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INSIGHTS | Brooklyn investment property sales cool in 1H17, southwest region industrial assets heat up
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Brooklyn investment property sales cool in 1H17, southwest region industrial assets heat up

August 14, 2017 – By Aaron Warkov, Director - Investment Sales; and Aryeh Orlofsky, SVP - Investment Research, Ariel Property Advisors

Brooklyn investment property sales continued to struggle during the first half of 2017, echoing 2016’s trend, with pricing metrics slumping across the board, particularly on multifamily properties. However, activity noticeably bounced back during the latter part of the second quarter, indicating the market may have turned a corner.

(From left to right) Aaron Warkov, Director - Investment Sales and Aryeh Orlofsky, SVP - Investment Research

During 1H17, New York City’s biggest borough saw 570 transactions consisting of 756 properties, totaling approximately $3.58 billion in gross consideration, according to Ariel Property Advisors’ recently released “Brooklyn 2017 Mid-Year Sales Report.”

Compared with 2H16, dollar volume and transaction volume dropped 11% and 8%, respectively, while property volume held steady. Year-over-year the drop was more significant, with transaction and property volume falling 20% and 16%, respectively, while dollar volume slid 7% compared to the same period in 2016.

Downtown Brooklyn and Park Slope were the most active neighborhoods in the borough, accounting for nearly 42% of the borough’s dollar volume, driven by large-scale multifamily and development transactions. Dollar volume in the neighborhoods of Bedford-Stuyvesant, Bushwick and Crown Heights comprised 14%, the same percentage as Williamsburg and Greenpoint.

From January through June, Brooklyn multifamily transaction volume receded by 12% versus 2H16, with 337 transactions registered. Dollar volume followed suit, slipping 17% to $1.56 billion during the same period. Compared to the averages of 2016, prices per square foot decreased by 8.5% to $344 per square foot, capitalization rates increased from 4.58% to 4.88%, and gross rent multiples decreased from 15.96 to 15.28.

Multifamily assets were weighed by a slew of factors in 1H17, including a softening residential rental market, a challenging tax environment, increases in interest rates, and rising operating expenses. However, the borough continues to attract new institutional buyers, including Clipper Equity which bought Brooklyn’s largest single property multifamily transaction of the year at 107 Columbia Heights, a 161-unit elevator, former Jehovah’s Witness building, for $87.5 million or $568 per square foot.

Development site dollar volume in 1H17 decreased 41% to $1.04 billion and transaction volume dropped 12% to 148 compared to 2H16. One of the most significant development transactions was the $68 million sale of 633 Fulton Street sold by Jem Realty to the Rabsky Group. The Downtown Brooklyn/Fort Greene property completes an assemblage for the buyer who can now build an approximately 770,000 square foot building on the site.

However, the outlook for the development market is encouraging. The passage of Affordable New York tax abatement legislation, formerly 421-a, in April triggered an uptick in demand for development sites in May and June.

Southwest Brooklyn Buoyed By Dearth Of Industrial Space

The loss of millions of square feet of industrial space to residential developments throughout New York City in recent years has created a dire need for the creation of Industrial Business Zones to protect remaining industrial and commercial space in Brooklyn.

The softening of brick-and-mortar retail and shopping malls, the rise of e-commerce, and the need for fulfillment centers, has set the stage for an enormous need for industrial space. Online retailers have rabidly snatched up buildings for storage and shipment. While Long Island City and Williamsburg have been hot spots, they are currently perceived as being overbuilt and overpriced.

That is one of the reasons why investors have increasingly turned to Southwest Brooklyn, specifically the neighborhoods of Gowanus, Sunset Park and Red Hook, where industrial activity has skyrocketed in recent years. In 2011, the dollar volume for these assets was a paltry $22.05 million, but that mushroomed to an astonishing $102.57 million in 2016.

Dollar volume this year will surpass 2016. In fact, through July of 2017, there has been more than $142 million in industrial sales, led by the $105 million sale of the Innovation Studio Portfolio by Est4te Four.

Pricing followed the same trend, with the average price per square foot for industrial buildings in Gowanus, Sunset Park and Red Hook clocking in at $426, a remarkable 166% increase from the $160 per square foot seen for these assets in 2011. Despite the price appreciation, relative valuations indicate industrial properties in these neighborhoods have room for even more growth.

Southwest Brooklyn is highly desirable for a number of reasons, with its close proximity to Manhattan and Downtown Brooklyn a major draw for industrial space. It is also in close proximity to some of the borough’s well-known cultural destinations, as well as an abundance of trendy restaurants and bars.

Copious transportation options are also a draw. The 15-month shutdown of the L-train in 2019 will not impact residents and businesses as it does not run along the area. In fact, it will likely spur migration from other regions, ultimately driving rents higher and hoisting property values.

Looking ahead, a recent pickup in bidding activity on active listings and contract signings suggests things may begin to turn around in the investment sales market. So, while we are holding out for the possibility of a modest pick-up in the second half that will carry into 2018, our baseline expectation is for investment sales volume and pricing to remain stable at current levels through the end of the year.

This article was also published in Brooklyn Eagle.

More information is available from Aaron Warkov at 212.544.9500 ext.62 or e-mail awarkov@arielpa.com.

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The information contained herein has either been given to us by the owner of the property or obtained from sources that we deem reliable. We have no reason to doubt its accuracy but we do not guarantee the accuracy of any information provided herein. As an example, all zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example, and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should carefully verify each item of income, and all other information contained herein.