Concerns Rise Over Brooklyn Boom
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It is hard to imagine that 14,300 new apartments are now under construction or in the pipeline for downtown Brooklyn. Business leaders who have made a positive commitment to this area are bullish on the future of the area, but others worry that a number of the planned developments there will be delayed because of the turmoil in the credit market, as well as the tightening of underwriting standards by financial institutions and the recent changes in the 421-a tax abatement program.
On the bullish side, real estate experts point to a combination of apartments, offices, and retail that will finally populate the area 24 hours a day, seven days a week. “For the first time, we have a full-scale view of downtown Brooklyn’s future as a thriving neighborhood, supported by a revitalized commercial core and made possible by the financial commitments from the city and the private sector, which further enhances the environment for continued growth,” a co-chairman of the board of directors of the Downtown Brooklyn Partnership, Robert Catell, said.
“The residential development is what is sparking a whole new set of demand and activity in downtown Brooklyn,” the chairman of Thor Equities, Joseph Sitt, said. “These many new residences are creating a new residential consumer base, igniting demand for retail services, restaurants, hotels, and even businesses that feel that relocating to downtown Brooklyn will allow them to draw on a strong base of talented and educated employees in the Brooklyn market.”
The president of the Downtown Brooklyn Partnership, Joe Chan, said: “In the pipeline there are 56 projects which will develop a total of 14,300 residential units, including the Atlantic Yards project. Forty percent are slated to be condominiums, and the balance will be residential rentals. Today we are seeing some developers hedging their bets between condominiums and rentals. Of the 5,600 rental projects, approximately 3,200 will have an affordable component, the majority of which will be located in the Atlantic Yards.”
The new apartments, Mr. Chan said, will “create a 24/7 environment and will help to diversify the retail environment and strengthen the local economy. In the long term, this will help the commercial market, and people’s perception of downtown Brooklyn will change for the positive.”
Still, changes in the credit market and the drying up of the long-fruitful 421-a subsidy program loom large, even for Mr. Chan. “Brooklyn will not be immune to the credit crunch,” he said. “Prices will have to be adjusted for developments to take place and units to be sold. Perhaps the biggest effect on new residential developments in Brooklyn and the other boroughs is the change in the 421-a legislation, which provides tax abatements for projects which have their foundations in the ground prior to June 30, 2008.”
After December 28, no written agreement for 421-a negotiable certificates projects will be issued by the city, but existing certificates will not expire and can still be used, with some limitations. If construction commences after June 30, 2008, only buildings receiving substantial government assistance under an affordable housing program, those that set aside at least 20% of their units as affordable, and projects that purchase negotiable certificates from agreements executed prior to December 28 are eligible for 421-a benefits in the geographical exemption area, which includes downtown Brooklyn.
A former City Council member and a partner at the law firm WolfBlock, Kenneth Fisher, said recent revisions to the 421-a program could be devastating to downtown Brooklyn’s residential market.
“Given the credit crisis and problems on Wall Street, they picked exactly the wrong moment to choke the golden goose,” Mr. Fisher said. “Even the biggest developers are worried that there is simply not enough subsidy to meet the need. The 421-a requirement for affordable housing is already skewing the market. Projects are being accelerated to meet the deadline, creating a glut just as the demand might soften.”
“Home ownership is at risk as developers switch to rentals because there are no meaningful subsidy programs for condos,” he said. “The biggest losers will be the smaller projects, which can’t possibly qualify or navigate the subsidy program.”
The president of the Brody Group, Eric Brody, said: “In the short term, there is a scramble for landowners to develop their existing property before the deadline of the 421-a tax abatement. Bankers are not interested in giving new developers money to develop, so the landowner has two options: put up another year of interest reserve or partner up with a proven developer ASAP. This creates a high demand for developers because there are only so many people who have the credibility to obtain financing. This will decrease the amount of projects that occur before the deadline.”
“After the deadline, many projects in downtown Brooklyn’s most insulated neighborhoods will still move forward because sellout prices still make the jobs feasible,” Mr. Brody said. “Developments on fringe areas but still in the exclusion zone will be most affected. All of those planned new developments in Prospect Heights are examples of this type of development. The neighborhoods are ‘rising stars,’ but they are still a bit fringe. They will be unable to survive without the abatement to attract buyers.”
Another residential developer in Brooklyn, who asked to remain anonymous, called the market in downtown Brooklyn “lukewarm.” “Last week at some new development open houses, very few or no one even showed up,” the developer said. “Nevertheless, developments in good locations with priced-right products will move and be sold, especially since they are offering 421-a tax abatement. Developments in fringe areas in towers being built at prices of $700 to $800 a square foot, located on streets with three lanes of heavy traffic, will have difficulty selling.”
There remain an extraordinary number of new apartments at some stage of construction, and developers are reporting strong sales. The developer Dean Palin, president of Palin Enterprises and a co-developer of the 309-unit Oro condominium on Gold Street and Flatbush Avenue, said apartments are selling well, with some units selling for close to $800 a square foot. Directly adjacent to the Oro, Mr. Palin’s partner in the project, Ron Herscho of United Homes, is creating a mixed-use building with a Hilton Hotel on the lower half of the building and 10 stories of condominium units above.
Nearby, construction is under way on an affordable and market rate condominium development by BFC Partners at 225 Flatbush Ave. Extension. When completed, the 310,000-square-foot development will have 240 condominium units.
Construction has begun on Lalezarian Properties’ new $200 million luxury rental complex, which will comprise three high-rise towers encompassing nearly a full city block on Gold Street, between Tillary and Concord streets. The 512-unit building will have an attended parking garage, as well as 40,000 square feet of retail space.
The developer of Avalon Chrystie Place on the Lower East Side, AvalonBay Communities, is also bullish on downtown Brooklyn and is now building a rental property there. The senior vice president for development at the company, Fred Harris, said: “Our tower will be 42 stories with over 625 market-rent rental apartment homes on the site at Myrtle and Flatbush avenues. We are very excited by the magnitude of the investment that is being made in downtown Brooklyn, where we plan to spend over $300 million, which would be the largest single investment by our company.”
United American Land is planning to build a $208 million development a block from Fulton Street Mall and MetroTech. The development site occupies approximately half a square block along Willoughby Street, between Bridge and Duffield streets. The 594,000-square-foot development would include retail stores on the base with housing on top.
A real estate investment fund, Glory Capital — a subsidiary of an international company in the apparel and licensing business, Faded Glory Group — has been active in acquiring properties in downtown Brooklyn. Since the beginning of the year, it has acquired a 43-unit apartment building at 6-10 Clark St., as well as a 30-story, 50,000-square-foot, 76-unit luxury apartment building at 67 Livingston St.
A joint venture of SDS Procida Development and the real estate investment fund Jamestown Properties has retained Cushman & Wakefield as the broker for 189 Schermerhorn St. The site is currently under development as a mixed-use property consisting of two buildings with 246 luxury apartment units, 13,700 square feet of retail space, and a 150-car parking garage.
The Clarett Group is also quite active in developing downtown Brooklyn. It is completing a 30-story, 108-unit condominium tower, the Forte, at 230 Ashland Place in the Brooklyn Academy of Music cultural district. In addition, the company has recently acquired a prime development site in Carroll Gardens. The site, on Court Street, between Union and Sackett streets, was recently acquired from Long Island College Hospital’s School of Nursing. The developer plans to build a residential project that would include 91,000 square feet of residential condominiums on Court Street and 40,000 square feet of single-family townhouses.
A joint venture of Clarett Capital and Equity Residential is planning a large rental apartment development called 111 Lawrence Street, between Willoughby Street and Myrtle Avenue on the MetroTech campus. When completed in June 2010, the 52-story tower will contain 493 rental apartments and a 202-space parking garage.
As reported last week, Acadia Realty Trust is developing City Point, a mixed-use 1.5 million square-foot tower adjacent to the Fulton Mall. The complex will house approximately 500,000 square feet of retail, 120,000 square feet of office space, and 900,000 square feet of rental apartments. The rental component will be developed by MacFarlane Partners and Rose Associates and will have 20% reserved for affordable housing.
One of the largest residential developments is by the Red Apple Group, which is owned by a mayoral candidate, John Catsimatidis, on Myrtle Avenue, between Prince Street and Ashland Place. The development contains 660 condominium apartments in a 37-story tower and 415 mixed-income rental apartments in mid-rise buildings. The development will include approximately 290,000 square feet of commercial space and subgrade parking. One of the most prominent condominium developments near downtown is known as One Brooklyn Bridge, a project by the RAL Companies. The 450-unit project is the conversion of the industrial buildings on the waterfront, once owned by the Jehovah’s Witnesses, who sold the property in 2004 for $200 million. According to real estate sources, many of the units that have extraordinary views of the East River and the lower Manhattan skyline are selling for more than $1,000 a square foot. With seven universities in downtown Brooklyn, a number of new dormitories have been built and are planned.
In September, New York University opened a new graduate residence hall at 67 Livingston St. that is home to 115 NYU graduate students. The university is making a van available at night to take students to the Brooklyn dormitory from NYU’s Manhattan campus.
Mr. Chan said: “You are seeing in downtown Brooklyn a growing college community. Polytechnic is building on Johnson Street, and Long Island University recently built a dormitory at One Hoyt Street and is converting a couple of hundred dorm rooms, a joint venture of the Chera Family and Long Island University. Downtown Brooklyn is going to be a 24/7 campus for students. As residential grows, college students will feel happy, and this will add to the retail environment.” One thing is certain: The landscape of downtown Brooklyn will change dramatically over the next decade, with commercial, retail, office, and residential development. Expect to see thousands of new residents joining the ranks as residents of this dynamic urban community.
Mr. Stoler is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.