The investment trend is the result of a citywide phenomenon. According to "Arrested Development: Breathing New Life Into Stalled Construction Sites," released by Manhattan Borough President Scott M. Stringer in late 2011, construction spending across all five boroughs fell 23% in 2010 from peak years, with the number of construction jobs dropping 15%, resulting in hundreds of stalled projects. As of July 31, 2011, the New York City Department of Buildings reported 646 stalled construction sites across the five boroughs, down from the peak of 709 halted sites in November 2010.

Much of that building bust took place in Brooklyn, where 44% to 48% of the total number of stalled construction sites is concentrated. The report says that Brooklyn's Community District 1, which includes the neighborhoods of Williamsburg and Greenpoint, has 92 such sites, more than any district in the city. Coming in second was Queens, followed by Manhattan, Staten Island and the Bronx.

As investors slowly come back to finish the job, they might look for inspiration to Steelworks Lofts, a stalled 110,000-squarefoot mixed-use condo development at 76 N. 4th St. in Williamsburg, which got a jump-start earlier this year. The troubled project secured a $28.4-million acquisition and construction loan on behalf of a partnership between Cayuga Capital Management and Jacob Toll, according to Meridian Capital Group LLC, which arranged the 36-month loan.

The partnership bought the note in cash from the prior construction lender—which included private parties as well as troubled bank Anglo Irish Bank Corp.—and executed a deed-in-lieu-of-foreclosure, according to locally based Real Capital Analytics.

The site—formerly the home of the Lewis Steel Products factory—was rezoned from industrial to allow mixed-use commercial. In June 2007, the property flipped for $26.1 million to developer Fifth Square Partners, which planned to build 88 condo units. But after the housing crash, the developer was unable to pre-sell the units to obtain construction financing, RCA records show.

The new ownership plans to convert the former steel factory into an 83-unit rental apartment building with 20,000 square feet of retail space on the ground floor. Amenities will include a health club, roof patio with gardens, barbecue pits and bocce courts.

Aaron Appel, a managing director at Meridian, tells Real Estate Forum that the building's location, along with the borrowers' renovation expertise and market knowledge, helped to procure "highly competitive" construction financing with limited guarantees in a challenging financing environment. As for buying debt on stalled sites in general, he says "there's certainly an appetite" for it.

According to brokerage MNS Real Estate, as of May 2012, rental rates for studios in Williamsburg averaged $2,621 per month, compared with $2,600 in April and $2,398 in January. In May, one-bedroom units averaged $3,087 a month, compared to $2,960 in January. Two-bedroom apartments were going for $4,050, up from $3,909 in April.

"Manhattan rents have been going up in lockstep with Brooklyn," Garfield says. "A well-located building in Williamsburg will warrant a rent between $40 and $50 a foot; a year ago it would have been 20% less."

In addition to an increase in pricing, Williamsburg is also experiencing a culture change. From 2005 to 2008, Appel says people were moving to the area because it was a lower-priced alternative to Manhattan. That's not the case today, however; renters are flocking to Brooklyn as a matter of preference, causing a major shift in the price of real estate and the type of capital investing in the asset class. "There's been a flood of institutional capital into the equity portion of the stack," Appel relates. "It's not just private families or private developers."

As a result, major players are getting involved in the space. Recently, Glendale, CA-based American Realty Advisors acquired a newly developed 62-unit apartment complex at 111 Kent Ave. from Stellar Management for $55.5 million, nearly double what Stellar initially paid to acquire and complete the property. RCA data show that Stellar bought the site for $25.4 million from Garrison Investment Group in March 2011. And after finishing the construction and reaching 100% occupancy, the company achieved a price per unit of $900,000, a source close to the deal says.

The property—located near the East River waterfront, mass transit and ferries—is located in an area that has high demand for residential product. "The transaction represents Brooklyn's legitimacy as a destination for institutional investment," says Will Silverman, corporate managing director of the capital transactions group at Studley, who worked on the deal with executive managing director Woody Heller, corporate managing director Eric Negrin and Daniel Parker, assistant director. "The caliber of the tenants is at least as good and, in some cases, superior to what you'd find in Manhattan."

Similarly, Madison Realty Capital—which specializes in flexible debt and equity financing for middle-market transactions throughout the US—is known for its recent push into distressed multifamily note buys, as evidenced by its purchase of 385 Union Ave. in Williamsburg. Madison purchased the note and the deed on the six-story, 53,000-squarefoot condo property for $21.5 million, or $458,511 per unit—almost half-a-million dollars for each apartment home.

The 47-unit property, now 97% occupied, was originally owned by Anshel Friedman, Pincus Freund and Joseph Freund. In 2009, they defaulted on their construction financing, and the property was placed in receivership after the original lender filed a foreclosure action.

Now Madison plans to complete the finishing touches on construction and satisfy various tax and construction liens previously clouding title. In addition, the management team intends to stabilize the property and enhance its value and visibility in the Brooklyn marketplace.

"We've been involved in a number of these deals, and we love it when we can get in and buy the debt, finish the projects and make them work as rentals," says Josh Zegen, co-founder and managing member of Madison, noting that two more Williamsburg deals will close by end of summer.

Overall, Zegen says Madison sees opportunity in buying and repositioning properties that come in at a lower cost. "We reposition the real estate, rebrand it and finish the amenities the past developer unfortunately could not complete," he says.

The biggest opportunity for the company in the market right now, says Zegen, is in distressed multifamily, simply because of the lack of financing. "Typical banks don't like to finish a broken deal; they don't like getting their hands dirty," he explains.

With pricing shooting up and available sites in Williamsburg becoming increasingly scarce, investors are now thinking about where to put their money next. "The inventory of stalled condo jobs is pretty much through," says Stewart Campbell, SVP of Berkadia Commercial Mortgage LLC. Berkadia just closed an almost $50-million loan for a new multifamily project at 205 N. Ninth St. in Williamsburg called the Driggs.

"There are certainly some other jobs that stalled at the footing stage," he says, "and investors are showing renewed interest in Williamsburg because the rental numbers are working on those deals," which sweetens the pot for new construction financing.

In particular, Hudson is looking outside the neighborhood to Downtown Brooklyn, Prospect Heights, Fort Greene and Bushwick, anticipating that residential growth will move further into the borough. "In submarkets like these that have been a little slower to gentrify relative to Williamsburg, it's taking place right now," Garfield says. The firm just funded an $11.6-million construction loan for a condo conversion of a vacant commercial property in Park Slope that will incorporate 20,757 square feet of residential space and 6,175 feet of below-street-level medical office space.

Garfield says financing terms tend to be more competitive on ground-up development, though Hudson was able to get a better yield on partially completed buildings. "The timeframe in which they come to market is much shorter, which we also like," he says. "We like the fact that they're coming to the market sooner rather than later. We've been fortunate because the rents that we were underwriting a year ago have gone up dramatically, so the market and cap rates are moving in our direction."

Other investors are thinking outside the box and pioneering in neighborhoods with development potential. Recently, MRC took ownership of 224 Richmond Terrace, a 60,000-square-foot, 40-unit multifamily property just a half-mile south of the Staten Island Ferry terminal in the borough's burgeoning St. George neighborhood.

Marking its first foray on the Island, Madison had purchased from Bank of New York Mellon the non-performing first mortgage on the condo property for $8.4 million, some 66% of the unpaid principal balance and 52% of the payoff balance including interest. The firm has taken title by completing foreclosure proceedings.

Seeing opportunity along Staten Island's new Waterfront Arts & Cultural District, Zegen says the company is planning to convert the condos into rentals in response to the growing demand for high-quality rentals near Lower Manhattan. "It's very similar to product you'd find in Williamsburg, and I think that was the original vision of this developer," he says. "This was the cheapest waterfront product in the five boroughs."

Appel says Long Island City is similar—to an extent. There is institutional capital there now, particularly toward the waterfront. "For a renter, the location is fantastic," he states. "You have six or seven main subway lines right into Grand Central, but it's still a better-priced alternative."

And while the area is still somewhat lacking in services like health clubs and restaurants, they're starting to sprout up. "Land prices in LIC are still not high enough to prohibit new development," he says.