How Brooklyn Real Estate Is Faring After 18 Months of COVID

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 (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.

Toby Moskovits’ Heritage Equity Partners, for example, filed for bankruptcy on The Williamsburg Hotel, after defaulting on a $68 million loan at the property. Moskovits also faces foreclosure on a different Brooklyn site at 232 Seigel Street in Bushwick, where she hoped to build a 144-room hotel.

All Year Management has also struggled with a wave of foreclosures, bankruptcies and defaults. Ultimately, the Williamsburg-based developer was forced to file for bankruptcy on the second phase of its massive Bushwick project, Denizen, which consists of 911 rental units on the former Rheingold Brewery site.

The Brooklyn retail market is also a mixed bag.

“There’s still a lot of vacancy and hesitancy in the marketplace, but it’s no longer on life support,” said Tim King of SVN CPEX Real Estate. “The patient is back up and walking after being on their deathbed, if you will, but not ready to run a marathon yet.”

Asking rents remain down from early 2020 levels across much of the borough, though some retail corridors in busy residential areas have fared well. Average retail asking rents in Dumbo have declined 48 percent, from $69 a square foot in the winter of 2020 to $36 in the winter of 2021, according to the Real Estate Board of New York’s most recent data. Court Street between Atlantic Avenue and Pierrepont Street saw a 29 percent drop in asking rents over the same period, while rents along the northern portion of Bedford Avenue in Williamsburg slid 17 percent.

Positive outliers included Montague Street in Brooklyn Heights, which saw a 10 percent year-over-year increase in asking rents from early 2020 to early 2021, and Flatbush Avenue in Park Slope and Prospect Heights, which saw a 3 percent increase in the same period. Rents on Seventh Avenue in Park Slope also remained essentially flat.

“The more expensive areas saw a bigger drop than others,” said King. “There were certain corridors of Downtown Brooklyn that depend on schools being open, office workers being in their offices. When those constituencies were gone for a year or more, those areas took a hit.”

Jason Pennington, a retail broker who manages Ripco Real Estate’s Brooklyn office, said that rents remain at a 15 percent discount. However, he felt that leasing activity was increasing in Downtown Brooklyn, Cobble Hill, Fort Greene, Park Slope and Prospect Heights.

He pointed out that these areas are recovering because they “aren’t heavily reliant on tourism. It’s mostly people within the five boroughs coming for daytime shopping, dining.”

Food tenants, day care centers, tutoring centers and grocery delivery companies are all in the market for retail space, he said. Small fitness tenants have also begun looking for space again, after a challenging 18 months that put a significant dent in the sector’s business.

The COVID rent discounts might even draw some new companies and small-business owners into the mix.

“I think we’re going to see some entrepreneurs and groups coming in from other states,” said Pennington, “taking advantage of the fact that rents are down, and they can come into New York for the first time.”

Rebecca Baird-Remba can be reached at rbairdremba@commercialobsever.com.