Waldorf owner pressured to sell as China clampdown escalates

by Bloomberg news\\Waldorf Astoria

Photo: Buck Ennis


When Anbang Insurance Group Co. agreed to buy New York’s iconic Waldorf Astoria hotel for $1.95 billion in 2014, the world took notice. It was a defining moment in the global rise of China Inc., a deal that would help kick off one of the greatest acquisition sprees in history.

But now the Waldorf, along with more than $10 billion of Anbang’s other deals, could become symbols of corporate China’s rapidly shrinking global ambitions. Chinese authorities have asked the embattled insurer to sell its offshore assets and bring the proceeds back home, according to people familiar with the matter, who asked not to be identified because the details are private.

The unprecedented request marks an escalation of China’s clampdown on its biggest overseas dealmakers, which until now has focused on slowing the pace of new takeovers and prodding domestic lenders to pay more attention to their exposure. While there’s no indication that the four other active acquirers singled out by China’s banking regulator in June face similar pressure, the Anbang request underscores President Xi Jinping’s determination to rein in debt-fueled investments and restrict capital outflows before a key leadership reshuffle later this year.

For Anbang, it’s another setback in what has been a remarkable fall from grace. The company rose from obscurity to global prominence in just over a decade until its chairman, Wu Xiaohui, was detained by investigators in June, becoming the most high-profile target of an industrywide crackdown on risky investment practices.

It’s not clear yet how Anbang will respond to the government’s request on overseas asset sales, said the people, who didn’t mention the Waldorf Astoria or any other specific foreign holdings. Anbang “at present has no plans to sell its overseas assets,” the company said in a WeChat message.

Anbang’s October 2014 agreement to buy the Waldorf, which set a price record in the American hotel industry, catapulted the once-obscure insurer onto the global stage. Over the next two years, Anbang bought real estate and financial services companies in Asia, Europe and North America, including Strategic Hotels & Resorts and an office building in midtown Manhattan to house Anbang’s U.S. headquarters.

The insurer’s rise was fueled by sales of lucrative investment products that offered among the highest yields in the industry. But Anbang’s buying binge fizzled as Chinese authorities cracked down on such products this year, part of a wider campaign to rein in financial risks before the Communist Party’s twice-a-decade leadership reorganization.

“Authorities clearly do not want other insurance companies to copy Anbang’s growth model, which relies on short-term products,” said Steven Lam, a Hong Kong-based analyst with Bloomberg Intelligence. “The signal from the government is very strong on proper asset-liability management and being responsible to policyholders.”

HNA, Fosun

In June, Chinese regulators stepped up scrutiny of other serial dealmakers such as HNA Group Co., Fosun International Ltd. and Dalian Wanda Group Co., asking banks to report their exposures to the companies. At a conference on financial regulation convened by President Xi in July, policy makers pledged to rein in corporate borrowing and said that preventing systemic risk was an “eternal theme.”

Chinese acquisitions, even by firms under regulatory scrutiny, haven’t completely come to a standstill. On Friday, Shanghai-based Fosun, whose businesses range from insurance to pharmaceuticals, said it agreed to team up with a state-backed dairy producer to buy French margarine maker St Hubert for 625 million euros ($733 million). HNA, which has taken on least $73 billion of debt as it transformed from a small regional carrier into a global conglomerate, recently announced it will buy the operator of one of Brazil’s busiest airports.

Read more: Fosun’s Guo says he backs China’s clampdown on deals

Still, the pace of deals has fallen dramatically. After a record $246 billion of announced outbound takeovers in 2016, cross-border purchases plunged during the first half of this year. Announced Chinese acquisitions of overseas assets fell 37% to $99.9 billion, from $157.9 billion in the same period last year, according to data compiled by Bloomberg.

As the government’s tolerance for debt-funded deals wanes, some firms have already begun selling assets. Wanda, led by billionaire Wang Jianlin, agreed in July to sell most of its Chinese theme parks and hotels for $9.4 billion.

Potential buyers

Anbang’s U.S. assets, which in addition to the Waldorf Astoria include trophy properties such as New York’s JW Marriott Essex House and the Westin St. Francis in San Francisco, may be attractive to sovereign wealth funds because of their prestigious profile, said Lukas Hartwich, a lodging analyst at Green Street Advisors LLC. Blackstone Group LP, which sold Anbang the bulk of the insurer’s U.S. real estate and has previously bought back assets it sold near market tops, would also be an “obvious candidate” as an acquirer, Hartwich said. A Blackstone representative declined to comment.

“These are mostly really nice hotels,” Hartwich said. “The Waldorf is more of a turnaround play to return the hotel to its former glory.”

If China exerts strong pressure to sell, whoever buys is likely to negotiate a discount. “All the potential acquirers know there’s blood in the water and that’s not usually a strong bargaining position to be in as a seller,” Hartwich said.

The Waldorf Astoria may potentially be appealing to a residential developer. Anbang shut the hotel down in March to convert most of the property into luxury condominiums. Christopher Nassetta, chief executive of the hotel’s manager, Hilton Worldwide Holdings Inc., said on the company’s earnings call last week that the project is on track. He said Anbang has told Hilton it has the financial capability to complete the conversion, which is scheduled to take about three years. The market for New York luxury condos has softened as the supply of such properties mushroomed.

Hilton is unlikely to buy back the Waldorf, having spun off its real estate into Park Hotels & Resorts Inc. in January. The spinoff is focused on internal growth and New York isn’t one of its key expansion markets.

SoHo retail space hits market for over $80 million

Sellers believe strong anchor tenant could drive premium price in a ‘real test’ for retail by Daniel Geiger

The owners of a corner building and two adjacent retail condos that house the French luxury brand Louis Vuitton in SoHo have put the property on the market in a deal that could fetch more than $80 million.

The ownership group has hired a team from CBRE, led by sales executives Ned Midgley and Ed Goldman, to market the property, which includes 106 Prince St., a 5-story building on the corner of Prince and Greene streets, and the neighboring ground-floor retail condos at 102 Prince St. and 114-122 Greene St.

Together, the spaces total about 21,600 square feet, with about 11,550 square feet of retail on Prince and Greene streets, two of SoHo’s busiest shopping corridors

But the attractiveness of even prime retail space has faded among real estate investors as e-commerce has eaten into brick-and-mortar sales, boosting vacancies and sapping rents. Midgley, however, predicted that 106 Prince St. and the adjacent condo spaces would draw interest because it has a long-term anchor tenant in Louis Vuitton, which has a lease for the entirety of the retail space stretching until 2033.

“There’s a negative sentiment in the market, so this is a real test for retail,” Midgley said. “But with Louis Vuitton, a buyer is getting a great credit tenant and annual increases on the lease that we believe makes this a very attractive deal.”

The luggage brand Tumi currently occupies the retail condo at 102 Prince St., but when that lease expires in a little over two years, Louis Vuitton has an agreement in place to take that space as well.

Vuitton also rents the second floor at 106 Prince St. for a small office. The building’s third, fourth and fifth floors are market-rate rental apartments that command $6,000 a month each, Midgley said.

The current owners are a collection of three Italian families. The group previously tapped Midgley and his team, which also includes CBRE brokers Tim Sheehan and Daniel Kaplan, to sell the property about two years ago, but Midgley said the sellers realized they would face heavy taxes due to their ownership structure. The group delayed a deal in order to reorganize, creating a special purpose holding company based in Luxembourg to control the asset. The sale will be arranged by selling shares in the Luxembourg company. Because a deal will involve the trade of European securities, CBRE’s London office will assist in the sale.

New York Underwater

Editors note: We felt the following issue, although considered by some as a non event, significant enough to discuss on these pages.
While the city’s real estate industry has avoided taking a stance on climate change, some say it may have everything to lose
By Kathryn Brenzel | July 01, 2017 01:00PM


When President Donald Trump announced in June that the United States would pull out of the Paris climate accord, New York developer Jonathan Rose sensed that something more than an environmental safety net was at stake. He saw retreating dollar signs.

“Bottom line is, these are major economic opportunities,” he said, referring to technologies that promote energy efficiency, such as electric cars and solar energy. “We just ceded them to China.”

Nearly 200 nations, including the U.S., signed the Paris agreement in December 2015, pledging to dramatically reduce greenhouse gas emissions and limit global temperature increases to 2 degrees Celsius or less by 2100. In some ways, supporting the accord is a symbolic gesture — even if every participating country meets its reduction goals, the world is still on track to exceed that amount of warming by 2030. But inaction or silence on the issue accomplishes even less, and in the case of New York City’s real estate industry, rising temperatures could have grave consequences — from regular flooding to major storms like Superstorm Sandy that occur every few years.

Maya Camou, director of sustainability at the Manhattan-based development firm Time Equities, said “it was a no-brainer” for her company to formally sign a letter supporting the Paris climate accord. “Climate change is real, and you see it everywhere,” she said. “Our own properties all over the U.S., as well as internationally, will start being affected by these changes [over the next few years].”

New York real estate developers would seem inclined to support measures that would curb rising temperatures and extreme weather events — threats that could directly impact their assets. While a handful of companies are incorporating climate-conscious designs in new development projects, the industry at large hasn’t stepped up to make climate change a public priority.

“It’s very hard for people to grasp what things are going to look like in 100 years,” said Sweta Chakraborty, a risk management expert and assistant director of the Institute for Global Policy. “Whose job is it to look beyond their lifetime? Builders definitely don’t.”

Of 165 real estate firms The Real Deal surveyed on Trump’s decision to remove the U.S. from the Paris agreement, 146 declined to participate. Some later said that they didn’t have an opinion on the matter, but most declined to participate without explanation.

When asked separately, the Real Estate Board of New York’s spokesperson Jamie McShane said that the lobbying group doesn’t have an official position on the agreement.

“To the extent that many in the real estate industry are political conservatives, it isn’t all that surprising that climate change hasn’t been high on their agenda,” said Michael Mann, a professor of atmospheric science at Pennsylvania State University. “It is unfortunate and rather ironic since the real estate industry may be among the hardest hit by climate change.”

New York real estate owners are not only among the most exposed when it comes to rising sea levels and storm damage, but they are also responsible for a majority of the city’s greenhouse gas emissions.

Buildings produce 75 percent of NYC’s annual emissions, which weighed in at an annual 52 million metric tons in 2015, according to the most recent data released by the city. Without dramatic reductions in fossil fuel use, sea levels could rise as much as six feet by 2100, and major storms that were previously expected every 100 years or so could instead occur every two to three years.

Jeff Moelis, director at L+M Development Partners, who was disappointed by the president’s choice to abandon the climate accord, said it’s not as easy for real estate as it is for other industries to collectively make its position known.

“The real estate industry is so fragmented. It’s not like oil or gas, where you have one company that’s the mouthpiece for the industry,” he said. “It’s a lot of small family businesses, so there isn’t one general thought leader.”

Playing the long game

After Superstorm Sandy pummeled New York City in October 2012 — resulting in $8.6 billion of private property damage — some developers and real estate owners took steps to guard their buildings. They moved mechanical equipment from basements onto higher floors, invested in detachable flood shields and added landscaping designed to intercept rainfall. Rudin Management, for example, elevated the second floor of Dock72, a waterfront office development in Brooklyn, 40 feet above the ground. And Brookfield Properties decided to add floodgates to One New York Plaza after more than 20 million gallons of water rushed into the building’s subterranean shopping mall.

But while these measures acknowledge the need to be proactive in the face of climate change, they only address immediate threats.

Sea levels in New York City are expected to rise 30 inches by 2050 — and by that point, roughly 90 percent of the city’s 1 million buildings will still exist, according to a study released by the city last year. Most of those buildings — 98 percent — span less than 50,000 square feet, according to the report. Because those small and mid-sized properties are rarely vacant and tend to change hands often, their owners are less likely to incorporate technology like solar and wind power or passive-house standards. In addition, some owners are not financially equipped or willing to wait a decade for the benefits of energy efficiency to pay off. Their investment horizons are limited to however long they plan to own the asset, and the added upfront cost and potential loss is enough to dissuade them from trying out new technologies that could cut down on energy use and carbon emissions.

“It’s a challenge to [retrofit] existing buildings when they are fully occupied,” said Justin Palmer, CEO of the sustainable property developer Synapse Development Group.

Synapse has had luck building from the ground up, and the company constructed Manhattan’s first passive-house rental apartment building, at 542 West 153rd Street. On average, passive houses use anywhere from 70 to 90 percent less energy than standard buildings, according to the independent research organization the Passive House Institute. The structures require airtight construction and an energy-recovering ventilation system in place of traditional heating and cooling equipment.

While similar projects have sprung up in the city over the past few years — including Cornell Tech’s 26-story residential tower on Roosevelt Island, which will be the world’s tallest passive house — the standard is hardly the go-to due to high costs and limited labor. Building to passive-house standards can cost 3 to 5 percent more than a building with a traditional heating and cooling system, and there are only a handful of contractors equipped to install passive-house facades and ventilation systems, Palmer and others explained.

L+M and Jonathan Rose Companies are teaming up on a 751,000-square-foot passive- house project in Harlem dubbed Sendero Verde, which means “green path” in Spanish. The affordable housing project is expected to use 60 to 70 percent less energy than a standard building of its size.

But building sustainably requires patience. For instance, incorporating solar and wind power — which requires upfront costs of hundreds of thousands of dollars — can take seven to 10 years to pay off, said David Brause of real estate investment firm Brause Realty. His firm, which owns and manages more than 3 million square feet of property, is developing a 38-story, 266,000-square-foot rental building in Long Island City that uses both.

Brause said that not all property owners are thinking long-term, and many plan to sell before the energy savings pencil out. But family-owned companies tend to take the long view, he noted, since they typically build with future generations in mind.

“It’s my duty as a father and the owner of a business to do what I can to make the world a better place,” Brause explained. “It’s not just about making a dollar in the real estate business.”

Another family firm, the Durst Organization, which owns 13 million square feet of office and retail space and another 3 million square feet of residential rental properties in New York, has made efforts to build responsibly. The developer had planned to take its massive Hallets Point residential project off-grid, which means the buildings would operate using their own power plants.

But that plan was foiled when the 421a tax break lapsed for 15 months starting in 2016, Phil Skalaski, vice president of engineering and energy services at Durst, told TRD. Without the exemption, it wasn’t clear if all five buildings would be constructed, and the off-grid concept hinged on the entire project moving forward. Instead, Durst incorporated an alternative air-conditioning system, where cold water is circulated through a building’s pipes and tenants are able to control exactly how much energy they are using.

While the chilled water apparatus increases the initial cost of each building’s mechanical system by about 8 percent, the projection is that the energy-savings costs will more than make up for that, Skalaski said.

He said that the complexity of alternative air-conditioning and other forward-thinking technologies can be a deterrent for property owners, noting that many aren’t willing to front the extra money and are often wary that the new systems won’t work properly.

“I don’t know if that’s going to change,” Skalaski said. “A lot of developers have one way of doing things.”

Pat Sapinsley, managing director of cleantech initiatives at Urban Future Lab, NYU Tandon School of Engineering’s incubator for smart-grid energy solutions, echoed that sentiment, calling the real estate industry acutely “liability conscious.” But she noted that there are some climate-conscious players in the industry and named Rudin Management’s John Gilbert, who last year helped pioneer a cloud-based building operations system. The new technology allows the company to monitor and adjust energy use in its buildings based on occupancy and other factors.

But many developers and property owners remain wary of that and other energy-saving technology. “They don’t trust the energy-savings calculations,” Sapinsley said.

David Schwartz, principal of the multifamily developer Slate Property Group, said that while he supports the Paris climate accord, there isn’t enough “compelling data available” to convince landlords that energy-saving technology, like passive house or cogeneration, is a glitch-free way to cut costs.

“You never want to be the first guy to do it if it doesn’t work,” he said.

Inefficient efforts

Other initiatives such as Energy Star and Green Globes exist, but over the last 20 years, many developers have built to the requirements of the Leadership in Energy and Environmental Design (LEED) certification program, which the United States Green Building Council launched in the late 1990s to evaluate the environmental performance of a building.

However, architects and engineers alike have spoken out against the international certification program, claiming that it detracts from more effective initiatives. Critics argue that LEED is prohibitively expensive and hinges on a point system that doesn’t always add up to an energy-efficient building.

Geoffrey Lynch, director of architecture at the New York office of engineering giant AECOM, said that he still views LEED as a powerful tool but has seen some developers move away from the system. They either feel that they can make their buildings energy efficient without it or seek a more advanced certification program.

“When it first came out, it was new and different and it was something to show off,” he said. “It’s not exotic anymore.”

In April 2010, architect Frank Gehry caused a stir when he told Bloomberg News that developers were given LEED awards for “bogus stuff” and that the program served as more of a marketing tool than a meaningful way to promote energy efficiency.

“[LEED has] become fetishized in my profession. It’s like if you wear the American flag on your lapel, you’re an American,” he told Bloomberg at the time.

A few months later, the Brooklyn-based development firm Forest City Ratner announced it would not pursue LEED certification at its Gehry-designed rental tower at 8 Spruce Street in Manhattan.

“As much as we can, we designed the building to be sustainable. And as we look at the ongoing operations, we look to make it as sustainable as possible,” Susi Yu, an executive vice president at Forest City Ratner, told TRD last month.

Most recently, some of the building’s residents began participating in a composting program as part of a pilot run by the city. Eventually, Forest City plans to make the program available to all residents in the roughly 900-unit building to significantly cut down on trash input.

But on the whole, Yu said she feels that developers are increasingly making climate-conscious decisions as a selling point for younger tenants.

Regulatory pressure

Demand is not only coming from everyday New Yorkers. Local officials are also putting increased pressure on property owners to start retrofitting their buildings, especially in the wake of the country’s withdrawal from the Paris agreement and President Trump’s move to dismantle the Environmental Protection Agency. State and city leaders have pledged to adhere to the climate accord despite the president’s decision.

In late June, seven City Council members introduced a bill that would essentially require certain buildings to meet passive-house standards beginning in 2025. And just a few weeks earlier, Council members Jumaane Williams and Brad Lander called on Mayor Bill de Blasio to require retrofits across the city, which was met with fierce opposition from the real estate industry. Williams, who serves as chair of the Council’s committee on housing and buildings, said the city needs to target buildings under 25,000 square feet and require energy-saving upgrades to electrical systems.

Last month, John Banks, president of the Real Estate Board of New York (REBNY), told Politico that although the group shares the city’s goal to reduce emissions, a call of mandatory retrofits does not reflect “economic reality or credible methods of implementation.”

Carl Hum, REBNY senior vice president for management services and government affairs, later told TRD that “tenants will ultimately feel the impact in their monthly rent bills.”

It’s not the city’s first attempt to seek mandatory retrofits, however. In December 2009, then-mayor Michael Bloomberg tried and failed. He backed off amid objections from building owners that the plan would prove too costly. Instead, the city left it up to property owners to make changes on their own.

Sapinsley of Urban Future Lab said mandatory retrofits would be an important next step to actually get owners to take energy-saving action. “I have no patience for [the real estate industry’s] whining,” she said.

However, some developers have run into regulations that make going green a lot harder — and far more costly. The Durst Organization is jumping through various regulatory hoops at One Bryant Park, where it has its own 4.6-megawatt cogeneration plant that provides both heat and electricity to the 2.3 million-square-foot office tower. Though the developer boasts that the system is twice as efficient as a conventional plant, Durst is still required to pay Consolidated Edison some $1 million each year in standby rates, fees paid for the utility’s backup energy systems — energy that the building isn’t actually using.

Skalaski said Durst has been working with REBNY and public officials to get Con Ed to reform its rates and incentivize the use of combined heat and power units.

“There’s got to be some level of payback for that. It can’t be a loss every time, or no one will do it,” he said.

Financial shortfalls

Rose of Jonathan Rose Companies said the country’s withdrawal from the climate accord is in some ways a positive development in that it’s shifted the onus of combating climate change on local government and private businesses.

And indeed, at a meeting in late June, the United States Conference of Mayors, a nonpartisan organization comprised of more than 1,400 mayors, stated that it would not only urge the federal government to rejoin the accord, but also find ways to combat climate change in individual cities, the New York Times reported.

Republican and Democratic mayors alike committed to a slew of green initiatives, including enforcing more building codes and creating more incentives for property owners to reduce energy use.

Although environmentalists, city officials and a handful of developers push for more green-building requirements, the bottom line is something any real estate owner can understand: cost. Even when it comes to the city’s efforts to safeguard itself from another Sandy, funding for some New York City-run projects has dried up.

In June, city officials announced that a plan to protect Red Hook from the next “100-year flood” would need to be significantly scaled back. A feasibility study showed that the $100 million project to raise streets in the neighborhood would actually only protect it against a 10-year event. A larger project, the Wall Street Journal reported, would cost $300 to $500 million.

The city’s “Build It Back” program, which is overseeing the rebuilding of thousands of homes in the hardest hit areas such as Staten Island and Red Hook, is $500 million over budget.

And it doesn’t look as though the city will be able to bank on additional federal funding. The president’s proposed budget cuts $667 million from the Federal Emergency Management Agency (FEMA) and local grant programs. He also gutted all $3 billion in funding provided by the Department of Housing and Urban Development after a disaster.

Alan Blumberg, a professor at Stevens Institute of Technology who studies coastal waters and how they interact with urban areas, noted that cities are increasingly planning according to more specific scientific data, not just the broad-brush predictions provided by FEMA. Last year, at the request of the city, the agency agreed to redraw its flood maps to better reflect both current and future flood risks.

For New York, it’s a delicate balance between allowing people to enjoy the waterfront, while they still can, and preparing for a future when they can’t, sources inside and outside of the real estate industry say.

“Pay attention to 2050. Sea level will be at maybe a foot or two more in New York City,” Blumberg said, noting beyond that it’s unclear what things will look like. “People ask me, when is the next 100-year storm coming?” he added. “I say maybe never. Or maybe next year.”

Is East New York for real?

Despite a few affordable housing projects and lots of hype from the city, private developers are still ignoring the neighborhood
 By Eddie Small | July 20, 2017 03:30PM

Photo illustration of a map of East New York and renderings of 3301 Atlantic Ave and 315 Linwood Street

Development in Brooklyn has seemed like an unstoppable force over the past few years, washing over neighborhoods and leaving behind a trail of luxury apartments and vegan-friendly restaurants in its wake.

As the boom has crept farther away from the waterfront and deeper into Kings County, some real estate professionals have become convinced that East New York will be the next neighborhood to experience a transformation. Others say its helium is largely manufactured by the city, and there are few signs that private development is marching east of Broadway Junction.

“The wave is in East New York now,” said Bill Wilkins, manager of the East Brooklyn Business Improvement District. “It was in Dumbo and Carroll Gardens and Vinegar Hill and Fort Greene and Clinton Hill and Crown Heights, so now it’s in East New York.”

Several major developments are on their way, but they are all affordable projects. Phipps Houses is building an affordable housing complex with 403 apartments at 3301 Atlantic Avenue  and Alan Bell’s B&B Urban recently filed plans for a 100-unit affordable housing complex at 315 Linwood Street.

The Linwood Street development will be B&B Urban’s first Brooklyn project. Bell views the neighborhood as an ideal location for affordable housing, given the potential for gentrification moving forward.

“It’s got a lot of homeownership,” he said. “People don’t realize how may single family, two-family, three-family homes there are in East New York, and it’s the strength of the area.”

B&B Urban’s Alan Bell

Despite these developments — and $267 million from the city to improve schools, parks and infrastructure — East New York isn’t receiving the headline-grabbing, market-rate megaprojects that are in store for other developing parts of the city. In fact, you won’t find a single market-rate project of scale, let alone one that compares to the Durst Organization’s Hallets Point project in Astoria or Somerset Partners’ and the Chetrit Group’s complex along the South Bronx waterfront.

David Manheimer, co-founder of Brooklyn Standard Properties, said he thought the neighborhood had not seen a major market-rate project yet because developers do not see much of a difference between what they can charge for market-rate apartments and what they can charge for affordable ones.

“You can do affordable and still get market rents,” he said, “because the asking prices are not high enough on rents over there.”

HPD’s Simon Kawitzsky

Median asking rents in the neighborhood have climbed steadily over the past few years, rising from $1,400 in 2012 to $1,900 in 2016, according to StreetEasy. But they still lag far behind median asking rents throughout Brooklyn, which were $2,475 in 2012 and $2,550 in 2016, StreetEasy data shows.

“The rents that someone will pay to live in an apartment are driven by the demand for living in an apartment in that neighborhood,” said Simon Kawitzky, an assistant commissioner at the Department of Housing Preservation and Development, “and you’re not seeing people willing to spend that kind of money right now to support development without subsidies from HPD or HDC.”

Maybe some day

Bestreich Realty Group president Derek Bestreich is skeptical about how much of a boom there really is in East New York. He said that his multifamily properties in East New York have attracted little interest, and he noted that there are still parts of Brooklyn closer to Manhattan that have not been fully developed and remain more appealing to investors.

“Maybe there’s just a big spread between sellers’ expectations and where buyers are willing to buy, but there are not a lot of buyers that want to buy out there,” he said. “I think demand really starts to wane east of the Broadway Junction. West of Broadway Junction, it’s all in play.”

Bestreich added that he saw the buzz around East New York as being somewhat manufactured by the city.

“The city has to push its agenda, and New York City government has to bring the city to where they want to take it,” he said. “So they really focus on areas where they think they can make an impact and probably where property values are not as high.”

Bestreich Realty Group’s Derek Bestreich

The City Council approved a controversial rezoning of East New York last April as part of Mayor Bill de Blasio’s larger affordable housing plan. It stipulates that under Mandatory Inclusionary Housing, developers seeking a residential rezoning must set aside at least 25 percent of their apartments as affordable. The rezoning plan affects 190 blocks in East New York, Ocean Hill and Cypress Hills and the city believes it will eventually create more than 6,000 apartments. Half would be market rate, and half would be affordable for families of three earning between $23,350 and $69,930 annually.

Critics have lambasted the rezoning plan’s affordability component for not going far enough, and say they observed a huge spike in flipping as soon as the neighborhood’s rezoning was announced.

Sales on the rise

Though it’s not clear how much of the sales market movement stems from flipping, home sales appear to be on the rise. From the beginning of the year through May 31, 14 residential properties were sold in the neighborhood at an average price of $514,000, according to the Brooklyn MLS, which doesn’t include all transactions. This is significantly higher than 2012, when the database cataloged just 12 sales throughout the year at an average price of $350,000. Sales in 2017 are on pace to be higher than last year, when the MLS documented 17 sales at an average price of $425,000.

Rowhouses on a street in East New York, Brooklyn

The neighborhood tends to be popular with blue-collar workers and young families, according to Anthony Franzese, broker/owner of the Brooklyn real estate firm Weichert Realtors—the Franzese Group. He acknowledged that East New York has not yet seen any noteworthy private projects but said that the hype around the neighborhood was real, noting that a recent open house his company did on Hemlock Street saw 93 visitors in two hours.

“People got really aware of it and started to realize it’s kind of like a last frontier here in Brooklyn,” he said. “There are really no places here where you can take $700,000 or $750,000 and still get a deal.”

Keller Williams Realty Empire broker Charles Olson agreed that East New York is heating up. He said he’s been able to sell houses in the neighborhood for above asking price, and described the area as popular with families looking for more affordable neighborhoods.

“As for the multifamily homes, the single-family homes, it’s your average middle-class families getting priced out of the downtown neighborhoods that are looking on the fringes,” he said.

If you ask City Council member Rafael Espinal, who represents East New York and supported the rezoning effort, the amount of affordable housing coming to the neighborhood is a positive development, since it keeps locals rooted in the community.

“My vision was to see more affordable than market rate be built, so I am currently satisfied that that happens to be the case,” he said, “and I hope that the affordable units continue to outpace market rate units in the future.”