Yo Brooklyn!
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).
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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Comments (17)
What do you think of Jersey City? Lots of condo development going on there (specifically the Grove St PATH station area), which offers a 7 minute commute to downtown, or 15 minutes to 33rd Street Herald Square. Also it's not as priced as high as LIC or Harlem, since it's settling around $500 to $600 a square foot.
Posted by Ray | January 22, 2008 12:11 PM
The whole "gold coast" is going to be overbuilt. A LOT of inventory has been added to Edgewater and Weehawken.
Posted by AvnerUWS | January 22, 2008 1:43 PM
There was a huge condo boom in southern Brooklyn areas, like Sheepshead Bay. I know it's nowhere near Manhattan but at one point there were 2-3 condos being built on every block along Ocean Ave.
Any thoughts on that area?
The sellers there also don't seem to be budging from their pre-bubble-popping prices.
Posted by Rob | January 22, 2008 3:40 PM
Avner, Rob & Ray,
Sorry for the delay. My tour of Brooklyn didn't take me out as far as Sheepshead Bay etc. I am also not much of an expert on the New Jersey gold coast. But here is my 2 cents, which is really predicated on a Macro call. the macro call is that the whole US residential real estate market suffered from 3 problems....people over paid for property, they used too much leverage and the market was over-built. To date NYC has only suffered from the first 2 of these issues (and the too much leverage thing was kept somewhat in check by co-op boards in Manhattan). The special thing about Manhattan is it didn't get over-built due to the land shortage, barriers to building etc. The secondary markets Brooklyn, LIC, New Jersey are really overflow markets from Manhattan and benefitted from the shortage of new housing in NYC. They still will get some of that benefit, but they had worse over-payment and over-leverage issues. Also select sub-neighborhoods are arguably getting over-built. In the event that Manhattanites can afford to stay in Manhattan with a little improvement in affordability, these frontiers will all get hit harder. My feeling in closer in Brooklyn is that aside from the NYC overflow, it seems as if it has some of its own internal demand creation engine, something I cannot say for LIC or Harlem. My guess is the same for the Jersey gold coast, but some Jersey suburbanites may gravitate there for lifestyle and fuel cost reasons. I and many others believe there is a major long-term trend back to city living due to fuel costs and infrastructure problems in the Burbs.
Posted by Jeff | January 22, 2008 4:38 PM
Any thoughts on downtown brooklyn? A lot of new condo developments and the area feels like it is still emerging.
Posted by Mike | January 23, 2008 5:05 AM
The problem I have here is that you are now just taking a tour. Not only that you take the tour with a developer. Not a local, nor someone that's been there for a while, not Jerry Minsky from Corcoran that is a God of Fort Greene real estate. Developers are naturally bearish on marketsas they develop property and usually sell out too early. And to actually recommend that Bushwick and Bed Stuy would fall out of favor with the downturn is silly. The upturn in those neigborhoods is huge and every artists I know is looking in Bushwich. One person I know lost out on a bidding war in Bushwich recently. I'm not saying its gonna be easy but your analsysis has a lot to be desired. Lastly, it doesn't seem that you yourself have sold in Brooklyn. I like your website, don't get me wrong, but more and more I see that your are a conflicted econimist who has to sell real estate, as that feild sucks too, and I know, I was with an econimist for years. You should decide which side of the fence your sitting on. And I can see the, I'm just trying to give correct information, line already but increasingly I just don't trust this site for real estate advice. Its more targeted to the investor and not the home buyer. As investors need to play the futures market and home buyers need to buy a home, and thats a whole different metric.
Posted by Anon | January 23, 2008 7:14 AM
Anon / Jerry Minsky -
Noah didn't write this Brooklyn commentary, idiot.
Nice self-promotion, too. You know, it doesn't take much for a talentless, unethical broker to ride a Fort Greene boom. Let's see how you ride it on the way down.
Posted by anon2 | January 23, 2008 7:21 AM
anon - wow. First off, Im not an "econimist" or an economist!
Second, as above stated, Jeff wrote the above post and he is a developer based in LIC and writes about his knowledge, experience, and what he learns on the street and conferences he goes to. Valuable insight.
Third, ARE YO HONESTLY SAYING BUYING A HOME IS NOT AN INVESTMENT? Lord help me as this is the problem with so many brokers out there!
Fourth, if you go back and read my buyer tips and seller tips and renovating tips, you will see TONS of content specifically for buyers & sellers that is great advice for any potential buyer or seller to fine tune their strategy!
Fifth, I am an equities trader through and through and have a passion for understanding macro economics and for trading profitably from it. Its just me. I also have a passion for real estate. Saying you cannot combine the two is like saying real estate has NOTHING to do with the economy or macro. I just dont know how to respond to that.
Posted by Noah | January 23, 2008 9:09 AM
Just to clear up a couple of things. The tour I was taken on was by a very knowledgeable residential and commercial broker in Brooklyn, who is a co-owner of his own firm and has plenty of experience in the market. He competes against the big real estate chains everyday and does well because of his local knowledge. His wife runs a property management company as well. I have not given his name, because of the hostility some people have at market turning points....I didn't want him taking heat for me. He gave me permission to give his name after he read the article yesterday and if anyone wants to know who he is or talk to him about his listings or selling a property, you can call me and I will put you in touch with him. I think I have made it clear why i think what I think and the limits of the data I presented. Other opinions are attributed directly to the people I got them from. I don't know Bed-Stuy or Bushwick, the opinion was that of my friend the broker, who will stand by it in a discussion with anyone who wants to talk about it, I'm sure.
Posted by jeff | January 23, 2008 9:37 AM
Jeff -
What do you see happening on the far West side, Hudson Yards, Javits, etc.? Any news on whether or not the slowdown will impact the subway extension? I haven't heard anything about the Hudson Yards proposals for awhile. For Manhattan, that neighborhood seems to be just about as emerging as Harlem.
I too have been interested in Central Harlem. I like the feel, the vibrancy, and there are some very nice developments going up (on land that was purchased for a song or given to the developers by the city, allowing for greater flexibility potentially in pricing). My problem with these emerging areas (having lived through the early '90s bust) is that often when development slows, so does available public funds and investment in infrastructure. It can take a number of years for things to pick back up, and Harlem could still use a bit in the way of retail to warrant buying upscale new construction. Do you think the funds that have been slated for the 125th street corridor will come to fruition?
Posted by Brenda | January 23, 2008 12:57 PM
Brenda,
I don't have any special knowledge with regard to Hudson Yards or Harlem. I can just tell you what I read and hear. Big developers like Rockrose continue to buy in and around Hudson yards. These guys have deep pockets and can afford to wait if Hudson Yards gets pushed out a couple of years...in fact land prices would dip and give them the chance to put together even better assembleages of property, swap air rights etc. My guess is that as lender confidence in commercial development wanes it will slow things down. In Harlem my guess is that public funds will keep flowing, partly predicated on the fact that i think we have a fiscal stimulus coalition forming in government, I see a return to democrats holding power and I believe the environmental benefits of city living will be a positive force for upzonings and higher density development of places like 125 st goinf forward.
Posted by Jeff | January 23, 2008 1:52 PM
Jeff,
As another commenter mentioned I'm surprised you make no comment on downtown Brooklyn. Was it part of the tour? Belltel Lofts, City Point, 200 Livingston, Oro, just to name a few -- it's probably the second biggest concentration of new units after Williamsburg. Some may go rental given market trends, but do you have any thoughts on this area?
Posted by New Reader | January 23, 2008 5:39 PM
We did not spend a lot of time on downtown Brooklyn. I had heard through the grapevine that sales at Oro were slow which my broker friend also mentioned, he commented that the location just wasn't ideal, which I could understand when we drove by. There were applications for 257 units in downtown Brooklyn filed in 2007 down from 574 in 2006 (well below Williamsburg). There are several large projects planned downtown that may not have been filed yet and my guess is deliveries of the product may not happen for a couple of years.....out past my radar screen's reach. Other than that I can't add a lot more value.
Posted by Jeff | January 23, 2008 6:49 PM
Jerry Minsky didn't write that asshole, I did - I doubt he needs to self-promote, as I doubt he reads this site.
I like this site, but I think Noah is an equites trader like he says with a passion for real estate. He doesn't always offer sound advice they way a committed broker would to a client.
I never said a home wasn't an investment, I said, it has to be a home first, and investment second. Buying by numbers doesn't work.
Posted by Anon | January 27, 2008 12:09 AM
and lastly, I don't care who wrote it - its on the Urbandig site, Noah is responsible. It's his site.
Long Island City, yeah, I want a guy in Long Island City telling me about Bed-Stuy, as another commenter wrote, what about Dumbo, or downtown Brooklyn?
This advice sucks.
Posted by anon | January 27, 2008 12:20 AM
Not a real estate wizard, but I have lived here proudly all my life, and now Brooklyn is all about buzz neighborhoods. Don't get me wrong, I like how some neighborhoods evolve and culturalize, but I hate the fact that more and more people from everywhere else but Brooklyn are laying out the exorbitant money to land a new construction or renovated space. $800K for a 1-br in Williamsburg just because it's buy McCarren Park? What a waste of money. And that's because someone from somewhere else decided it's a viable market? Whoever bought places at prices like that are about to really bite the bullet for a long time. You ain't upgrading any time soon.
Posted by Anonymous | January 29, 2008 4:27 PM
What do you think about the new big developments on waterfront in Williamsburg btw 4th and 7th?
The two project are the Northside pears and the Edge.
The Edge will open his sales office in 10 days and it looks like that 525 apartments will be for sale.
Do you think that is this early stage is it possible to negotiate the price?
Also do you think that if you buy now will your property appreciate by the occupancy time scheduled for Spring 2009? ( I think will be late 2009).
I have some European investors interested in buying in New York but I am not sure if I should go out in offering them this opportunity!!!
Thanks
Manuel
Posted by manuel | March 18, 2008 2:21 AM