BROOKLYN
2007-2014 CAP & GRM TREND REPORT
INTRO
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.
contents
*Data current through 2014
01
introduction
02
brooklyn strong
03
the tale of two
neighborhoods
06
nyc real estate
vs economy
07
conclusion
01
BROOKLYN STRONG
Brooklyn Strong
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.
02
TALE OF TWO NEIGHBORHOODS
01 Crown Heights
In 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.
Crown Heights Price Per Unit
$200,000
$180,000
$160,000
Year
Price Per Unit
$140,000
2007 $112,173.10
2008 $43,830.48
$120,000
2009 $64,906.84
$100,000
2010 $87,969.35
$80,000
2011 $103,444.01
$60,000
2012 $110,457.35
$40,000
2013 $137,213.62
$20,000
2014
2013
2012
2011
2010
2009
2008
2007
2014 $175,723.68
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%.
03
TALE OF TWO NEIGHBORHOODS
Crown Heights CAP Rate
Year
14%
CAP Rate
2007 6.1%
12%
2008 11.5%
10%
2009 11.2%
2014
2014 3.4%
2013
0%
2012
2013 4.0%
2011
2012 5.3%
2%
2010
4%
2009
2011 4.7%
2008
2010 9.4%
6%
2007
8%
Crown Heights GRM
16
YearGRM
14
2007 11.1
12
2008 6.2
10
2009 6.8
2010 8.7
8
2011 9.8
6
2012 9.9
4
2013 12.9
2
2014 14.9
2014
2013
2012
2011
2010
2009
2008
2007
0
02 Flatbush
Not 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.
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.
04
TALE OF TWO NEIGHBORHOODS
Flatbush Price Per Unit
$200,000
$180,000
$160,000
Year
Price Per Unit
$140,000
2007 $87,170.49
2008 $93,072.40
$120,000
2009 $62,285.63
$100,000
2010 $95,034.96
$80,000
2011 $116,892.53
$60,000
2012 $111,186.01
$40,000
2013 $114,038.56
$20,000
2014
2013
2012
2011
2010
2009
2008
2007
2014 $192,649.15
Flatbush CAP Rate
2011 4.72%
2%
2012 5.86%
0%
2013 4.92%
2014
4%
2013
2010 8.23%
2012
6%
2011
2009 8.45%
2010
2008 8.59%
8%
2009
2007 5.40%
10%
2008
Year
12%
2007
14%
CAP Rate
2014 4.68%
Flatbush GRM
16
YearGRM
14
2007 9.91
12
2008 10.77
10
2009 8.31
8
2010 9.25
6
2011 11.11
4
2012 9.92
2
2013 12.53
2014
2013
2012
2011
2010
2009
2008
2007
0
2014 12.98
05
NYC REAL ESTATE vs. ECONOMY
Economic Overview 2007-2014
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.
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.
06
CONCLUSION
As 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.
Recent Transactions
$60,315,600
$13,000,000
1811 Quentin Road
1745 East 12th Street
2566 Ocean Avenue
& 465-473 East 84th Street
Brooklyn, NY
260 Apts
$25,700,000
$15,350,000
115 Ocean Avenue
Brooklyn, NY
89 Apts
410 Eastern Parkway
Brooklyn, NY
73 Apts
El Greco Diner
1809-1825
Emmons Avenue
Brooklyn, NY
90,000 SF Buildable
$6,350,000
$4,775,000
$3,000,000
$2,400,000
555-561 Gates Avenue
Brooklyn, NY
28 Apts & 3 Stores
216 Macon Street
Brooklyn, NY
17 Apts
1702 Avenue M
Brooklyn, NY
6 Apts & 3 Stores
377 South 1st Street
Brooklyn, NY
8 Apts
07
Crown Heights & Flatbush Price Per Unit
Crown Heights & Flatbush CAP Rate
$200,000
14%
$180,000
12%
$160,000
$140,000
10%
$120,000
8%
$100,000
$80,000
6%
$60,000
4%
$40,000
2%
$20,000
2014
2013
2012
2011
2009
2014
2010
2008
2013
2007
2014
2013
2012
2011
2010
2009
2008
2007
0%
Crown Heights & Flatbush GRM
16
14
12
10
8
6
4
2
UNEMPLOYMENT
REAL ESTATE
BUBBLE/BURST
RECESSION
YEARS
2012
2011
2010
2009
2008
2007
0
FED BOND
BUYING
SUPPLY/DEMAND
IN 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.
METHODOLOGY
Our Methodology
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.
GFI Realty Services, Inc.
140 Broadway 41st Fl.
New York, NY 10005
Office: (212) 837-1655
www.gfirealty.com
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.