Topsy-Turvy Multi-Family Buildings

image001It used to be that the most lucrative exit strategy for a developer was to sell his or her apartments as condominiums. That notion is being flipped on its head – especially in Brooklyn these days.

What started as a one-off sale in Williamsburg, Brooklyn of 175 Kent Street to Equity Residential in January of 2012 has kicked off a buying spree of new developments that were slated as condo’s in the boro that seems to have no end as developers finish up their buildings, lease them up, and quickly flip them to cash-heavy funds that are all too eager to swallow them up and move to the next building.

Why’s this happening now? Well, for one, it’s part of the multi-family craze happening in the US right now. But in Brooklyn, it’s more than that. Back to 175 Kent, at the time Sam Zell’s EQR purchased it, the developer would have made pretty much the same amount as condo’s as it did rentals – around $750 per square foot. The benefits to the seller is simple – 1 transaction rather than, in this case, 113 transactions should they have gone condo, taxes – as a multi-fam, the profit gets treated as a capital gain versus ordinary income when you do a condo sale, and pretty high on this list is the nuisance factor. With the abundance of lawsuits from condo owners (some legitimate, some not) many developers are getting cold feet when it comes to the condo exit. Don’t get me wrong, they’d do it in a heart-beat if the returns significantly outperformed the sale of the building as a multi-family, but for now, it’s not. And with the pending sale of 111 Kent Avenue, also in Williamsburg, rumored to have sold at close to $900 per square foot, this trend does not seem to be going away.

What it will take for the trend to start moving the other way and developers being incentivized to take the condo exit is for condos values to be about $200-$300 per square foot more than the multi-family value. In Williamsburg, that means condos selling at $1,000 per foot or more – not unachievable numbers as we see those types of prices regularly in our sales at The Williamsburg Edge, but certainly not the average for the neighborhood yet. But with the Williamsburg rental market fast approaching $65 per square foot, I don’t believe that this trend will end anytime soon.