Yo Brooklyn!

Posted by jeff

Tue Jan 22nd, 2008 11:10 AM

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I recently had the pleasure of touring Brooklyn with a broker friend of mine (name withheld to protect the innocent) and I was pleasantly surprised. On the basis of some of the numbers, which I will get to in a minute, I have been a little worried about Brooklyn, which I previously lumped into the "emerging markets" of New York City. Contributing to this worry was some commentary I had heard at a conference where Joshua Muss of Muss Development spoke. The Muss family are long-time major developers in Brooklyn (as well as Queens) and frankly at the conference a few months ago Joshua was prescient in his bearishness on the economy, Wall Street situation and (potentially) Brooklyn real estate. His take was simple: it's been 20 years since we've had a major real estate downcycle and we're gonna get one. He believed that land prices had appreciated beyond levels where developers could turn a profit on new construction and that with all the building Brooklyn has seen in the last few years and the somewhat fevered pace of the last 18 months, it would suffer too. But as I implied at the beginning of this piece, I'm a little more positive on Brooklyn than a couple of the other "emerging markets" around NYC following my recent tour. So let's look at some data and then I'll give my two cents on the takeaways from my tour with a knowledgeable commercial and residential broker. I took the data on condo plan filings with the NY Attorney General's office below from a Real Deal published in late November. The data is a little stale as it only goes through October 15, 2007, but let's face it, with the credit crunch in full swing, I doubt a huge amount of new filings hit in November and December. (I have a Freedom of Info Act request in for the latest data...stay tuned).

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The chart above shows that the big ramp in condo development in NYC in the last couple of years had an abrupt slowdown in 2007. Part of it may have been uncertainty about 421A, but at the same time, lots of guys were trying to get out of the ground ASAP in case the program was axed in June of 2007, instead of 2008. Most likely the credit crunch stopped things cold starting in the summer. However, since it usually takes at least 18 months to deliver a ground up development, there is still a rather large pipeline of projects that have not come to market. The pipeline number in the chart is my creation....it's just 2006 + 2007 condo plan filings, as the large bulk of these should be delivered to market....if they got funded.....in 2008. (There are lots of potential problems with this number, I know, but it's all we have.)

As you can see from the chart, Queens has seen the least slowdown in condo plan filings, while the spigot looks to have been just about cut off in the Bronx. Also note that both Manhattan and Brooklyn have way bigger pipelines. Every one of these boroughs on its own constitutes one of the larger cities in the country, if not the world, and we all know that the supply side in Manhattan has been tight for years, driving people to the boroughs - see my piece What's Up with Manhattan Real Estate for some background here. So the pipeline in and of itself doesn't really worry me that much and the fact that new additions to the pipeline are decelerating significantly is a big positive a year or so out.

What worries me more are some of the neighborhood numbers. For instance, in Brooklyn, Williamsburgh has the biggest pipeline of units at 2,493, followed by East Williamsburgh at 1,136 and Fort Greene at 1,060. That's a lot of product in a pretty condensed area, and it constitutes 30% of the total Brooklyn pipeline.

In Manhattan, the top 3 neighborhoods in terms of supply pipeline are Lower Manhattan with 3,361 units, the Upper West Side with 2,982 and Harlem with 2,851, constituting a large 46.5% of the total Manhattan pipeline. Now the new unit applications for the Upper West Side and Downtown slowed significantly in 2007, down 62% and 81%, respectively. But Harlem has only slowed 11% and the pipeline there constitutes 14.4% of Manhattan's total.

Queens may have the most dramatic neighborhood inflation. Of the total Queen's pipeline of 6,730 units, 1,007 units, or 27.4% of the pipeline, is from one neighborhood, Long Island City. I have written positively here about both Harlem and Long Island City as emerging neighborhoods that deserve home buyers' attention. However, I have also cautioned that these "emerging markets" will get hit hardest in a downturn.....but will offer some of the best opportunities for future gains when they do.

Back to Brooklyn. So my broker buddy takes me on a grand tour of Brooklyn - for which I sincerely thank him for his time and urban combat driving skills. We visited many of the key neighborhoods and looked at a bunch of his listings around the borough. On the way he points out several new condo developments where "they ain't movin". His biggest complaint, though, is that sellers, just don't get it. In particular, he does pro formas on commercial sites that would be condo conversions or development sites and finds that the numbers just don't work for potential developer buyers. You can't overpay for land/FAR (buildable area) and make a return, particularly when costs are spiraling higher and sell out prices for finished condos are flat or .....DOWN. He is turning away listings where customers just aren't realistic about selling prices, because the listings are just not worth the time and marketing dollars. For the market, this is actually future good news, land pricing will come down eventually and in the mean time the pipeline of new condos will dry up. Until land/FAR prices re-normalize, developers won't be getting a lot of new product started. It wasn't for nothing that Joshua Muss was harping on over-valued land pricing when I heard him speak. My friend says that on the residential side many of his potential buyers seem to have stepped to the sideline but business is seasonally slow anyway - he's hoping that come Spring they will come back in and potentially be met by more realistic sellers.

Among the other takeaways from my tour were that emerging markets of Bushwick and Bed-Stuy were still too early (rough and tumble) and would likely fall out of favor with the market downturn. But overall Brooklyn really isn't emerging - it's here and now. Perhaps most importantly, in Williamsburg and Fort Greene, despite the numbers above, I didn't feel overwhelmed by the cranes per square foot. The state bird of South Florida, just didn't seem overtly prevalent. In contrast, Long Island City and Harlem seem to have construction going on everywhere you look. All this is totally subjective and one not very well informed man's opinion (when it comes to Brooklyn in particular), but when all was said and done, I came away less bearish on Brooklyn than I expected. It's not that I don't expect a price correction, I do, particularly for land prices, I just think Harlem and LIC are more likely to see some condo fire sales.




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