Brooklyn rents fell steadily last year as a flood of new apartments came online. With a pipeline full of new units ready to hit the market, prices are poised to fall further in 2018.
Rental reports from the city’s brokerages show the median net effective rents in the borough falling nearly 2 percent year-over-year in December 2017, making it the ninth month in the past year to see prices drop compared to the year prior.
Meanwhile, the Brooklyn sales market gained momentum as price indicators and velocity climbed even as buyers shifted toward smaller units.
Both the rental and sales trends, MNS CEO Andrew Barrocas said, stem from a blitz of development starts that tore through Brooklyn from 2014 to 2016 as builders rushed to take advantage of the 421-a tax abatements being offered in their area before they expired.
“It forced everyone to get a shovel in the ground and you saw multifamily rental projects popping up everywhere,” Barrocas said. “Now you have all those finished products coming to the market at the same time.”
During the rental gold rush from the first half of this decade, Brooklyn’s condo market was being neglected by the development community, Barrocas said, which caused the creation of new supply to lag behind the growth in demand.
Now, with most of Brooklyn’s western coastline and northern border included in the 421-a program’s geographic exclusion area, the prospect of making money on multifamily rentals have dwindled, especially as costs of land and construction continue to rise.
MNS’s December report showed average rents falling by half a percent borough-wide, though heavily developed areas such as Williamsburg, Bushwick and DUMBO bore the brunt of the declines.
Barrocas said he expects the market to continue softening during the coming year then stagnate for a three months or so before rents begin rising again.
Signs of market struggles were also evident in the monthly analysis compiled by Miller Samuel Real Estate Appraisal and Consulting Services for Douglas Elliman. That report showed the concession rate hitting an all-time high of 46 percent, with nearly 70 percent of newly-constructed units offering rent breaks compared to 35 percent of existing apartments.
“New development over supply is driving the market and a key reason for the record concessions,” said Jonathan Miller, president and CEO of Miller Samuel..
Listing inventory in the borough fell by 11 percent year-over-year and, similarly, the number of new leases signed in December was down more than 10 percent. Also, while the share of apartments that saw some type of concession shot up dramatically, the average number of free months declined from 1.7 in December 2016 to 1.2 last month.
On the other hand, sales of condos, co-ops and one-to-three-family houses in the borough registered near-record price trend indicators, with median sales prices jumping from $750,000 in 2016 to $770,000 in 2017, even as more buyers opted for less space.
Co-ops were the main driver of this increase, as sales prices for that segment shot up nearly 15 percent.
Shaun Riney, a commercial real estate consultant with Marcus & Millichap who specializes in the multifamily rental markets, said while over development is hurting rents in places such as Bushwick, Crown Heights and Ridgewood, Queens, he sees areas of growth in Greenpoint and Sunset Park.
“There’s still more people moving into Brooklyn than moving out every day,” he said. “The new construction is affecting things but it’s not Armageddon by any means, people are still leasing apartments just not at the rate that they did in the summer of 2016 and it’s important to remember that this whole boom has been created by a transient population, there’s a lot more turnover, people are trying different areas, experimenting to see what they like.”
Riney sees lower rents, longer turnaround times and higher concessions continuing in the near term but believes the worst of Brooklyn’s period of correction is behind it.
“We got a little bit ahead of ourselves so things are slowing down a bit but there hasn’t been a crash,” he said. “It’s been a $200 drop (for two-bedroom apartments), maybe $250 drop and now it might take a month longer to lease an apartment but I don’t think we’ll experience the same kind of rental pains this year that we did last year.”
Adding more hope to the rental market is the tax reform bill passed by Congress and signed into law at the end of last year. By capping state and local tax deductions at $10,000 and cutting mortgage interest rates limits from $1 million to $750,000, the federal government has driven up the cost of ownership in New York and other high-tax states.
Riney said he could see the new tax law nudging people on the fence toward the rental market.
“Unless you’re going to be in the same place for the next 10 years it might not make sense to buy right now,” he said.
Meanwhile, Barrocas said he saw an uptick in condo purchases immediately after the tax bill was signed into law, which he said could be a byproduct of the bill’s hefty tax breaks for small-business owners.
“You would think with the new tax plan it would slow the market down and yet we had our busiest December in years,” he said. “Buyers see the markets are doing well, we’re hearing about a lot of bonuses being doled out because of the corporate tax breaks and entrepreneurs, who are a big driver in the Brooklyn market, are realizing with the new cuts, they can afford to buy, even if they can’t deduct their property taxes.”