At the end of last year, I took over as the Head of the Northeast for Commercial Term Lending, replacing Chad Tredway who accepted the role of Co-Head of J.P. Morgan’s Real Estate Banking group. Since then, I’ve been focused on educating myself on New York City’s unique boroughs and submarkets. One of my favorite ways of doing so in slightly warmer months was taking long runs. Another way our team ensures we remain on top of any changes in the market is doing periodic van tours—block by block, street by street—to develop a deep understanding of the fabric of neighborhoods. Due to how rapidly Brooklyn is changing, Chad and I recently went on a tour of the borough and its submarkets.
Here are some of the insights I took away from our Brooklyn tour and the key factors we’re seeing affect Brooklyn’s multifamily market.
New York’s real estate market has always benefited from the city’s status as the capital of global finance. And as geopolitical events unfold internationally, New York’s dominance in the FIRE (finance, insurance and real estate) sector is only expected to grow. But in recent years, there has been a boom in commercial real estate that extends beyond Manhattan. Brooklyn's revived waterfront neighborhoods have become a home for many of the nation’s leading TAMI (technology, advertising, media and information) firms and have seen an increase in redevelopment.
Set along the East River, the iconic Domino Sugar Refinery has become an emblem of the borough’s new economy. What was once the largest sugar refinery in the world, the Williamsburg complex is now home to a redevelopment project that will offer 600,000 square feet of office space, 2,000+ apartment units and 6 acres of new parkland.
Just to the south, the Brooklyn Tech Triangle is home to 11 universities and more than 500 tech startups. Today, there are at least 36 coworking sites in Brooklyn catering to this growing part of the local economy. Established Silicon Valley firms like Google and Facebook now have offices in Brooklyn, and new media giants like VICE have offices in converted warehouses nearby.
Brooklyn’s private sector employment grew by 29.3 percent between 2004 and 2014, far faster than any other borough. Over the same 10-year period, the number of residents with a bachelor’s degree grew by 77 percent. Adding to the borough’s dynamic makeup, economic diversity is a clear strength of the market with nearly 40 percent of jobs coming from small businesses.
The rise of Brooklyn’s TAMI sector is drawing a diverse crowd of young professionals to the borough, which has been a boon for the multifamily market. Unlike previous generations, who fled to the suburbs as their careers took off, millennials have shown a desire to continue living in the urban center even as their paychecks and families begin to grow.
The influx of millennials has shifted the entire city’s demographics. Prime renting-age citizens (age 20 to 34) now comprise 21.5 percent of New York’s population, a full percentage point higher than the nation’s average. With the prospect of owning a home in the city’s high-demand neighborhoods a far-reaching goal for most salaried workers, the tide of young professionals is driving increased demand for rental units.
Prime renting-age citizens (age 20 to 34) now comprise 21.5 percent of New York’s population, a full percentage point higher than the nation’s average.
Immigration has long been a source of demographic growth for the city. New York City continues to add residents despite negative net domestic migration. The city appeals to immigrants for its dynamic economy and diverse population, and their rate of arrival outpaces the stream of residents moving inland for lower-cost destinations.
New York’s outer boroughs have always drawn immigrants—which has been a strong driver of demand for rental units. From 2004 to 2014, Brooklyn’s population grew by 5 percent compared to 3.7 percent for New York City as a whole.1 And today, Brooklyn stands as the most populous borough with approximately 2.64 million residents.
The city’s unique demographic and economic landscape has created a booming multifamily sector. Within Class A product, rents in Brooklyn peaked in 2015, trended downward in 2016 and declined in 2017. Rent growth has slowed in Class B and C assets. Approximately 16,000 units are under construction in Brooklyn with another 20,000 in the planning stages—which should continue to put downward pressure on rents and occupancies. In addition, population and job growth have both slowed. Finally, interest rates, and by association, mortgage rates, have begun their march upward.
I recently had the pleasure of hearing Bob Knakal, Chairman of New York Investment Sales at Cushman & Wakefield, speak. During his presentation he covered the correlation between cap rates and interest rates over the last 33 years.
Source: Bob Knakal; Cushman & Wakefield
Needless to say, upward movements in rates negatively impacts values. And while the new supply will take time to absorb, fundamentals will eventually revert and values should stabilize.
There are many reasons for multifamily investors to remain optimistic about the long-term prospects of Brooklyn. The recent economic and demographic shifts indicate that Brooklyn’s multifamily market should have staying power. It has transformed from an industrial hub to the heart of the city’s most vibrant industry cluster, which should continue to draw in young professionals. People want to live in Brooklyn, and meaningful jobs are locating here. There are other reasons to be optimistic if you are a multifamily investor: Median home prices remain at all-time highs at approximately $750,000 and there are nearly 14,000 rent-stabilized buildings in Brooklyn. Both of these factors add to the stability of the tenant base and the underlying cash flows of the existing multifamily stock. As a lender, we see these factors as positives for NYC’s multifamily investors and believe in Brooklyn’s staying power.
Meet our new Head of Commercial Term Lending East, Kurt Stuart, and hear about how he plans to help our clients succeed in today's dynamic market.
1NYC Department of City Planning, “Current and Projected Populations.” http://www1.nyc.gov/site/planning/data-maps/nyc-population/current-future-populations.page.
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