), which should be immune to the slowdown in job growth. Actually, both have 65% middle-income units, for households earning six figures, which might in fact be affected.

After that, he said, if demand slows, "we have the option of starting the next building, it’s nothing we’re wed to." Well, yes and no. They certainly do have time, but they do have to build the affordable units by 2025, according to an agreement signed in 2014.

Unlike the very large 8 Spruce Street, with 900 units, he said, they can start buildings with 300 apartments. "We can add buildings as demand says we should, not as as any schedule or need that we have to do it," he said, again omitting that 2025 deadline.

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