For the last two years or so, I've cautioned investors about buying in areas which were overdeveloped. Williamsburg was an easy target to mention. In 2006-2007, thousands of units were planned or constructed in the area. Since then many investors have jumped at the chance to convert broken condo projects to either sell them off at a discount or convert them into rentals.
My theory was that as these distressed situations worked their way through the system, there would not be enough demand to absorb them. Furthermore, I thought that those tenants previously priced out of Manhattan would look to return once pricing corrected.
I was wrong on several accounts.
I started to catch on to this when several people told me that they preferred to live in Williamsburg over Manhattan. According to our Williamsburg specialist Brendan Maddigan, who works with Mark Lively, these tenants are drawn to the area because they receive more space and have great options to shop and eat. It's very convenient for those who work in Manhattan as they can be downtown in 15 minutes on the L train or reach Midtown in 20-25 minutes.
What surprised me is that they're willing to pay more than some Manhattan neighborhoods to live there. Rents in this submarket have exceeded $60/SF in some cases.
For example, 184 Kent rented a 3 BR penthouse for $6,215 per month or $59/SF. Meanwhile, 34 Berry rented a penthouse for $3,599 or $61/SF. Out of the 35 comps I survey at that building, the average was an impressive $51/SF.
The logical question to ask is if this is an anomaly for a few buildings and that if overall vacancy remains high. This was not the case when I searched Streeteasy. The site showed only 73 apartments listed for rent at an average of $3,100 per month or $52/SF.
To capitalize on this trend, it looks like many more projects will follow suit. 111-17 Kent Avenue at the corner of North 7th Street sold in March for $26,009,702. The original developer had planned for condos at defaulted on a $43,000,000 loan. The project was mostly complete. The buyers, Largo Investments, have now said they will take the 82,000 square foot site and convert it to rental.
If it cost the developer $50/SF to complete, they would be in for about $375/SF. If they too can achieve rents at $50/SF and obtain 421a benefits, the investment should fair exceptionally well. Even at a 30% expense ratio, it should pencil to around a 10% return. As finished multi-families in the outer boroughs are now selling in the 5-6% cap range, they could turn around and make a quick profit.
Meanwhile, other projected like 170 N 5th Street may also turn rental. I guess hindsight is 20/20, but I will be more careful in the future when making snap decisions on a neighborhood.