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BROOKLYN2007-2014 CAP & GRM TREND REPORT
INTROcon
tents
GFI Realty Services, Inc. is pleased to present our first Brooklyn capitalization (CAP) rate and gross rent multiplier (GRM) trend report. This report is a comprehensive analysis of the relationship between the fluctuations in CAP rates and GRMs in Brooklyn from 2007 to 2014*. During this time period, real estate investments were influenced by the macroeconomic climate, as the economy moved successively from boom to bust to recession and, finally, to recovery.
Certain areas of Brooklyn prove a case study for demonstrating how real estate remains a secure investment class because of gentrification and other social factors. These factors create an environment in which income levels grow at a pace fast enough to offset any economic turmoil.
Our report is a case study of two areas: Crown Heights and Flatbush.
*Data current through 2014
01 02 06 0703introduction brooklyn strong nyc real estate
vs economyconclusionthe tale of two
neighborhoods
01
The New York real estate marketplace is as dynamic as it is resilient, as has been demonstrated in previous market cycles. From boom to bust to recovery, NYC Real Estate remained strong, and the Brooklyn market has proved especially healthy. In 2003, the median GRM was between eight and nine times the rent roll; by Q1 of 2014, it had hit peaks as high as 15 times.
During the same time period, the average price per unit of Brooklyn apartments more than doubled, climbing from $80k in 2003 to $200k at the close of 2013; the median price per unit numbers similarly jumped from $83K to $150K in the same time period. While correction cycles lowered the average price per unit from $150K per unit to $98k in Q3 2008, the prices rebounded in 2010.
On the other hand, CAP rates averaged 8% in 2003 but are currently below 6%. As a result of the federal government’s quantitative easing recovery efforts, interest rates are at historic lows, and the market expects that we will face interest rate normalization in the near term. However, the increased rents that will likely follow will mitigate any adverse effects.
Brooklyn Strong
02
BROOKLYN STRONG
01 Crown HeightsIn the case of the Crown Heights section of Brooklyn, the change between 2007 and 2014 is quite remarkable. While several Brooklyn neighborhoods, including Williamsburg, Fort Greene, Bedford-Stuyvesant and Bushwick, underwent notable changes in this time period, the story of Crown Heights is particularly illustrative of the capital investment flowing into the market, and the multiple market swings that have occurred in these gentrified areas.
Our study analyzed a sample of 91 multi-family buildings in Crown Heights. For each year between 2007 and 2014, we selected 10-13 buildings that were traded in that year. In order to maintain par in the set, we only studied properties with the following criteria:
• The properties were constructed in, or prior to, the 1980s• The properties had between 30-50 units (without any retail or commercial components)• The properties were between 40,000-50,000 square feet
Analysis of the data provides fascinating insight into the repeated directional changes in pricing over this short period of time. While in 2007, as the market reached its peak, the average price per unit was $112K, the 2008 market crash more than halved valuations, lowering average prices to $43K. After The Great Recession, the market recovered steadily, with price per units reaching an average of $175K by 2014, exceeding the average price per unit during the “height” of the market in 2007.
TALE OF TWO NEIGHBORHOODS
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
2007
2008
2009
2010
2011
2012
2013
2014
Year Price Per Unit2007 $112,173.102008 $43,830.482009 $64,906.842010 $87,969.352011 $103,444.012012 $110,457.352013 $137,213.622014 $175,723.68
Crown Heights Price Per Unit
03
Turning to CAP rates and GRMs, a similar trend can be seen. Over the seven years of our study, the average CAP rate declined from 4.6% to 3.44%. During the economic downturn of 2008, the same dynamic seen previously can be seen playing itself out, as CAP rates made a short-term jump to 11.5%.
Similarly, GRMs increased from 11.1 times to 14.9 times from 2007-2014, despite dropping to an average of 6.2 times in 2008.
Therefore, a hold period that weathers downturns (seven years for the purpose of this report) provides overall returns that are quite impressive. In the worst-case scenario within our sample (purchasing property in Crown Heights at 2007’s high prices, and selling the property in 2014), value appreciation is 22%, not accounting for cash flow. In the best-case scenario (purchasing at the lows of 2008 and selling in 2013), value appreciation would be 213%.
04
Year CAP Rate2007 6.1%2008 11.5%2009 11.2%2010 9.4%2011 4.7%2012 5.3%2013 4.0%2014 3.4%
Year GRM2007 11.12008 6.22009 6.82010 8.72011 9.82012 9.92013 12.92014 14.9
Crown Heights CAP Rate
Crown Heights GRM
14%
12%
10%
8%
6%
4%
2%
0%
2007
2008
2009
2010
2011
2012
2013
2014
16
14
12
10
8
6
4
2
0
2007
2008
2009
2010
2011
2012
2013
2014
02 FlatbushNot every area of Brooklyn experienced such a steep ascent in property value. This is demonstrably true when examining the performance of the Flatbush market between 2003 and 2014. In stark contrast to Crown Heights, there was actually a slight increase in average price per unit between 2007 and 2008, with prices climbing from $87k to $93K. However, in 2009, the Flatbush market saw average prices per unit fall to $62K. Overall, Flatbush prices were much more stable over the seven-year time period than those of Crown Heights. Only in 2014, with average price per unit increasing to $193K, has Flatbush begun to show the same value trend indicators of an area on the verge of tremendous growth.
TALE OF TWO NEIGHBORHOODS
The information contained herein has either been provided by the owner of the property or obtained from sources deemed reliable. GFI does not guarantee the accuracy of any information provided herein. All information, including without limitation, zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should independently verify each item of income, and all other information contained herein.
05
Year Price Per Unit2007 $87,170.492008 $93,072.402009 $62,285.632010 $95,034.962011 $116,892.532012 $111,186.012013 $114,038.562014 $192,649.15
Flatbush Price Per Unit
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
2007
2008
2009
2010
2011
2012
2013
2014
Year CAP Rate2007 5.40%2008 8.59%2009 8.45%2010 8.23%2011 4.72%2012 5.86%2013 4.92%2014 4.68%
Flatbush CAP Rate
14%
12%
10%
8%
6%
4%
2%
0%
2007
2008
2009
2010
2011
2012
2013
2014
Year GRM2007 9.912008 10.772009 8.312010 9.252011 11.112012 9.922013 12.532014 12.98
Flatbush GRM
TALE OF TWO NEIGHBORHOODS
16
14
12
10
8
6
4
2
0
2007
2008
2009
2010
2011
2012
2013
2014
06
NYC REAL ESTATE vs. ECONOMY
While the international real estate market may have triggered the United States’ most recent economic recession (via the subprime mortgage crisis) and impeded its recovery, it is now one of the keys to the country’s fiscal rebound. The overall health of the economy — generally measured by economic indicators such as gross domestic product (GDP), employment data and other metrics — is one of the key factors that affect real estate values. Broadly speaking, when the overall economy is lethargic, the real estate market follows suit. By comparing multifamily real estate trends over the last seven years with the performance of U.S. GDP and stock indices over the same time period, we have the evidence needed to adequately predict the direction in which the NYC real estate market is headed. As real estate investors grapple with low inflation expectations while also trying to make sense of CAP rates in this environment, some investors will seek out defensive strategies. One strategy that should appeal to many of these investors is seeking out high-growth neighborhoods. Investment in Brooklyn, which has strong fundamentals and wider cap rates than Manhattan, should help mitigate macro risk significantly, balancing the income side and providing the necessary components to provide for true capital appreciation.
Furthermore, in examining the S&P 500 and Dow Jones Industrial (DJIA) tables from 2007 to March 2009, the dramatic decline in the economic health can be seen quite easily. In March 2009, the S&P bottomed out at 683 basis points while the Dow plummeted to 6,626. GFI’s Median GRM vs. Median Price per Unit graph shows a meteoric plunge in line with that of the market. In 2007, as the indices reached their peak prices, the mean sale price per unit of Brooklyn apartments was $153k (CoStar Group) with a median GRM of 11.06 times. The market crash in 2008 sent valuations below $95K per unit and GRMs below 8 times, representing a 38% decrease in asset value. The GDP, on the other hand, did not show a drastic decline until 2009, only decreasing by about $300 billion year-over-year (over 2%).
Real estate contributes to GDP in two distinct ways: through private residential investment, and consumption spending on real property services. Residential investment includes construction of new dwellings, structural remodeling, unit upgrades and other similar expenditures. Consumption spending includes gross rents paid by renters, owners’ imputed rent and utility payments. Traditionally, residential investment is equal to approximately 5% of GDP, while housing services comprise approximately 13% of it; combined, residential real estate is generally equal to 18% of GDP (NAHB.org). The 2% drop in GDP from 2008 to 2009 would suggest a similar decline in real estate’s share of GDP.
Based on this seven-year cycle, overall returns in both the national economy and local real estate market leave observers optimistic. Following the market’s bottom-out in March 2008, there has been a gradual increase in the overall U.S. economy and the Brooklyn multi-family market has also enjoyed prosperity in this time period, with property valuations climbing above pre-recession heights. Best case scenario, if you purchased in 2009 at the very bottom and sold today at the average price per unit of $227K (CoStar) it would represent a 139% change in appreciation. At the very worst, if you purchased at pre-recession metrics and sold today, it would still represent a 49% increase in value, verifying the overall strength of the NY real estate market.
Economic Overview 2007-2014
The information contained herein has either been provided by the owner of the property or obtained from sources deemed reliable. GFI does not guarantee the accuracy of any information provided herein. All information, including without limitation, zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should independently verify each item of income, and all other information contained herein.
07
CONCLUSIONAs property values in NYC continue to rise, many domestic and foreign investors are setting their sights on Brooklyn, and purchasing apartment buildings near transportation routes that provide convenient access to Manhattan. As a result, many local Brooklyn investors are being priced out of the downtown Brooklyn and Williamsburg areas. These investors are instead moving into the southern and eastern neighborhoods of Brooklyn, where they are targeting value-add properties. As investors seek out these opportunities, the average price per unit continues to flourish in Crown Heights and Flatbush.
Taking into account the dynamic and ever-transformative Brooklyn real estate market, this report proves the resilience of real estate investments. During one of the most tumultuous economic time periods, Crown Heights has demonstrated a tremendous amount of growth and appreciation, making it an ideal area to represent the meteoric rise of certain neighborhoods in Brooklyn. In contrast, there are other areas, such as Flatbush, that were comparably stable during the same time period.
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& 465-473 East 84th StreetBrooklyn, NY
260 Apts
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$3,000,0001702 Avenue M
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$13,000,000El Greco Diner
1809-1825 Emmons Avenue
Brooklyn, NY90,000 SF Buildable
$2,400,000377 South 1st Street
Brooklyn, NY 8 Apts
Recent Transactions
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
2007
2008
2009
2010
2011
2012
2013
2014
14%
12%
10%
8%
6%
4%
2%
0%
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
16
14
12
10
8
6
4
2
0
2007
2008
2009
2010
2011
2012
2013
2014
Crown Heights & Flatbush Price Per Unit Crown Heights & Flatbush CAP Rate
Crown Heights & Flatbush GRM
UNEMPLOYMENT REAL ESTATEBUBBLE/BURST
RECESSIONYEARS
FED BONDBUYING
SUPPLY/DEMANDIN BROOKLYN
The information contained herein has either been provided by the owner of the property or obtained from sources deemed reliable. GFI does not guarantee the accuracy of any information provided herein. All information, including without limitation, zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should independently verify each item of income, and all other information contained herein.
Data Collection:• Ten to Thirteen properties per year (2007-2014) were selected; sourced through Property Shark meeting the followng criteria; • 30-50 Units (without retail) • 40,000-50,000 SF • Constructed Before 1980 • Located in Crown Heights & Flatbush• Information collected from third party sources including Co-Star, nyc.gov/finance, NAHB.org as well as news articles from industry related sites.
Our Methodology
GFI Realty Services, Inc.140 Broadway 41st Fl.New York, NY 10005
Office: (212) 837-1655www.gfirealty.com
METHODOLOGY
The information contained herein has either been provided by the owner of the property or obtained from sources deemed reliable. GFI does not guarantee the accuracy of any information provided herein. All information, including without limitation, zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should independently verify each item of income, and all other information contained herein.