INSIGHTS | Despite challenging environment, Brooklyn real estate financing should hold firm
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Despite challenging environment, Brooklyn real estate financing should hold firm

April 25, 2017 – By Matthew Dzbanek, Director - Capital Services; and Katherine Speltz, Analyst, Ariel Property Advisors

As the U.S. economy continues to strengthen, the Federal Reserve is expected to tighten monetary policy further in 2017, ultimately leading to higher interest rates. While higher borrowing costs could suppress loan origination, commercial real estate financing, particularly in Brooklyn, should hold steady as a host of new lenders and a conducive economic climate keep borrowing activity buoyant.

(From left to right) Matthew Dzbanek, Director, Capital Services and Katherine Speltz, Analyst

A robust labor market and firming inflation has the Fed, following years of lackluster growth, confident that the economy is strong enough to withstand the impact of higher rates. This was evident when the Fed’s policy-making arm raised short-term interest rates by a quarter of a percentage point in March, pushing the fed funds target rate up to a range of 0.75 percent to 1 percent. It was the central bank’s second increase in three months and only its third since last decade’s financial crisis.

Interestingly, long-term 10-year Treasury yields have been on a downward trajectory after hitting a two-year high of 2.61% in March. While risk aversion stemming from geopolitical events and concerns about the economy have pushed yields lower, interest rates are expected to head higher. Indeed, minutes from the Fed's latest meeting showed policymakers discussed the possibility of reducing its massive bond portfolio later this year. This move should put upward pressure on rates and eventually lead to higher borrowing costs on consumer and business loans.

At between 3.500%-3.875%, interest rates on five-year multifamily loans are roughly 50-75 basis points higher than where they were a year ago. However, despite the uptick, interest rates remain historically low, which should keep the lending landscape favorable.

For most of the past decade, record low interest rates fostered feverish demand for New York City real estate, which, in turn, sent prices substantially higher. Therefore, a move higher in rates in many ways is a positive development in that it should “normalize” market conditions, with sellers possibly inclined to lower prices to attract buyers who are more capital-constrained.

Larger transactions drove dollar volume to record levels in 2015, while in 2016, small to mid-size transactions played a more dominant role, causing New York City total dollar volume to drop dramatically compared to the prior year, according to Ariel Property Advisors’ research.

As property sales slowed last year, lenders infused less money into the New York City market. Commercial real estate financing volume fell 17 percent year-over-year to $82 billion in 2016, according to The Real Deal, citing a report from lending database CrediFi.

New Lenders in Brooklyn Fill Bank Void

While 2016’s drop in real estate financing reflects a market that was cooling off from an extremely busy 2015, it also indicated caution on behalf of lenders. Indeed, the market for commercial mortgages is starkly different from a few years ago when banks binged on multifamily commercial loans.

Banks have dramatically pulled back on lending, primarily a result of concerns regarding over-leverage and government regulation. In 2015, federal banking regulators cautioned banks of overexposure to the multifamily asset class and its impact on their financial stability. Banks appear to have heeded their warning, with New York City’s two biggest multifamily lenders, New York Community Bank and Signature Bank, slashing deal volume last year.

NYCB, which was the top lender in 2015, fell to fifth place in 2016, with its loan origination volume shrinking a remarkable 53%, according to CrediFi’s report. And while Signature Bank maintained its No. 2 status last year, lending volume fell by 13% versus 2015.

As the top lenders of the past pulled back, new alternative lenders, both individual and institutional, swiftly emerged with a fresh appetite to lend in Brooklyn. Last year, Deutsche Bank replaced NYCB as the most active lender, with the firm’s total commercial real estate origination volume increasing 37% from 2015, CrediFi reported.

Other new entities in the lending arena already own and develop real estate. Institutions like Blackstone and Starwood Capital have been active lenders in the last two years, and commercial real estate firms such as RXR Realty, Kushner Cos and SL Green, have also hopped onboard the financing train.

Brooklyn’s economy has improved markedly in recent years, with New York State data showing employment in the borough rising to 1.176 million in February, up 13.7% from a year earlier. The unemployment rate stood at 4.8% in February, mostly in line with the national average, but sharply below its year-ago level of 5.7%.

The dollar volume of all mortgage activity in Brooklyn nearly mirrored the overall New York City market in 2016, falling 18% to $2.29 billion from 2015’s $2.80 billion. However, while the number of mortgages slid 15% to 798, mortgage activity was higher than 2014’s tally of 781, according to Ariel Property Advisors’ research.

As more and more people call Brooklyn home, institutional and private investors will likely continue to seek mortgage financing in New York City’s biggest borough. Rising rates may have senior lenders pulling back as properties qualify for less but could drive stronger demand for loans higher up the capital stack, utilizing mezzanine financing or preferred equity more frequently. Overall, Fed tightening reflects a robust economy, and therefore we expect capital markets to remain strong this year, allowing investors ongoing access to attractive and reliable financing.

This article was also published in Brooklyn Daily Eagle.

More information is available from Matthew Dzbanek at 212.544.9500 ext.48 or e-mail


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.