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Brooklyn Real Estate Development On Cusp Of A Comeback As Opportunity Zones, Amazon Effect Drive Demand

February 14, 2019

By Dusan Racic, Ariel Property Advisors


Brooklyn Real Estate Development On Cusp Of A Comeback As Opportunity Zones, Amazon Effect Drive Demand


Brooklyn has been one of the fastest-growing sub-markets in New York City, but despite attractive dynamics such as population growth and a roaring job market, development site sales softened this year. Demand for land, however, is poised to take off in 2019 as newly designated “Economic Opportunity Zones” in the borough, along with a likely spillover effect from Amazon’s HQ2 announcement, invigorate activity.

(From left to right) By Daniel Tropp, Investment Sales Professional and Dusan Racic, Analyst

In 2018, Brooklyn’s development market recorded 302 transactions, down 4% from 2017 levels, according to Ariel Property Advisors’ “Brooklyn 2018 Year-End Sales Report.” Other gauges however, reflected strength, with dollar volume jumping 31% year-over-year to $2.87 billion, and the 9.9 million buildable square feet that traded was roughly 40% more than in 2017. Put simply, fewer transactions took place, but the sales that did occur were large in scale.

Sean R. Kelly, Esq., a Senior Director at Ariel Property Advisors that focuses on submarkets such as Downtown Brooklyn and Gowanus, believes that despite concern of oversupply of rentals and condos, demand for large-scale development sales is a trend that will continue as these are proven markets. Evidence of investor confidence include the purchases of two sites at Pacific Park by The Brodsky Organization and TF Cornerstone and Two Trees' Gowanus acquisitions

Brooklyn developers have seemingly shown comfort with current pricing levels and project returns. The price per buildable square foot averaged $261 in 2018, up 5% from 2017, and an astonishing 83% from five years ago.

This growth has been fueled by a stellar economic backdrop, with Brooklyn’s job market becoming the fastest growing out of all five boroughs. Private sector employment in Brooklyn reached a record of 613,400 jobs in 2017, a 39 percent increase from 2009, according to the Office of the State Deputy Comptroller. Meanwhile, mirroring the nationwide trend, unemployment reached a record low this year.

Another strong indicator that impacts the new construction condo and rental market is employment in Brooklyn’s tech industry, which reached a record of 9,800 jobs in 2017, and an average annual salary of $92,900.

Still, the newest and perhaps the biggest driver of development in the coming years will be the recent formation of “Economic Opportunity Zones,” which were created through a provision in the federal government’s Tax Cuts and Jobs Act (TCIA) of 2017. This program, which aims to encourage long-term investment in low-income communities throughout the United States, is already impacting development in many areas of Brooklyn.

Basically, the program allows investors to roll their capital gains from real estate and, notably, other sources of capital – including unrealized gains from stocks – into a Qualified Opportunity Fund (QOF). Depending on how long on an investor keeps their investment in the Opportunity Zone, they can receive an increase to the basis on the capital gain that is initially deferred and, if they meet certain requirements, can potentially receive tax-free treatment on the additional gains earned from the fund.

In Brooklyn, this program should have a sizeable impact on neighborhoods such as Red Hook, Coney Island, Downtown Brooklyn, and Cypress Hills, with development and pricing all but guaranteed to increase. The advent of the program might partly explain why the average price per buildable square foot for Brooklyn development rose in 2018.

Lastly, e-commerce giant Amazon’s plan to situate one of its headquarters in Long Island City will strongly impact development in Brooklyn. With Long Island City’s vacancy rates already at historic lows, residents will look to surrounding areas that are easily accessible and offer similar, attractive amenities, such as vibrant retail and public transportation.

This Queens megaproject will benefit nearby Williamsburg, Greenpoint, and Downtown Brooklyn, and they should all witness an uptick in demand, especially if the BQX streetcar, which will connect the two boroughs, comes to fruition. At the same time, with the appetite for large-scale developments in Queens likely to accelerate even further, so will land prices, and investors will keep an eye on Brooklyn for its value and scale.

Matthew Dzbanek, a Director in our Capital Services Division, says there are still market headwinds, namely rising interest rates and uncertainty in condo pricing, causing borrowers to reevaluate their plans and fill the capital stack with other forms of financing.

The absorption of new units in the borough is also a concern for many builders. According to a recent report by Localize Labs, Brooklyn contains 4 of the top 5 NYC neighborhoods in terms of new units in the development pipeline: Williamsburg, Bushwick, Greenpoint, and Bedford Stuyvesant. Tertiary markets, such as Flatbush, Crown Heights, and East New York have also seen an uptick in new projects.

Jonathan Berman, an Investment Sales Director who focuses on some of these neighborhoods and has seen an increase in listing activity, particularly among the multifamily and development product types. Indeed, there has been a surge of year-end listing activity, which suggest a strong start to 2019.

Looking ahead, development transaction volume in Brooklyn should modestly increase as developers’ confidence in absorption, the lending environment, and the overall market bounce back. The borough’s strong job market and budding tech sector will continue to fuel population and income growth, supporting the existing, robust development pipeline. Incentives such as Economic Opportunity Zones and Amazon’s massive endeavor in Queens will only further support this growth as developers try to capture the market’s unprecedented long-term upside.

More information is available from Dusan Racic at 212.544.9500 ext.904 or e-mail dracic@arielpa.com.

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