One thing has been clear throughout the pandemic: New York City as a whole may have struggled, but Brooklyn has been more stable than that ritzier borough on the other side of the East River. Brooklyn lost fewer people than Manhattan, and so its rents — particularly for apartments — only took a small hit by comparison. Retail and office rents also seem to have declined at a much less precipitous rate in Brooklyn.
“Brooklyn in many ways was behaving like the suburbs,” said Jonathan Miller, who runs his own real estate appraisal and consulting firm, Miller Samuel. “The sales market is through the roof. The rental market was hit hard, but not that hard.”
At the height of the rental market doldrums in February of this year, New York City was struggling through the second wave of the coronavirus. Rents in Manhattan averaged $3,791 a month, down 13.5 percent from February 2020’s average of $4,385. In Brooklyn, the average rent dropped 9 percent, to $3,125, from $3,442 a year prior.
Now, however, the year-over-year price trends have reversed, largely because Manhattan rents had fallen so far last year during the height of the pandemic. Miller Samuel’s latest market report, for August, finds that average Manhattan rents are actually up 1.4 percent from a year ago, to an average of $4,038, while the average in Brooklyn is down nearly 7 percent, to $3,218.
“The COVID rent discount in Brooklyn has fallen by about half,” said Miller. “We were looking at a 14 or 15 percent decline [earlier in the pandemic].”
He noted that while median rent in the borough remains down about 7 percent compared to two years ago, concessions on new leases are also getting shorter. In January, it was 2.1 months of free rent — its highest level during the pandemic — and now it’s at 1.5 months.
Even with Hurricane Ida ravaging the five boroughs and the delta variant of the coronavirus pushing up case numbers, Miller said he felt that increased vaccination rates were bringing renters back to the city.
“Vaccine adoption played a big role in the revival of the rental market,” he explained. “That pulled people into the city from the suburbs. Even with the delta variant, I don’t think the trend [of rising rents] is going to reverse, but rent growth will continue … at a more modest rate.”
Meanwhile, office rents in Brooklyn have remained surprisingly stable since March 2020. Some submarkets saw fluctuation, but all within a few dollars per square foot.
Downtown Brooklyn, which was the most active office market in the borough during the pandemic, saw rents tick up in the second quarter of 2020 to $58 a square foot on average, and then gradually decline to $55 a square foot in the second quarter of this year, CBRE’s data shows. Rents in Dumbo, another in-demand market, also rose slightly over the course of the pandemic, from $62 to $64 a square foot. Greenpoint-Williamsburg saw a slight decline, from $59 to $57 a square foot, from Q1 2020 to Q2 2021. Across the borough, the average office asking rent has remained pretty stable at $46 a square foot for the past year and a half.
Back in February 2020, “Brooklyn was doing pretty well, as was the entire New York City office market,” said Nicole LaRusso, Northeast director of research and analysis at CBRE. “We were seeing a lot of activity in the market. The challenge in the market was that there was quite a lot of supply, and heading into the pandemic, there was plenty of demand. There was a lot of supply coming online in Brooklyn, not all of it in the most accessible locations. It wasn’t compelling enough to drive a lot of leasing activity, but we were seeing nice momentum growing on the leasing side.”
The pandemic put the brakes on office leasing in Brooklyn, as it did in Manhattan. But that’s changing. Tenants signed 408,000 square feet of new Brooklyn leases in the second quarter of this year, bringing leasing in the borough to its highest level in five quarters, per CBRE.
St. Francis College signed a 255,000-square-foot lease at Tishman Speyer’s The Wheeler building on Livingston Street in Downtown Brooklyn, accounting for more than half of the square footage leased in Brooklyn during this past quarter. Dumbo also saw its biggest quarter of leasing in two years, with more than 70,000 square feet leased exclusively to tenants occupying less than 10,000 square feet each.
Manhattan, meanwhile, saw skyrocketing vacancy and availability rates throughout the pandemic, as major office tenants put blocks larger than 100,000 square feet on the market. Asking rents declined, while concessions and free rent in office leases rose.
“In general, Brooklyn fared better than much of the rest of the market,” said Evan Haskell, an office broker at CBRE. “A big reason for that is the strength of the Brooklyn residential market, and the fact that many of the people that lived in Brooklyn, stayed in Brooklyn.”
He added that “we saw really dramatic increases in large blocks of space across all the major markets in Manhattan, and we did not see that increase in large blocks of space in Brooklyn. Manhattan saw increases well north of 30 percent in terms of [large blocks] available, while Brooklyn saw just an 8 percent increase in spaces over 100,000 square feet.”
Dock 72 in the Navy Yard and the handful of new office buildings in Williamsburg — including Two Trees’ Ten Grand Street and Heritage Equity Partners and Rubenstein Partners’ 25 Kent — have struggled to lease space throughout the pandemic. However, Vice Media is rumored to be negotiating a significant office deal at Dock 72, so the waterfront office project’s fortunes may finally be changing.
“Dock 72 has a fair amount of activity on it,” said Haskell. “What that tells us is that quality product at the right price point will lease in Brooklyn.” Williamsburg, however, “is still a neighborhood that’s establishing itself as an office market. The product needs to meet the pricing related to that.”
Whatever the relative resiliency of its apartment and office markets, Brooklyn’s investment sales market continues to struggle. The total dollar volume of commercial property sales in the first half of the year was $1.73 billion, according to TerraCRG’s most recent market report. That’s a 26 percent decline from 2020’s total during the first six months of $2.26 billion.
“At the peak of the market in 2015, we had almost $10 billion worth of transactions,” explained Ofer Cohen, TerraCRG’s president. “Between 2016 and 2018, the market was averaging between $6 and $8 billion [in transactions annually]. And then, in 2019, it was under $5 billion, because of the change in the rent laws.”
Cohen had an optimistic take on the remainder of 2021, after a lackluster investment sales volume of $4.5 billion in 2020. “We think that this year is a real recovery year,” he said. “It just takes time to close these deals. We’re projecting somewhere in the range of $5.5 billion worth of transactions in 2021 and a more robust, normal market in 2022.”
Of particular investments, the market for industrial property in Brooklyn remains incredibly strong. That’s because of growing demand from e-commerce companies and a dwindling supply of large industrial properties in the borough.
“The current winners are industrial, last-mile assets, and the demand for them has just been pretty robust in the last 12 to 18 months,” said Cohen. “The pandemic actually added a layer of demand to that last-mile distribution.”
The Gowanus rezoning, which entered public review last April, has pushed developers to buy up soon-to-be-residential land around the neighborhood’s eponymous and toxic canal.
“That’s going to spur a whole wave of transactions and a tremendous amount of affordable housing units to be created there,” said Cohen. The rezoning, which covers 82 blocks, could produce up to 8,500 units of housing, of which 3,000 would be affordable.
Cohen pointed to the upcoming expiration of the 421a tax exemption program in the summer of 2022 as one potential damper on the investment sales market, as residential developers can no longer realistically buy a property and start construction in time to get the exemption before the program expires in June 2022. The federal government is also considering raising the capital gains tax by about 25 percent and potentially curtailing the 1031 exchange program, which is one means of deferring capital gains taxes.
The changes may push long-term owners, particularly families, to sell off their buildings this year, said Cohen. “A lot of people are reconsidering their buy-and-sell scenario,” he noted. “It affects a big part of what we’re working on, and it’s sparked activity.”
Two Brooklyn developers in particular, struggled during the pandemic, perhaps a reflection of the uncertain market over the past 18 months.
Read the full article here.