A sponsored post in the 7/16/18 Commercial Observer, Ariel Property Advisors’ Sean R. Kelly Gets Real About Real Estate In Brooklyn, has a Q&A relevant to Atlantic Yards/Pacific Park:
Are worries about an oversupply of rental units and rental concessions in Downtown Brooklyn warranted?
Concerns over concessions are overhyped. In fact, New York City suffers from a perpetual shortage of housing, especially rental housing. Downtown Brooklyn, in particular, continues to evolve into the 24/7 “Live, Work and Play” neighborhood its stakeholders and the Department of City Planning envisioned with a rezoning that took hold in 2004.
Notable projects in Downtown Brooklyn include Steiner Equities’ “The Hub” and TF Cornerstone’s 33 Bond Street, both purchased by family offices who employ long-term “buy-build-hold” outlooks. Family offices are driven more by occupancy and therefore are willing to offer more competitive leases via better concession packages because they aren’t looking at a five- to seven-year exit strategy.
The Hub site was purchased for $60 per buildable square foot in 2011, while 33 Bond Street sold for $125 per buildable square foot. Pricing for development sites in Downtown Brooklyn has increased to between $300 and $400 per buildable square foot, making it very difficult to build a rental building and hit opportunistic level returns.
Both projects launched in 2017, adding over 1,400 units to the market, and in total more than 5,000 units came on line within a 24-month period. There was a bottleneck of units, but even with attractive concession packages the market is holding steady in the high $50s to low $60s per square foot, up from five years ago when developers were underwriting $50 per square foot.
Keep in mind, outside of Pacific Park, there is not a deep pipeline of rental units coming to market in or around Downtown Brooklyn. Lastly, an increasing amount of rental housing is being eliminated from the market and Downtown Brooklyn still offers over a 10 percent discount to Manhattan.(Emphases added)
Well, concerns over concessions may be overhyped, as real estate executives continually say, but... there were six middle-income units listed last week on StreetEasy at "100% affordable" 535 Carlton with one-month free.
Regarding pricing for development sites, keep in mind that the 2013 deal between Forest City Enterprises and Greenland USA for 70% of the project going forward (minus the arena and the 461 Dean tower) stated that "the total anticipated [site acquisition] costs [which include infrastructure like a deck and paying the MTA for air rights] yield an expected average cost per square foot of approximately $180-$220 per square foot, prior to vertical development."
So maybe not such a bad deal--though presumably infrastructure costs have risen too. Let's keep watch on the stated costs for the deal for all but 5% of Forest City's share.
As to building rental buildings, I think Kelly's statement referred to market-rate buildings, while most if not all future Greenland Forest City towers will have affordable units and access to, among other things, tax-exempt financing and the 421-a tax break.
But Kelly's statement about the pipeline--which ignores pending but yet unapproved projects like the giant 80 Flatbush--perhaps provides long-run optimism for the owners and boosters of Pacific Park. What's clear is that there's at least one, and probably more, real estate cycle to go.
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