Brooklyn's Oversupplied Office Market Is Ready To Welcome Manhattan Satellites
Brooklyn’s office market has been sluggish in recent years, hampered by large, available spaces, a plump development pipeline and reticence from big space users to make the jump from Manhattan.
But as businesses begin to plot their futures, Brooklyn players are banking the borough could reap economic rewards in the immediate aftermath of the coronavirus pandemic.
Before the virus took hold of the city, office leasing in the borough was picking up. There was a total of 945K SF leased in Brooklyn in the first three months of 2020, an almost 170% quarterly increase and 159% above the five-year quarterly average, per CBRE. The average rent hit almost $46 per SF, but availability was at 20% borough-wide. Manhattan has an availability rate closer to 11%, though the rate varies from submarket to submarket.
Still, the surge in activity at the start of the year doesn't mean there aren't storm clouds ahead, with signs of distress already beginning to emerge. TPG RE Finance Trust is in talks to take back the 500K SF Whale Building, a former industrial property in Sunset Park that Madison Realty Capital turned into office space, CEO Greta Guggenheim said on the company's earnings call.
Madison, which owed $81.4M of debt on a property valued at $150M two years ago, opted to hand it back rather than repay the debt it owes, The Wall Street Journal reported this week. Guggenheim said there wasn't the demand from creative tenants the sponsors had anticipated.
For the owners left standing, their cheaper Class-A office space with more big, open areas and less reliance on the subway are emerging as key selling points for the borough.
“I think this is a confluence of events that will make Brooklyn look attractive to tenants,” SVN CPEX Managing Partner Timothy King said. “We will be in the pause, catch-up and breathe mode. But after that you will see companies look at their space needs. As they expand and relocate, Brooklyn could be as viable a location as anywhere else in the Tri-State area.”
Millions of square feet of new office development is set to hit Brooklyn in the coming years. Now, with the city under stay-at-home orders, almost every area of business is on hold. While CBRE doesn't release monthly lease statistics for Brooklyn, it said Manhattan volume plunged 64% below the five-year monthly average last month. But as the city emerges, proponents of the borough are hoping office buildings there will be seen in a new light.
“We’ve had more inbound inquires from tenant's of a different variety of industries since this happened," said Rubenstein Vice President and Director of Investments Jeff Fronek, whose company co-developed 25 Kent Ave. in Williamsburg.
The 500K SF, eight-story building is 15% leased so far, but he predicts some tenants will consider a building such as 25 Kent for satellite offices, as companies with big headquarters in Manhattan look to spread out and reduce the amount of time workers spend on public transportation.
He said he has had one inquiry from a potential tenant considering that option, but he declined to give specifics.
“It’s exploratory," he said. "It would be on the smaller side, but it’s a company I never thought we would talk to."
Multiple companies have publicly indicated their plans to keep their workers remote for months at least. Now, there are growing reports that suburban offices will enjoy a renaissance, with some coworking companies based outside the city reporting an uptick in requests, as Bisnow reported last week.
Citi is reportedly looking at space for satellite offices in Long Island, Westchester and New Jersey as part of its return to work plan. Brooklyn, advocates of the borough said, could be a suburban alternative — with some added benefits.
“Brooklyn is just another consideration in addition to New Jersey or Long Island,” said Colliers International Senior Managing Director Franklin Wallach, adding that a draw for the satellite office market would be its easy access to Manhattan. “The modern, Class-A office market in Brooklyn really changed in the 1980s with MetroTech ... The residential side has really changed, too. Young people and C-suite people live there.”
Even if companies see Brooklyn with fresh eyes after this public health crisis, they will enter a tenant's market. Recent new office developments opened up in the last year include Rudin Management and Boston Properties’ Dock 72, a 675K SF office building at the Navy Yard, and CIM Group and LIVWRK Holdings’ office complex, Panorama.
And there is more to come. In total, almost 6M SF of new office development is due to be delivered by 2024, per Colliers data.
CBRE Vice Chairman Paul Amrich, who is handling leasing at JEMB Realty’s 1 Willoughby Square — where 375K SF of the 500K SF of office space is yet to be leased — said the company has tweaked the marketing to highlight elements he believes tenants will now consider most desirable in the wake of the pandemic.
Access to outdoor areas, airflow and state of the art air filtration are going to come to the fore. He discussed the future of the outer boroughs office market on a Bisnow webinar this week, where he and Columbia Properties Trust CEO Nelson Mills examined how the city’s office market may be reshaped by the crisis.
“I actually think more mature, core companies will be taking a look at [1 Willoughby] versus where we were before,” Amrich said in an interview.
He noted both Brooklyn and Long Island City markets have seen far more investment in commercial and residential real estate than in the run-up to previous downturns.
“The boroughs stand to do better because of the specifics of this event, but also because they are far more mature than they ever have been in past cycles,” he said.
Others said small tenant leases, which have always been the lifeblood of the Brooklyn office market, will continue to dominate. Jobs in technology, creative and advanced manufacturing industries grew faster in the borough than in Manhattan over the last decade.
More than 1,200 tech-focused startups were based in Brooklyn as of last June, a 356% increase from 2008, according to a report released by the Center for an Urban Future.
TerraCRG Commercial Realty Group partner Dan Marks said he expects small leases to remain a big part of the engine in Brooklyn for the foreseeable future.
“Even before COVID, [developers] were doing their best to attract big names,” said Marks, who specializes in Brooklyn commercial leasing and sales. “We are not going to see a big shift for larger tenants to fill these buildings. We are still bullish those tenants are coming, but it is likely to take even longer now.”