The Meat and Potatoes: Brooklyn Multifamily Rents
The Meat and Potatoes: Brooklyn Multifamily Rents
What pro forma rents should you underwrite for your new pre-war, walk-up or elevator building? How far below market are your in-place rents on your legacy assets? These and other related questions are usually at the top of mind at this time of year when purchasers prepare for end-of-year closings and property owners look ahead to upcoming vacancies in the spring.
Some Background
According to Douglass Elliman, new and old Brooklynites signed just under 4,000 new residential leases in September. That's more than 3x the number of new leases signed last year in Brooklyn. This swell in lease signings isn't just a post-Covid whiplash effect either; in September 2019, renters only signed 1,506 new leases, 62% fewer than the number of leases signed in Sep 2024.
Yet, more remarkable than the increases in lease signings is the recent pace of rent growth. In the chart below from 2019, Elliman's research illustrates that rents were relatively flat from September 2016 to September 2019, beginning at just below $3,000 and snaking their way up to the $3,000 mark. In Elliman's September 2024 report, the same chart tells a very different story. In recent years, the strained supply and healthy demand for Brooklyn apartments have sent rents' up and to the right'. Median rents were at ~$2,950 in Sep 2021 and now they are $700 higher at $3,650, demonstrating 24% growth, or 8% annual growth rates. What's also noteworthy is that these are real rents – less than 20% of these ~4,000 lease signings had concessions, and if they did, they averaged to less than 1-month free rent. Further, more than 25% of prospective tenants entered bidding wars to secure apartments. The market is very tight.
Table 1 – September 2019 Elliman Market Rental Report
Table 2- September 2024 Elliman Market Rental Report
Corcoran's September 2024 report highlighted the areas where renters are moving to in NYC and the variances year over year. Downtown Brooklyn continues to be a draw for movers, who tend to be younger, well-educated, and upwardly mobile. Traditionally strong areas like Downtown Brooklyn and DUMBO continue to be strong, with big pops in rental demand versus last year. Gentrifying Greenpoint and South Williamsburg also witnessed strong demand this summer compared to the previous year.
Chart 1- Signed Leases in Brooklyn Neighborhoods with Greatest Changes YOY
The Problem
And yet, the data from Elliman or Corcoran or even MNS can only go so far in explaining what is happening in the market. Lofty questions like "Is the increase in lease signings coming from outsiders moving into NYC, or existing tenants moving around?" or, "Can investors attribute DUMBO and Greenpoint's acute growth in September lease signings to increased supply, greater demand, or both?" go unanswered.
More importantly, looking at rent data doesn't explain whether your rent forecasts are correct. The question to answer is: What rents should I forecast at cash-flow stabilization for my new 20-unit hybrid FM-RS building acquisition in Red Hook?
Rent reports that don't segment their insights based on the following can't be relied on to determine pro forma rents:
New Construction vs. Pre-War
Renovated vs. unrenovated units
Large apartments vs. smaller ones
Separating different parts of Brooklyn
I did the research myself because there was nothing out there that I could rely on to get the insights I needed. I did this the brute force way and looked at hundreds of rented apartments on Street Easy and sifted through rented apartments to use in my comp set on what I know to look for.
Below is a weighted average of the rent / sf in select 'Prime Brooklyn' neighborhoods. The rents reflect 'true' rents in today's market, net of any concessions. The rents are taken exclusively from renovated apartments in pre-war, primarily walk-up (but not exclusively) buildings. To avoid overstating rents, I excluded sprawling garden apartments and corner buildings, which have higher rents / sf all other things held equal. The results are below. These are what you should use in your underwriting.
Table 3 – Rent / SF in Prime Brooklyn Areas
Use this in your underwriting for pre-war acquisitions.
Chart 2- Rent/sf in Prime Brooklyn Areas Spring-Fall 2024
Call me at 646 326 2220.
with any questions or to take a closer look at the data.
I am bullish on NY Multifamily.
Best Regards,
Romain Sinclair
Sources: MNS’s September 2024 Report, Elliman’s September 2024 Report, Elliman’s 2019 Report, Corcoran’s September 2024 Report, Street Easy listings