The rush on brownstone Brooklyn: Can new development benefit from the demand?

A recent real estate section cover story in the June 1st New York Times highlighted the "gold rush" on brownstones in established neighborhoods such as Brooklyn Heights and Park Slope that is resulting from the increased demand for single family homes. The author, Marc Santora, cited a year-on-year rise in prices as much as +60% in Boerum Hill and +27% in Carroll Gardens. With rents rising all over the city and historically low interest rates, buyers in every borough are more inclined to seek out home ownership. Santora's article reiterates what many Brooklyn real estate insiders, such as blogs Brownstoner and BK to the Fullest, have been predicting for years: brownstone prices are likely to continue to rise sharply due to their limited supply in neighborhoods that are also close to abundant shopping, desirable schools and convenient transportation. Further spurring demand is a trend underscored in another recent New York Times piece, an op-ed, about "walkable urbanism," indicating that in areas where a car is not a necessity, housing prices have been increasing steadily for the past two decades. Study co-author Christopher Leinberger wrote, "Today, the most valuable real estate lies in walkable urban locations. Many of these now pricey places were slums just 30 years ago." While he was referring broadly to all cities in the study, he might just as well have been talking exclusively about Brooklyn and the renewed interest from young families who increasingly prefer to be near a subway line instead of on a cul-de-sac on Long Island. For developers, the message seems loud and clear: demand is increasing for larger units. In contrast to the steep price increases for brownstones, sales of smaller units are not as robust, with Santora's article citing that "Studio and one-bedroom apartments in northwest Brooklyn have not proved as resilient, with prices still off from their peak levels." Recent market reports have indicated that large units are in demand, with sales of two or more bedroom units making up 86% of sales in Brooklyn Heights in Q1 2012. Developers will also want to take note that these units are fetching the greatest premium per s/f-close to $1,000 per s/f compared to $700 per s/f for one-bedrooms. The trend holds true for rentals as well, prices for two bedrooms increasing +10.4% over one year ago, versus +8.4% and +4.7% for one-bedrooms and studios, respectively. It's debatable whether families who are initially attracted to Brooklyn's charm and are seeking the privacy that comes with a brownstone will consider a new rental or condos instead. I'd argue that the amenities such as on-site parking, doormen, gyms and game rooms are likely to at least put new developments in the running but they can only compete if the units offer sufficient living space. Developers can also attract attention to family-sized units with marketing that speaks directly to this audience by highlighting the reduced maintenance that comes with new development as compared with a 100-year-old brownstone. These busy working parents are likely to respond to the selling point of getting lots of living space without the additional weekend chores that come with home ownership. With condo prices in northern Brooklyn going for an average of $674 per s/f ($745 per s/f for new development) according to Miller Samuel's Q1 2012 Report, a unit that can compare to a 2,500 s/f, three-story single family brownstone would go for between $1.68 million and $1.86 million (or more if you believe the price premium of up to 30% for larger units as cited in the earlier Brooklyn Heights example). This hypothesis holds true for at least one development that offers large units: Kirkman Lofts, a 100,000 s/f redevelopment in DUMBO (now 90% sold) offered a number of three and four-bedroom units for over $1.5 million and just put three single family townhouses of between 2,500 s/f and 2,800 s/f on the market for between $2.6 million to $2.9 million. One Brooklyn Bridge Park also offers large units and has sold well. The Brooklyn development market offers plenty of potential to build more oversized units. Note the pending sale of the Domino Sugar Factory in Williamsburg with nearly three million buildable s/f. And the Jehovah's Witnesses just began marketing a site with 150,000 buildable s/f in DUMBO, creating more anticipation that the nearly one million buildable s/f they own at 87 Jay St. will come to market soon. For those intent on owning a piece of brownstone Brooklyn, the options are to pony up the cash in a seller's market or seek out more affordable opportunities in areas like Bed-Stuy and Crown Heights. Changes will undoubtedly continue to abound in these areas, but perhaps not much further out as commutes to the city become less appealing and as many mid- to south-Brooklyn neighborhoods were built in the 1920s or later, therefore lacking the turn-of-the-century charm that initially brings many buyers to Brooklyn. They don't call it "brownstone Brooklyn" because people like to live in condos, but my bet is that buyers looking at established neighborhoods close to Manhattan are likely to be increasingly persuaded by the convenience and amenities of new construction-assuming the units provide comparable living space to a brownstone. If developers listen closely to market demand and take advantage of Brooklyn's relatively affordable (compared to Manhattan) prices for land of $115 price per buildable s/f, hopefully that oft quoted Field of Dreams line (with a slight tweak) will ring true: "if you build [large condos], they will come." Daisy Okas is an investment sales associate at Besen & Associates, New York, N.Y.