Shift In Investor Sentiment Stirring Up South Brooklyn

Traditional investor attitudes, strategy and profile in the south Brooklyn market are transitioning.

“We’re seeing a gradual shift of investment strategy in response to rising interest rates and a tightly constricted environment for rent-stabilized apartment buildings,” Marcus & Millichap’s John Brennan told Bisnow.

The most aggressive buyers are scoping sub-4% cap rate deals, as long as the price per square foot is tolerable and there is a significant margin of upside. Brennan attributes this to investors now buying for long-term capital appreciation, rather than steady cash flows.

Exemplifying this trend is a recent deal of John's at 332 42nd St and 232 54th St, a Sunset Park completely occupied rent-stabilized two-building, 26-unit package, which was sold to a Manhattan-based investor for $4.7M, at a 3.4% cap rate.

Buyers here are generally willing to settle for minimal returns incurred between transactions, viewing these as a sort of holding penalty. The average multifamily cap rate has fallen each year, from 6.56% in 2012 to 4.84% in 2015, according to a report from Ariel Property Advisors.

This strategic shift accelerates deal velocity and increases overall market activity.

There are new types of investors rapidly deploying capital in south Brooklyn, and the conventional investor has had to pivot or get out in response.

“The inflexible, traditional south Brooklyn investor has been sidelined and is simply not purchasing at all,” Brennan said.

New market entrants seeking to capitalize on the arbitrage opportunities rely on brokers’ increasingly prominent function as advisors, rather than mere transaction facilitators.

Foreign investors are particularly becoming more active, often all-cash with less concern for the day one cap-rate, Brennan told us.

“A Chinese client of mine is used to seeing 2 to 3% cap rates in Hong Kong, so is not fazed by a 3.5 to 4% cap-rate, as long as the upside is significant and the neighborhood noticeably gentrifying.”

In addition, Manhattan-based investors and funds are aggressively targeting certain neighborhoods of south Brooklyn like Sunset Park and Bay Ridge.

“These buyers are also accustomed to lower cap rates, but take a more proactive operating strategy that is often centered around buy-outs, immediate capital improvements and utilizing air rights, etc.,” said Brennan.

This ambitious hands-on approach can lead to a return in a shorter time frame. 

Brennan has seen far less competition around the asking price and fewer written offers. Still, price points are higher this year than in 2015 in most neighborhoods of south Brooklyn.

With rents capped for one-year lease renewals, and regulations increasing for running a rent-stabilized apartment building, “buyers have had to become more proactive during ownership, or have had to be realistic with low cap rates if taking a hands-off long-term approach,” said Brennan.

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