A Rental Market Surge in Brooklyn The market for multifamily buildings in Brooklyn has been heating up over the last year. But the recent sale of 111 Kent Avenue in Williamsburg was stunning even in a hot market. The buyer, American Realty Advisors, paid $55.5 million, or more than $895,000 for each of 111 Kent's 62 apartments. The price paid per apartment is a record for such properties outside Manhattan, according to the data company, Real Capital Analytics. "It was an eye-popping number," said Douglas Steiner, a developer and investor and the chairman of Steiner Studios. Mr. Steiner most recently acquired a 60-unit rental in Carroll Gardens for $24.5 million, or $408,000 a unit, and is in contract to buy another rental building in the borough. Several factors are behind the trend, including a strong rental market and low interest rates. Rents in the borough increased by 10 percent in 2010 and were estimated to increase by 7 percent last year, according to a market report by TerraCRG, a brokerage firm based in the borough, citing research by Marcus & Millichap Real Estate Investment Services. Ofer Cohen, the founder and president of TerraCRG, estimates Brooklyn rents will climb another 5 percent to 10 percent over the next 12 to 18 months. "In 2006 and 2007, any condominium you put on the market sold, and now the same thing is happening with rentals," said David J. Maundrell, the president and founder of apartmentsandlofts.com. I wouldn't say we are throwing darts, but we are pushing the envelope with rental prices and seeing how high we can take it. Despite the high rents, demand remains strong in part because it continues to be difficult to obtain a mortgage. "Although interest rates are low, for would-be buyers of condominiums, the banks have such stringent underwriting standards that they are often frozen out and forced to keep renting," said Adam Ginsburg, a co-chairman of GDC Properties, which recently developed 220 Water Street, a rental in Dumbo. In addition to a strong rental market, Brooklyn is attracting waves of investors because of the many stalled condominium sites that are primed for conversions into rental buildings. During the market bubble, neighborhoods like Williamsburg were inundated with condominium developments, but many of those projects were left half-finished when the market turned. In response, troubled condominium developers either repositioned the projects as rentals or sold the properties to investors who converted them into rentals. The buildings were quickly filled with renters and over the last year the properties have been sold to long-term holders, including many institutional investors. "Any time people build condominiums and the market doesn't support it, there is a shift to rentals - that is not a new phenomenon," said Woody Heller, an executive managing director at the brokerage firm Studley who, along with Will Silverman, a senior managing director, represented the seller in the sale of 111 Kent Avenue. What is new is that we are seeing this happen in Brooklyn. Other big sales include Invesco Real Estate's purchase of 75 Clinton in Brooklyn Heights for $50.8 million, or roughly $686,000 a unit; Invesco also bought the Arias Park Slope at 150 Fourth Avenue for $57.5 million, or roughly $605,000 a unit. Equity Residential, led by Sam Zell, bought 175 Kent Avenue for $76 million, or nearly $673,000 a unit. "Just two years ago, buyers in Williamsburg faced trouble closing on their condominiums because banks saw the Brooklyn market as declining," said David Behin, a partner and president of investment sales and capital advisory at the brokerage firm MNS. There has since been a dramatic shift from stalled construction sites and concern that there was too much inventory, to significant demand from investors. In the case of 111 Kent, the original developer had intended the building to be a condominium, but after constructing the majority of the building, financing dried up and Stellar Management and its partner Largo Investments acquired the property for $24.6 million. Stellar invested $8 million to finish the building and quickly rented out the units, some for as high as $70 a square foot, said Mathew Lembo, a vice president at Stellar. Then, earlier this month, Stellar sold the investment to American Realty Advisors, which plans to hold the property for the long term. "From a price standpoint, you get more value in Brooklyn than you can achieve in Manhattan," said Stanley L. Iezman, the chairman and chief executive of American Realty Advisors. The company had been looking for two to three years in the borough before finding 111 Kent, and is continuing to search for other retail or multifamily properties in the area, he said. Another factor that is attracting these investors to Brooklyn is that the bulk of the stalled condominium sites come with 15-year tax abatements as part of the 421A tax program. The tax program allows landlords to pay less real estate taxes over the life of the program. In return, developers are allowed to charge market rate for the rentals, but they can only increase those rents by a limited percentage each year, as set by the New York City Rent Guidelines Board. Since many of the projects were originally intended as condominiums, there is also the possibility that should the market shift they could be converted back into for-sale units. In many cases, the projects already have condominium plans filed with the attorney general's office or have condominium-level finishes and amenities. One caveat is that those projects that have the 421A tax abatement must wait until the program runs down before the building can be converted back to condominiums. The Naftali Group, for example, recently bought a vacant site at 267 Sixth Street in Park Slope that was intended to be a condominium and is instead building a 12-story, 104-unit rental building. "Either us or future investors could look to sell this as a condominium when the tax abatement expires," said Victor Sigoura, the chief investment officer of the Naftali Group, citing amenities that include a roof deck with cabanas, a lounge, on site parking and a gym. But like any hot market the buying binge will come to an end, and there are already signs that it could be winding down. The chief factor is the diminishing supply of stalled condominium sites. "We are moving into the later innings of the distressed cycle," said Dan Fasulo, a managing director of Real Capital Analytics. With this game, there is only a finite amount of opportunities left, and the lack of supply is driving values through the roof. At the same time, land prices have begun to creep up and condominium prices are also showing signs of strengthening. If land prices and condominium sales reach a certain point, then developers may begin pursuing condominium developments rather than rental projects. "At the beginning of this year, as the market saw more institutional investors coming in, there was a run up to finish buildings and buy the last available sites," said Mr. Cohen of TerraCRG. He estimated that in the last six to nine months land prices in Williamsburg, for example, have increased by 30 percent. Mr. Heller said "the landscape is beginning to feel selective and sparse" for multifamily sales, adding that "the market is at an interesting point of inflection."