Manhattan's Hybrid Work Pain Is Brooklyn Office Owners' Gain
The after-effects of the worst of the pandemic are hitting parts of Manhattan’s real estate market hard — but some shifts are helping, not hurting, in Brooklyn.
“Brooklyn has fared much better than Manhattan [in] terms of absorption and sublease space,” CBRE Executive Vice President Evan Haskell said at Bisnow’s Brooklyn State of the Market event this week. “We’re starting to see tenants actually looking at hub-and-spoke models — people who have big operations in Manhattan are actually starting to tour and talk about having outposts for their Monday/Friday operations.”
While office availability in Brooklyn sat at 21.1% at the end of the third quarter, according to Colliers, it was actually down 3% from March 2020 — compared to Manhattan’s 65% increase.
Leasing volume for the borough for the first nine months of the year is at 990K SF, per Colliers, 41% higher than 2021. Rents were up 3% from the quarter before to reach nearly $52 per SF. The Williamsburg/Greenpoint neighborhood is now commanding $67 per SF.
Panelists said Brooklyn, though facing many of the same challenges as Manhattan, has plenty of bright spots in both the office and retail market. The borough continues to hold international cachet, is home to more than 2 million people — many of them younger New Yorkers who stand to reap benefits as companies rejigger their office policies to allow workers to partially work from home.
Haskell said that while the office market is still “spotty” like Manhattan, with newer buildings largely commanding more attention and higher rents, the borough is better placed to weather the upheaval in the office world.
“[In Brooklyn] you’re seeing buildings that have been quasi-office, quasi-industrial, now going fully industrialized,” he said. “That's taking a lot of lower-priced space off the market."
This year, deals like design firm Huge’s 72K SF lease at Rudin and Boston Properties’ Dock 72 have garnered attention, but Two Trees’ Managing Director Alyssa Zahler said there is an "insatiable" demand coming from small tenants.
“That is not something I can say about other parts of our business on the office side,” she said. “Right now, we're cutting up a 30K SF floor, we got it back into 13 smaller spaces — if that gives you sort of a trend of where things are going.”
That demand, she said, is coming from people who are “sick of working from home.”
It is a part of the market that Brookfield is also looking to capture, said Jesse Cooperman, vice president of leasing at Brookfield Properties. The company is currently revamping MetroTech Center, part of which it acquired in 2018, and rebrand it as Brooklyn Commons. Interest from startups, he said, is starting to pick up, after years of growth in technology, creative and advanced manufacturing industries in the borough. The Center for an Urban Future found in 2019 that there were more than 200 tech-focused startups based in Brooklyn, a 356% increase since 2008.
"We first see a startup culture really starting to emerge in Downtown Brooklyn," Cooperman said. "As a landlord, we're positioning ourselves to capture any industries that come out of this for paradigm shift, by offering flex, smaller suite concepts [and] larger blocks, so that we can accommodate startups and companies at every stage through the growth process. And we think that, coming into 2023, that is going to be a growth opportunity."
While New York experienced an exodus during the worst of the pandemic, many residents in Brooklyn stayed put, panelists said, giving the commercial real estate market there more of a fighting chance.
Brooklyn Navy Yard CEO Lindsay Greene said because she runs the “mission-driven” landlord, supporting those residents' small businesses is a big part of the Navy Yard's focus.
"We're trying to support businesses, offer them coaching, offer them connections to marketing classes, offer them connection to financial providers, and we need spaces to do that that aren't, you know, big floor plate industrial spaces," she said, adding the complex fared well through the pandemic from a leasing perspective.
“We had a lot of space come online at the end of 2021, and we leased it all up during the pandemic," Greene said. "We always had relatively steady foot traffic, I think because people lived in Brooklyn or even lived in Lower Manhattan, and just needed a place to get away from just the same four walls.”
The retail market’s recovery has been largely driven by local, niche offerings that are owned by a diverse array of owners, following a years-long trend of landlords giving lower-credit tenants a chance to lease if they believe it will bring something unique to their properties.
Retail leasing has picked up — the Real Estate Board of New York’s summer Brooklyn retail report for 2022, released just before Thanksgiving, showed an increase in rent and a drop in concession packages in the borough, which it attributed to a jump in tourism and economic activity. In recent weeks, New York University announced it is spending $1B on a flagship engineering school in Downtown Brooklyn.
“Our marketing and our activations are all really focused on diversity,” Downtown Brooklyn Partnership President Regina Meyer said. “The fact is that Downtown has evolved into a fully mixed-use downtown. It's not just Fulton Street, which is great, it's not just the government sector … It's a ton of young people living in over 20,000 housing units, that's really what the asset is right now."
In the years leading up to the pandemic, the market had too much office space and new developments delivering with little or no pre-leasing. In 2019, Colliers predicted that 7M SF of office space was due to come online by the end of 2022, as places like 25 Kent Ave. and the Jehovah's Witnesses' former headquarters, the Watchtower Building, hit the market.
But Joe Riggs, principal at Hudson Cos., said he thinks most local office owners will fare well — even as the asset class more broadly face an uncertain future.
“Despite the sort of transitional moment we are in, the office market is still probably under-officed in the long run,” he said. “The trend has been that Brooklyn workers commute to Manhattan … I think that's going to change ... Office owners who can afford to hold on will be OK in Brooklyn.”