Could capital growth in New York’s fastest growing borough outperform Manhattan in the next few years?

The growth story around New York over the past few years has attracted property investors from across the world, earning the city that never sleeps a real estate investment safe haven status only shared by London on the international stage.

Property investment in Manhattan has delivered several years of impressive performance, but recently the city’s real estate situation has begun to change. The growth that’s presented such strong returns for Manhattan investors has pushed home prices, and rent levels, to the point where many New Yorkers are shifting their focus to the city’s outer boroughs. So, should investors be looking that way too?

BIG-TICKET MANHATTAN

The New York market has now reached a point where a Manhattan home is well beyond the reach of the vast majority of buyers.

By Q3 2014 the median condo sale price on the island reached USD908,242, up 4.2% year-on-year. According to the S&P Case-Shiller Index, this puts current prices 5.7% above the market peak in 2007, and represents a 19-year high for the market.

The situation for renters is not much better, with median rent in Manhattan having now reached USD3,470, or USD52 per square foot.

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Manhattan is increasingly becoming a market for ultra-high-net-worth individuals, and this is reflected in the recent trend of developers catering almost exclusively to this higher end of the market. This trend is best reflected by the 17.4% year-on-year rise in the average price of a condo, which now stands at USD1.68 million.

A further example of the increase in the ultra-luxury segment is the pricing of new developments coming onto the market this autumn. In October, there were 21 developments with 1,538 units that were either new to the market or soon to be released into the market, all of the units were priced at USD3,000 per square foot. What is more astonishing, is that two of these developments were priced at USD8,000 per square foot.

Despite this, Manhattan is a popular place to live and appetite for property remains. But investors seeking value are less likely to find the same opportunities presented to them after the GFC. Those looking to maximise their investment capital should consider looking to the outer boroughs or New Jersey.

BOOMING BROOKLYN

Across the lower East River is King’s County, known better as Brooklyn. It’s the most populous of New York City’s five boroughs, with some 2.6 million residents. If it were considered an independent city, Brooklyn would be the fourth largest in the US.

Brooklyn is also New York’s fastest-growing borough, with annual population growth of 3.5% between 2010 and 2013, while business and job growth has been even more impressive.

Traditionally, Brooklyn has been seen as something of a working-class hub, but this has changed in recent years, particularly in the neighbourhoods situated just across the river from Manhattan. These neighbourhoods have experienced rapid growth in the technology, creative and artistic sectors. Familiar names such as Etsy and Kickstarter are among those startups that have chosen to make Brooklyn their home.

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More new businesses and jobs appeared in the borough than in any other part of New York in the decade to 2010. This trend has driven a 30% increase in the total number of businesses in Brooklyn since 2000, against an average of 10% across the city, while the number of jobs in the borough grew by 15.8% against a citywide 2.6% over the same period.

This all comes against a background of improving local schools and falling crime rates, as well as significant investment in mass transit infrastructure that has only increased Brooklyn’s convenience, with many prime neighbourhoods just a short trip by subway or bridge into key Manhattan business districts.

Brooklyn is now widely considered one of New York’s most liveable, trendy areas; the “real” New York, standing in contrast to the corporate world of Manhattan, and its billionaires and tourists.

REAL ESTATE: BROOKLYN VS MANHATTAN

The economic and cultural changes seen in Brooklyn over the past decade has been a strong driver of residential property growth. While the median sale price in the borough is only USD587,515 – 35.3% less than in Manhattan – it’s year-on-year growth rate is slightly higher than Manhattan’s, at 4.5%.

Recent data puts Brooklyn condos on a par with Manhattan condos in terms of its saleability, with both boroughs averaging 92 days on the market. The most telling development behind the data is the appetite for Brooklyn condos; the average number of days on the market for a Brooklyn condo fell by 35.7%, while in Manhattan this figure increased by 4.5%.

Despite growing demand for property in Brooklyn, the homeownership rate in the borough is currently just 29.8%. This points to a strong rental market in the borough, where on average rents are 20% cheaper than Manhattan, which has a median monthly rent of $3,470 compared with $2,800 in Brooklyn. Time to find a tenant is also low, with the current 37 days stacking up very well alongside the Manhattan equivalent of 36 days.

What we expect to be a key driver of growth in the borough over the next few years is the lack of inventory to the market. In view of its rising population, there have been just new 4,990 units to Q3 2014. This is just a 3.4% increase year-on-year. If you compare this with Manhattan, which had 27% extra inventory come to the market in the same period, Brooklyn’s inventory levels look rather inadequate.

BROOKLYN HOTSPOTS

The borough’s best areas for good value property investments lie in the neighbourhoods near the East River, over the bridge from southeast Manhattan. These are the neighbourhoods with the highest median incomes and the highest quality housing options, as well as good transport access, both with Brooklyn and over to Manhattan.

IP Global are looking at a number of investments in the Williamsburg, Dumbo, Brooklyn Heights and Downtown Brooklyn areas and will be launching an investment in one of these areas in early 2015. Please get in touch if you would like to receive information of this property when it’s launched.