Despite high interest rates, regulations and the lack of tax abatements for development, Brooklyn’s investment sales activity slowly improved in the first six months of this year with dollar volume rising to $3.36 billion, a 43% jump compared to 2H 2023, and transactions increasing 6% to 405, according to Ariel Property Advisors’ Brooklyn 2024 Mid-Year Commercial Real Estate Trends report.

While the numbers from the first half were positive, the second half may be even better thanks to the state’s housing policy, interest rate cuts and new city and state initiatives including the City of Yes, Atlantic Avenue Rezoning and plans to transform the Brooklyn Marine Terminal.

New Incentives for Development

The expiration of the 421a tax abatement in June 2022 left Brooklyn’s development market reeling, resulting in the average price per buildable square foot dropping from $280 in 2023 to $231 during 1H 2024, the lowest average in Brooklyn since 2014, Ariel’s mid-year report showed.

Fortunately, the Housing Policy in the State’s Fiscal Year 2025 Budget passed in June included the 485x tax incentive as the successor to the 421a program, which we expect will help revive the development sector and encourage new projects in the borough.

Perhaps even more important, the policy extends the deadline to complete 421a-vested projects to 2031, which will give relief to developers at risk of missing the original June 2026 deadline to complete their projects. The extension was critical to the success of the Gowanus rezoning initiative approved in late 2021, which promises to create approximately 8,500 new homes, including 3,000 permanently affordable units in Brooklyn. The policy change is already bearing fruit as Gov. Kathy Hochul recently announced that about 71,000 new units of housing, including 21,000 affordable units, will be built citywide because of the extension.

Already, our research is showing that the dollar volume of development sales in the third quarter exceeded second quarter numbers.

The 485x tax abatement isn’t perfect, however, and some developers are still yearning for the old 421a program. Critics of 485x point to wage requirements that are mandatory for developments with 100 units or more, claiming that developers can’t make the numbers work under these circumstances.

Additionally, 485x comes with new affordability requirements. Developments with less than 100 units will be required to set aside 20% of the apartments for tenants with incomes that are 80% of AMI; projects with between 100 and 149 units will be required to set aside 25% of the units for those with incomes at 80% of AMI; and projects with 150 or more units, must set aside 25% of units at 60% of AMI.

Interest Rate Cuts

On the macro level, Fed policymakers surprised the market by voting for a larger than expected half a percentage point rate cut in September, their first rate cut since 2020, which lowered the federal funds target range to between 4.75%-5% and is expected to lift investment sales activity across all asset classes. In the Federal Open Market Committee’s Summary of Economic Projections released in September, participants projected additional cuts at their November and December meetings with the median fed funds rate falling to 4.4% at the end of 2024 and 3.4% at the end of 2025.

Ariel’s Capital Services Group reports seeing more lenders returning to the New York market and recently secured financing for three residential construction projects in Brooklyn—two condo and one rental development—that attracted 10 to 15 quotes. Lenders are viewing these developments positively because they reason the projects will be delivered into a strong market short on housing.

City and State Initiatives

City and state officials have sounded the alarm on New York City’s housing crisis noting that the vacancy rate has fallen to 1.4%, which is the lowest level since 1968, according to a survey by the New York City Department of Housing Preservation and Development.

To combat the housing shortage and boost the economy, the city has introduced the following initiatives that will benefit Brooklyn.

City of Yes

The New York City Planning Commission voted in September to approve the City of Yes for Housing Opportunity, which is designed to rezone all areas of the city with the goal of creating 108,850 new homes over the next 15 years. The City of Yes will do the following:

• Allow buildings to add at least 20% more housing if the additional homes are affordable to households earning 60% of the Area Median Income (AMI).
• Relegalize housing above businesses on commercial streets in low-density areas.
• Relegalize modest, 3- to 5-story apartment buildings where they fit best: large lots on wide streets or corners within a half mile of public transit.
• End parking mandates for new housing.
• Allow “accessory dwelling units,“ or ADUs — like backyard cottages, garage conversions and basement apartments.
• Make it easier for residential, faith-based or other campuses with underused space to add housing on their sites.
• Make it easier for vacant offices and other non-residential buildings to become homes.

Prior to the Planning Commission vote, Brooklyn Borough President Antonio Reynoso approved the City of Yes with adjustments to deepen affordability and legalize Accessory Dwelling Units. The City of Yes will now be reviewed by the City Council, which is scheduled to vote on the initiative before the end of the year.

Atlantic Avenue Mixed-Use Plan

In addition to the City of Yes, the City Planning Commission in October started the Uniform Land Use Review Procedure (ULURP) process for the Atlantic Avenue Mixed-Use Plan, a holistic community-led initiative that seeks to create 4,600 units of new housing and infrastructure improvements in a 13-block stretch of Atlantic Avenue between Vanderbilt and Nostrand Avenues and neighboring blocks in Crown Heights and Bedford-Stuyvesant. The major commercial thoroughfare is currently home to gas stations, vehicle repair shops, warehouses and distribution centers.

The plan proposes rezoning to allow higher density apartment buildings along Atlantic Avenue and medium density apartments along Bergen, Dean and Pacific Streets. Of the apartments, between 20% and 30% would be permanently affordable and income restricted through Mandatory Inclusionary Housing and new housing on city owned land would be 100% affordable and income restricted.

The local Community Boards, the Brooklyn Borough President, the City Planning Commission, and eventually the City Council will have the opportunity to hold public hearings and recommend changes during the ULURP process.

Brooklyn Marine Terminal

The borough will get another boost from the city’s plans to transform the 122-acre Brooklyn Marine Terminal into a modern 21st century maritime port and mixed-use community. The area is located just south of Brooklyn Bridge Park from Atlantic Avenue at the Columbia Waterfront District down through the Brooklyn Cruise Terminal to Wolcott Street in Red Hook.

New York EDC Assuming Control of the 122-acre Brooklyn Marine Terminal

Mayor Eric Adams, along with Governor Hochul, NYCEDC, and the Port Authority announced in May that the city will assume operational control of the entire marine terminal from the Port Authority. As part of the agreement, NYCEDC will be responsible for operating and maintaining Piers 7-12, while supporting existing tenants. NYCEDC has already invested over $162 million into Piers 11 and 12 over the last two decades.

The city is committing an initial $80 million investment in the Brooklyn Marine Terminal to stabilize and repair Piers 7, 8, and 10, and to fund planning for the 100+ acre waterfront's future.

A Taskforce—chaired by US Representative Dan Goldman with New York State Senator Andrew Gounardes and New York City Councilmember Alexa Aviles serving as vice chairs—was announced in September to lead the community engagement process with elected officials, unions, waterfront stakeholders, Brooklyn businesses, workforce development, the adjacent community, and the maritime industry. The goal is to develop a shared vision for facility and district.

Future of Brooklyn

Brooklyn has seen rapid development in recent decades boosted by strategic rezonings downtown, in Williamsburg and along 4th Avenue. These additional public and private partnerships announced by the city and state are expected to further benefit the borough and position it for even greater growth.