By Al Barbarino
Lenders are feeling looser than they have in 12 months, as Brooklyn finds itself on the verge of a construction lending revival.
Brooklyn’s rising rental and condo prices paired with comparatively tame land costs make the borough increasingly more attractive for developers and lenders looking for solid returns on their investments, industry professionals said.
“There’s a rising tide of activity,” said Doug Hercher, an executive managing director at Cushman and Wakefield. “Investors who used to really just look at New York as just being Manhattan are now looking at what’s going on in the heart of Brooklyn and DUMBO and some of the markets along the water and saying, ‘There’s a great opportunity here and I can get in at a better basis than I can in Manhattan.’”
Manhattan tops the list in terms of sheer loan dollars. But a scarcity of land in the city’s most densely populated borough is making Brooklyn a no-brainer for many developers, construction companies and lenders. Apartments and condos are being scooped up almost as fast as they are built in neighborhoods like Williamsburg, Park Slope and Carroll Gardens, spiking demand in surrounding areas.
Brooklyn apartment rents grew by an average of 6.58 percent in 2011, compared with a rate of just 0.37 percent in 2010, according to data from MNS Real Estate. In Greenpoint, just north of Williamsburg, rental prices (studio, one-bedroom, two-bedroom) shot up 11.51 percent; in Boerum Hill, separated from the waterfront by Cobble Hill, rents increased by more than 15 percent.
Manhattan apartment rental rates grew significantly as well, by an average of 5.4 percent, but land costs seriously dampen investor returns and the overall strength of deals. As of the fourth quarter of 2011, Manhattan’s average development costs (both for land and building-teardown projects), at $320 per square foot, exceeded Brooklyn costs by more than $200 per square foot, according to data from Massey Knakal.
“It’s really hard to build rentals in Manhattan because of the land costs,” said Jordan Ray, managing director of debt and equity at Mission Capital Advisors. “The deals (in Brooklyn) make sense from a return on cost perspective, whereas it wouldn’t in places like Manhattan where there’s just no land.”
While it was the hipsters who infamously filtered into trendy neighborhoods like Williamsburg over the past several years, a surge of young professionals and 30-somethings previously geared towards the Manhattan market are moving into the area, where they have more space and can still pay a good $20 less per square foot on a rental than they would in a trendy Manhattan neighborhood, Ray said.
Smaller deal sizes are also more attractive when compared to the Manhattan market, where deals over $100 million have become the norm. In Brooklyn, you can still easily find deals under $50 million. Mission Capital Advisors recently closed on a $20 million rental project in Williamsburg and a $23 million condo project in Park Slope, drawing $12.6 million and $14.5 million loans, respectively, Ray said.
“Lender clients are becoming more active in Brooklyn as competition heats up,” said Gary A. Goodman, a lawyer and partner at SNR Denton who heads the firm’s real estate division. “Deal sizes are manageable, there’s strong tenant demand and current rents support strong debt yields.”
But lenders aren’t exactly rushing to become construction lenders again. They are underwriting relatively conservatively and choosing borrowers very carefully, looking hard at how much liquidity developers have, the quality of their guarantees, their experience and their track records.
“In the market in 2004 to 2007 I think that borrower quality moved down the list because it was just so competitive and now all of the sudden that’s back as a very prime concern,” Hercher said. “That doesn’t mean you need to be the Rudin family to borrow money, but some of the development deals that were getting done in the mid-2000’s where first-time developers were getting $50, $70, $100 million for projects – you’re not going to see that today.”
Lenders are also more likely to focus on borrowers teamed with a joint venture equity partner. There is more institutional equity interest in Brooklyn than at almost any point in the past, Hercher said. He was involved in the recent financing of a condo project at 340 Court Street in Carroll Gardens. The developer, Alchemy Properties, partnered with Prudential and ultimately received a $45 million loan from the lender – Capital One.
“That’s a project where the quality of the sponsorship – Alchemy’s experience as a developer, as well as Prudential as capital partner – clearly made a big difference in getting the financing done,” he said.
Ray, from Mission Capital, said he sees loan-to-cost ratios between 60 and 65 percent and up to nine percent return on cost ratios in Brooklyn. Out of four recent deals in Williamsburg in Park Slope, three involved some type of equity partner.
“As long as land doesn’t get too expensive, people are going to continue to buy and build more until the market’s in equilibrium,” he said.
*this article appeared in the Feb. 1, 2012 print edition of Real Estate Weekly