Sales of development sites in Brooklyn continued to soften in the first quarter, a trend that can be attributed to a confluence of factors, including higher land and construction costs, the expiration of the 421-a tax abatement, and an increasingly challenging financing environment. While Brooklyn’s development market will likely not reach the lofty levels seen in 2015, demand is poised to rebound given “Affordable New York,“ 421-a’s replacement, is now in play.

The expiration of the 421-a tax exemption on December 31, 2015 is the most significant factor behind the slide in land sales, which is abundantly evident in data gauging construction permits. In 2015, 51,500 new units of housing were approved throughout New York City, with 45%, or 23,393 new units, accepted in Brooklyn. In 2016, a mere 4,535 units were approved in Brooklyn, according to The Real Deal data.

In the first quarter, the borough saw total development dollar volume at just over $331 million, a 45% drop from the $619 million tallied during the same period in 2016, according to Ariel Property Advisors’ research. Moreover, only 54 transactions were recorded in the period, 40% and 32% below the same quarters in 2015 and 2016, respectively.

In April, New York State lawmakers, as part of the state’s $163 billion budget, passed the Affordable New York bill, offering developers full property-tax exemption for as long as 35 years with varying levels of affordability.

While Affordable New York will undoubtedly be a boon for development throughout Brooklyn – particularly in areas where land costs allow for the construction of rental apartments, such as Bedford-Stuyvesant, Bushwick, Prospect-Lefferts Gardens, and Flatbush – construction costs in New York City are the highest in the world and the current landscape for commercial lending is much tighter than in previous years.

Williamsburg, Downtown Brooklyn Draw Demand

Williamsburg and Downtown Brooklyn have emerged as primary targets for institutional capital willing to cross the river. Over the past 10-15 years, these areas have evolved into 24-hour mixed-use communities. However, along with their emergence has come the challenge of finding new development opportunities, particularly for rental housing.

Williamsburg was one of the hottest neighborhoods for development last year, notching a sizable 21%, 20%, and 19% of the entire borough’s dollar, transaction and property volume, respectively.

Williamsburg’s vigor did not relent in the first quarter, with the region registering the highest transaction and dollar volume in Brooklyn, with 6 development trades totaling $64.7 million. The largest sale in the period took place at 187 Kent Avenue & 48th Street, a 33,000-square-foot site that sold for $42.5 million, or $303 per buildable square foot, significantly above Brooklyn’s 2016 average of $262.

The popularity of Williamsburg, both from a commercial and residential perspective, stems largely from its vibrant and eclectic atmosphere. The looming shutdown of the area’s L-train in 2019 could cause some migration out of the neighborhood, but its impact will likely be subdued as the neighborhood is deeply immersed in culture, with a well-known art community. Indeed, a massive amount of people from around the world trek to Williamsburg for its abundance of art, music venues, bars, restaurants and boutiques.

Downtown Brooklyn, meanwhile, has become the housing and retail destination City Planning had envisioned with a rezoning that took hold in 2004. Notable sales in 2016 include Rabsky’s purchase of 625 Fulton Street from Forest City for $158 million, and Brooklyn Law’s sale of 1 Boerum Place to Avery Hall for $76 million.

Despite steep appreciation in recent years, Williamsburg and Downtown Brooklyn remain a much less expensive alternative to Manhattan, where development sites fetched an average $640 per buildable square foot last year. With more than 5,000 under construction and another 7,000 in the pipeline, there has been some concern over the absorption of rental units, but rents have held steady, hovering in the low $60’s per square foot.

Meanwhile, there is a huge shortage of condominium product in and around Downtown Brooklyn. With land prices steadily rising, developers who have constructed condos have been able to capitalize on the scarcity, with sellouts ranging from $1,400-$1,700 per square foot.

Looking ahead, the outlook is more uncertain than it has been in recent years, but the Brooklyn development market remains positive as the borough continues to blossom into one of the most coveted areas for property investment in New York City. Affordable New York is undoubtedly positive for development, and the borough’s relative affordability versus Manhattan should continue to foster strong demand.