In 2015, we don’t expect any sea changes in the New York City real estate industry. We aren’t going to see Flushing become the next Williamsburg, as some are predicting, or masses of white kids with strange hair cuts in Morrisania. But we do expect to see trends that started over the past few years continue, as the city’s prime core, gentrifying fringe, and outer ring of immigrant growth and white flight all press forward in the face of minimal new supply.
For the office sector, we expect 2015 to continue to be tough for developers at Hudson Yards and the World Trade Center, who might sign a few more leases but will still have trouble attracting the number of $80-a-foot-and-up tenants they need to make their projects financial successes. (Though we have more faith in the World Trade Center than Hudson Yards, due to vastly superior transit options and an existing built environment with much more character than the surface lots that still dominate the Far West Side.) Meanwhile, growing demand will continue to bump up against minuscule supply in Midtown South, Dumbo, and the Williamsburg waterfront – the only other places we expect to see ground-up construction – driving up office rents in those trendier locations.
On the residential side, ultra-luxury development looks to have peaked for this market cycle, but we’re expecting it to look more like a healthy saturation of the submarket than a bubble. Some developers may have paid too much for land – any supertalls around 57th Street that haven’t already broken ground might have a hard time doing so – but the market will soften rather than crash, with builders simply switching to more modest luxury units, not ceasing production as happened in the late 2000s.
The ultra-luxury glut will likely not have ramifications far beyond the very uppermost market tier, as the demand for “mere” luxury apartments – one- and two-bedroom condos in the low millions – is far deeper and cannot be saturated given current supply constraints. Upper Manhattan, western Brooklyn and Queens, and increasingly central Brooklyn neighborhoods like Crown Heights and Bed-Stuy will become ever more rewarding for condo builders and tough for those seeking to erect more modest rental buildings.
As promised, de Blasio will likely deliver a stepped-up version of the Bloomberg affordable housing program, which means that it won’t dominate production to the extent that many on the left hope it will. The majority of the city’s growth will continue to be in market-rate units, and we don’t expect the administration to be able to get much more than the 20 percent set-asides of the Bloomberg years on private land without extra subsidies beyond the normal tax abatements. Even the 25 percent (plus a bit more, but with subsidies) at Astoria Cove will be tough to make pencil out, and we don’t expect financing to be in place for that project in 2015 (or maybe even this decade, if what we’ve heard from potential buyers of the sites is true.)
Given the city’s tight zoning laws and low housing production, the increased demand brought about by the urban renaissance will continue to be expressed primarily through gentrification rather than new construction, and nowhere is this more felt than in Brooklyn, where rental builders will be forced out to new frontiers of gentrification.
In 2015, we will start to see more omens of convergence around Broadway Junction between the two kernels of gentrification that started in Williamsburg and around downtown Brooklyn. We’ve already seen faint signs – in just the past few days we’ve seen filings for new market-rate buildings near the Bushwick Avenue-Aberdeen Street stop on the L, just one away from Broadway Junction, and past Utica Avenue in Crown Heights, near the border with Brownsville. But in 2015, it will become obvious that the entirety of Bed-Stuy, Crown Heights, and Bushwick are candidates for gentrification, with the far eastern reaches becoming established territory for rental builders.
On the other side of Broadway Junction lies East New York, which looks like it will be the de Blasio administration’s first rezoning proposal. Whatever the specifics of the plan, we don’t expect to see any 80/20 buildings there any time soon – we expect all development to be subsidized outside of the usual tax abatements. The growth will be less of the mixed-income vision of inclusionary zoning – everyone will likely be subsidized, it’s just a matter of how much. The development will likely be more like a 21st century version of the post-war housing projects, but with better urbanism – everybody will be subsidized, it’s just a matter of how deeply.
To the south, we expect to see Flatbush, Sunset Park, and Kensington emerge as fast-gentrifying neighborhoods – Flatbush as the new Prospect Lefferts Gardens, Sunset Park as the new South Slope and Greenwood Heights, and Kensington as the new Windsor Terrace. Tension over growth should be most pronounced in Flatbush, where zoning is loosest – while we expect Hello Living’s 23-story tower at 1580 Nostrand, practically in East Flatbush, to have the same stellar design and affordable prices as Eli Karp’s other projects, we also see it riling up the left-leaning elements of Flatbush proper, much as 626 Flatbush Avenue did in Prospect Lefferts Gardens.
Much farther to the south, in southern Brooklyn proper, the transition from staid Italian neighborhoods to a kaleidoscope of different ethnic enclaves will continue to express itself in new development targeted towards newcomers, and perhaps more tension between anti-growth old-time residents and newer, more pro-growth immigrants. (Note the lack of gentrification – we expect the demand to continue to be limited solely to immigrant groups and religious Jews, not the sort of young white professionals who dominate in the more northern precincts.)
In terms of as-of-right development, Brighton Beach and parts of Sheepshead Bay are the most liberally zoned, so that’s where we’ll see the most growth (this year, we saw a filing for a 30-story condo and rental tower, by Muss and AvalonBay in Sheepshead Bay). Kings Highway (where we saw plans for $700-a-foot condos) and Ocean Avenue also have potential.
In the city’s most affordable borough, the rise of market-rate development in the South Bronx will be the biggest story. We don’t expect Mott Haven to turn into Williamsburg, but we do expect attitudes there and around the Grand Concourse to shift among developers. Youngwoo’s planned retail marketplace makeover of the Bronx Post Office may be the flashiest sign of the South Bronx’s revival, but it will be the more quotidian residential infill that defines it.
The city does not make market-rate development in the South Bronx easy, though, and so for two reasons, the new residential construction will likely be limited to small buildings. First, parking requirements generally kick in around 10 units, so builders like to stay below that threshold. But secondly, subsidized builders can outbid their market-rate counterparts in the South Bronx, leaving market-rate developers only the smallest pieces of land that are of no use to “affordable” builders.
The northern half of the borough – along with most of eastern Queens, and much of southern Brooklyn – will be much sleepier, and we expect the trend away from moderately-priced new construction in the far outer boroughs of the Bloomberg years to continue. While there is plenty of demand, especially from growing immigrant groups, the Bloomberg rezonings have taken their toll, and there are very few sites for the sort of two-, three-, and four-family redevelopment that has traditionally characterized building in the outer fringes of the outer boroughs. While the Department of City Planning is still holding out hope that the small construction market will return – that it wasn’t their downzoning during the Bloomberg years, but rather a weak market, perhaps, that caused the decline – most of the data is in for 2014, and it’s looking a lot like 2013 for small builders.
The market has largely returned, and we expect to see more and more mid-sized and large market-rate and 80/20 projects in the few areas where growth is allowed. The aforementioned parts of southern Brooklyn, plus downtown Jamaica and Flushing in eastern Queens, and pockets here and there in the northern Bronx.
In sum, we expect New York City’s anemic housing supply growth to continue to put pressure on all parts of the city. The de Blasio administration talks a liberal game, but we expect their affordable housing plan to look more like Bloomberg’s than left-leaning advocates would like, and we don’t expect to see a slowdown in gentrification. On the other hand, we also don’t expect de Blasio’s housing team to make any radical moves to increasing the housing supply, beyond squeezing builders for a bit more subsidized housing. For better or for worse, we see 2015 shaping up a lot like 2014 but on steroids, with the current cycle having a few more years to run before petering out and turning to bust towards the end of the decade.