Will the Gowanus rezoning be what developers hoped?

Rezoning Gowanus has been on the agenda of developers and politicians alike for a decade. As a result, investors have paid what many saw as speculative prices for land up for rezoning. And one-third of the 130 properties along the coveted, albeit polluted, Gowanus Canal have traded hands over the past decade, according to a study by DNAinfo last year. Although rezoning efforts are still in a nascent stage, prices keep climbing. For example, Kushner and SL Green Realty paid $70 million for a 140,000-square-foot property in 2014. This spring, Aby Rosen’s RFR Realty bought the parcel from them for $115 million. Meanwhile, home prices rose 7.2 percent in 2017 and are expected to increase 8.8 percent in 2018, according to Zillow. The median listing price is $1,107 per square foot.

Last month, local City Council member Brad Lander — who’s known for having cantankerous relationships with developers — took up the mantle by releasing an initial framework for the rezoning. The proposal calls for more residential and mixed-use projects along both the canal and other major arteries. It also includes Mandatory Inclusionary Housing (MIH), which requires 20 to 30 percent of units in new buildings to be set aside as affordable. (The median monthly rent for an apartment in Gowanus is $3,236, according to StreetEasy.)

Gowanus would be the first high-value neighborhood in the city to rezone with the MIH requirement, according to Lander. The requirement throws a wrench into many real estate players’ expectations that the area would be the next condo destination. To get a better idea of what’s to come, The Real Deal interviewed three experts on the submarket. And even after all the years of uncertainty, one Gowanus landowner who declined to speak on the record said that “the single biggest threat is that the rezoning doesn’t happen at all.”

Brad Lander
Member for the 39th district, New York City Council

Brad Lander

Your office released the report “Desegregating NYC” in April, which shows that less than 20 percent of New Yorkers live in racially integrated neighborhoods. This seems to have a lot of synergy with the Gowanus rezoning. Can you explain the relationship? If you’re going to criticize Department of Housing and Urban Development Secretary Ben Carson and the Trump administration [for canceling the Affirmatively Furthering Fair Housing policy], then you better be doing something about [segregation] in your own backyard. Right now, there’s almost no affordable or low-income housing [in Gowanus] and, as a result, it’s a relatively segregated neighborhood with relatively segregated schools. We’re the first wealthier, whiter, upper-middle income neighborhood to be moving forward in a rezoning, with MIH, under [the de Blasio] administration. We [now] have the opportunity to develop a neighborhood that’s much more integrated economically, racially and ethnically.

How do you see the real estate industry fitting in with your vision? For developers and real estate investors, there’s things not to do, like being in the mix of people who are harassing and putting pressure on and turning over rent-stabilized buildings. One of the most important things we can do is strengthen rent laws, so people have the ability to stay in neighborhoods as they change and improve.So, if you’re going to buy rent-stabilized portfolios, don’t overpay for them; don’t pay speculative prices. Purchase them in ways that allow you to make the investments necessary and work off the rent roll and help preserve inclusive neighborhoods.

The framework currently proposes more residential projects. Who do you think the additional housing stock will serve — current residents or newcomers? For the affordable units, the city’s policy is that half the units are reserved for people from the community and half are available for other New Yorkers who need affordable housing. In the market rate units, there’s no particular set-aside policy.

Do you think residential and commercial are on a level playing field under this framework? One of the goals for the Gowanus framework is to promote a real mix of uses, but it’s not easy. It’s probably true that, in some of the neighborhood rezonings, they have tipped so heavily to residential that there’s been a loss of all the commercial, industrial or light manufacturing — we want to preserve some of those uses. That said, most developers who I’ve talked to are in the areas where the plan contemplates allowing residential development. But we’re still a couple years before anyone could file permits on new development. And markets shift, so I would take anybody’s prediction with a grain of salt.

Dan Marks
Partner, TerraCRG

Dan Marks

Can you give a snapshot of the commercial market in Gowanus right now? I’d say demand is very, very, very high. Supply is very, very, very low. It’s a function of this limbo that the market is in from a rezoning standpoint. The transactions that have happened have been with developers who had high confidence that a rezoning was going to happen and also had patient enough capital to secure sites and wait. I think that’s going to change, but it’s going to take real specifics: information about how much FAR [floor area ratio], what the parking requirements are. Until we have that level of specificity, I don’t think people are going to be too motivated to transact.

Do you see any impact on the market at this point? We’re going to be a lot busier now that this framework is out — we already are. We may see an acceleration of condo developments that are in the planning stages get moving faster before MIH becomes a requirement.

What does the MIH component mean for the commercial market? MIH [is also going to] limit the amount of money people can pay for a development. And to be clear, I think MIH is a good thing. Affordable housing is desperately needed. But when you just look at the dollars and cents, MIH does limit the value of the property to some extent. When you saw the big development boom from 2013 to 2015, a lot of those sites were being sold to high-end condo developers who could afford to pay $300 or $350 per buildable square foot because they’re selling condos for over $1,000 a foot. Now, it’s unlikely that anyone’s going to build condos under MIH — this is going to be a rental market. We’re starting to see that because commercial rents are doing so well in this neighborhood, and the value between commercial development and residential development isn’t that far apart.

Some say the speculative pricing in Gowanus is over. What do you think? A lot of owners were holding out for this pop in value when the rezoning happens. What you have to realize is that this is not happening overnight. Instead, what you’ve seen is a steady growth in values over the last five years, and property owners need to realize that the spike in value has already been realized.

David Maundrell III
Executive Vice President of Brooklyn and Queens, CitiHabitats

David Maundrell III

What was it like when you first started working in Gowanus compared to now? Well, first of all, people actually know where it is. That’s because of the office development, but there’s also been this massive creation of nightlife and recreation that didn’t exist five years ago.

What’s your take on the rezoning framework? It’s exciting and it makes a lot of sense. I wish we’d look at what’s happening around places like Industry City; they’ve transformed that place and have a lot of diversity, not just in terms of people living there, but the businesses. You need residential development — obviously with an affordable component. [But] if there’s not a place for people to shop, eat, drink, to have daycare, it’s going to be a bedroom community.

Are you concerned at all about the increased onus of affordable units that will be required with the introduction of MIH? No. I’m just concerned because there’s so many environmental problems — you’re talking about hundreds of hundreds of millions in cleanup costs. Where’s that money going to come from? If you push that off to the private sector after you rezone, I don’t think it’s going to get built because the cost is going to be too high. There have to be some subsidies.

How are you feeling about more units coming online in a market that’s already flooded with concessions? Continually, in all the new development projects I’m working on, we can see anywhere from 15 to 30 percent of the folks moving into these buildings are coming directly from out of the state or country. People will continue to move to New York City, especially Brooklyn, because it’s a worldwide brand now. So, I am not concerned about that, but about the affordability. If you’re going to build on the Gowanus Canal and you’re going to require a developer to, for example, build an entire esplanade — which we all think is the right thing to do — the math has to make sense. So, whether it’s federal, city or state money, there needs to be help to make it happen. Otherwise, these developers will say, “I can’t make money. Why am I getting involved here?”