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The rapid growth seen in Brooklyn’s residential market over the past few years has tapered off thus far in 2008, according to a Q1 apartment research report by Marcus & Millichap Real Estate Investment Services. One result of the slowdown has been a reduction in the number of apartment buildings changing hands.

“There’s certainly been a softening in transaction velocity in the first quarter,” J.D. Parker, regional manager of Marcus & Millichap’s Brooklyn office, tells Real Estate New York. “We saw this toward the end of last year as well, but it has continued to decline. I’m seeing somewhere between a 50% and 65% decline in transaction velocity in apartment building sales in Brooklyn.”

While the dropoff may appear steep, Parker puts it into perspective. “The market was unusually active from 2004 through the early part of 2007, so this is a much more normalized market,” he says. “Before the credit debacle of last summer, the market of the last three years was overheated.”

Among the areas affected by that overarching debt market crunch has been employment. Employers are projected to add 1,000 jobs in Brooklyn this year, compared to 4,700 new hires in ’07. “Due to turmoil in the financial markets, though, the potential for a substantial decrease in citywide employment exists,” according to the report. Parker adds, “There haven’t been too many job cuts, although a lot of our clients are nervous about what’s going to happen in the coming months. But overall, people are optimistic. New York’s pretty resilient.”

New construction in apartment buildings is projected to drop off. Permits were issued for 8,800 multifamily units last year, while the figure for ’08 is predicted to be less than half that number. When those new units come on line, the prices apartment buyers end up paying may be slightly less than the developers anticipated.

“Some of the projects that are in strong locations will probably have to adjust their prices downward a little to move units off their shelves,” says Parker. “But I think most of the savvier builders have had a contingency plan in place, where if they had to go to a rental scenario, they could do it. I’ve seen a few buildings abandon the sales and just go straight for rentals. The market is very strong in rentals, because there’s almost no vacancy in all five boroughs but particularly in Brooklyn.”

In addition, Parker says, there could be a gap between the number of units projected in last year’s forecasts and those that actually come on line. “Some of the smaller builders who were more speculative and weren’t prepared or didn’t see this coming, or who overpaid or got too aggressive on their numbers going in, are starting to have some troubles,” he says. “I know of several foreclosures of projects that were in the planning stages and just can’t get off the ground. They were in over their heads and the banks have backed out of the deals.”

Overall, however, says Parker, “You’re not going to see a huge drop in pricing, especially areas that are stronger in terms of location—closer to the subway and closer to Manhattan—because the people who can afford to pay those kinds of prices on new construction in Williamsburg or Park Slope typically work in Manhattan.”

As this is written, the expiration of the current 421a tax abatement program is only weeks away, and that’s one reason fewer parcels are up for sale. Parker says the market for development sites to build condominium projects has “all but evaporated. There’s a whole host of reasons, 421a certainly being one of them. But if you’re running for the 421a deadline, you would’ve had to have your plans filed with the city last fall or winter, or if you were buying something, you would have to have closed by last summer at the latest. So we’ve already seen the 421a shakeout occur, whether people realize it or not. What you’re seeing now is just lack of financing.”

Citywide, a newly issued Massey Knakal sales report for the second half of ’07 found that although sale prices of apartment buildings across the city inched up slightly, there was a decline in the number of buildings sold. According to Massey Knakal, the mixed signals here suggest that prices will stabilize or even dip this year.

Prices per sf of all classes of apartment buildings—including elevator, walk-ups and mixed use—rose 4% to $234 in the last half of ’07 compared to the same period a year earlier, but were up by only 1.3% from the first half of ‘07. The slight price increase in the second half of ‘07 was accompanied by a 16.9% reduction in the number of apartment buildings sold compared to the first half of the year, and a 6.9% reduction from the second half of 2006.

“The lower volume level is not necessarily attributable to decreased demand,” says Robert Knakal, Massey Knakal chairman, in a statement. “Demand is there, but buyers and sellers are engaged in a psychological battle. Some buyers are being cautious and taking a wait-and-see attitude while sellers are reluctant to lower prices. Time will tell who flinches first.”

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