Development sites in Flatbush have seen a tidal wave of demand from investors in recent months, due largely to the reinstatement of a popular tax incentive this past spring. The program, called “Affordable New York”, has electrified activity in the up-and-coming neighborhood, causing prices to jump on these assets.

(From left to right) Alexander McGee, Director – Investment Sales and Aryeh Orlofsky, Senior Vice President – Investment Research

The April enactment of Affordable New York – a reiteration of the expired 421-a tax program – has undeniably been a game-changer, swiftly turning Brooklyn’s stale development market in the first half of 2017 into a revitalized asset class. Tightening credit markets and concerns over absorption suppressed development activity earlier this year, but the expiration of 421-a almost two years ago has been the market’s biggest impediment.

During 1H17, New York City’s largest borough saw development site dollar volume decrease 41% to $1.04 billion and transaction volume drop 12% to 148 compared to 2H16, according to Ariel Property Advisors’ “Brooklyn 2017 Mid-Year Sales Report.”

While dollar volume in Brooklyn’s development market will likely fall short of 2016’s tally of $3.136 billion, it should end the year on solid footing and fare even better in 2018 as developers continue to take advantage of Affordable New York. The program establishes an Area Median Income requirement and offers full property-tax exemption for as long as 35 years. It comes with some cost to developers since it implements new standards for construction wages, but the tax advantage far outweighs this added cost.

A major selling point for development in Flatbush is its attractive zoning relative to other neighborhoods in the borough. Indeed, parts of Flatbush offer some of the highest Floor-Area-Ratios (FAR) in Brooklyn, only trailing the recently rezoned areas of Williamsburg and Downtown Brooklyn. Therefore, for a developer looking to build more scale, but pay a lower land basis, Flatbush is the only option around.

Flatbush Development Frenzy In Full Force

The impact of Affordable New York on Flatbush cannot be overstated. In fact, in the five months following its enactment in April the neighborhood saw a marked pickup in activity from developers. From April through August, 7 development transactions sold for a total consideration of nearly $24 million, an impressive 32% increase from the comparable period prior its enactment.

Perhaps the most telling evidence of Affordable New York’s profound power is the swift surge in pricing as these 7 transactions averaged $153 per buildable square foot, an astonishing 32% leap from the $115 fetched before passage of the tax incentive. Just as remarkable is the asset’s appreciation in recent years, with sites in the neighborhood averaging only $74 per buildable square feet in 2014.

Lately, sites have approached and even exceeded the $200 per buildable square foot level, including 50 Clarkson Avenue. The 65,600 buildable square feet site was sold by Bluejay Management in July for $13.55 million, or $207 per buildable square foot.

Another solid example of Affordable New York’s influence includes 100 Lenox Road, a 22,000 buildable square foot site currently under contract by a private seller for over $200 per buildable square foot. The property, which Ariel Property Advisors exclusively marketed, is located just a few blocks from Prospect Park, one of Brooklyn’s most popular destinations.

Currently there is considerable upside in developing rental buildings in Central Brooklyn, due primarily to the “affordable” component of Affordable New York. In Manhattan, for example, the affordable rental rate is significantly lower than the market rental rate. The landlord, consequently, sees a steep difference in rent between the required “affordable portion” of the building and the free market dwellings.

However, in the outer boroughs, namely Central Brooklyn, affordable rents are extremely close to market rents. In Flatbush, the “affordable” two-bedroom at 130% or area median income is $2,791 while the free market rent for the same unit in the same location is $2,600. The new law, therefore, provides a clear path for developers to utilize the advantages of the tax abatement while operating a rental building at market rent.

Moreover, while Flatbush development sites have appreciated in recent months, the assets offer considerable upside as they remain significantly below the borough’s average price per buildable square foot of $249 in in the first half. Flatbush offers developers the opportunity to build in a solid neighborhood with much less capital. This relative affordability is a primary reason why institutional investors will likely continue to gobble up properties in the neighborhood.

Looking ahead, market uncertainty that characterized the start of 2017 has dissipated and the recent pickup in activity indicates the investment sales market has turned a corner. While interest rates are on the rise, they remain historically low, which bodes well for the financing of development projects throughout New York City. The impact of Affordable New York has been a boon for Flatbush and it should continue to pour fuel on an already hot development market.