The Real Deal New York

Brooklyn’s Class A woes

Borough’s Downtown market sees highest availability in office space in more than a decade

April 01, 2012
By Adam Pincus

From left: Forest City Ratner’s 1 Pierrepont Plaza, 2 MetroTech and 6 MetroTech

The Manhattan office leasing market is thriving compared to most major cities in the country, but just a short subway ride away in Brooklyn, the market conditions are vastly different.

The office market in Downtown Brooklyn was once going strong with a full slate of long-term leases, and a roster of financial firms like Bear Stearns & Company, which were locating back offices there to flee expensive Manhattan rents.

But today its high 90 percent occupancy rate masks a staggering 26.8 percent availability rate — from downsizing tenants and expiring leases in its 8 million square feet of modern, Class A office buildings. That’s according to fourth-quarter 2011 figures, the most recent available from commercial firm Jones Lang LaSalle.

The growth of vacant and available space has been a long time in the making, as financial firms reduced head counts, moved staff overseas, or decamped to New Jersey.

“It is really reflective of the macro trends,” said John Wheeler, a managing director at JLL, who represents office space in Downtown Brooklyn. “Wall Street — even before the financial crisis — had already been evolving and [its] back office required less space. And, in some ways, it does not need the proximity to Wall Street [that Brooklyn offers].”

The availability rate — measuring space vacant now or available over the next 12 months — in Downtown Brooklyn’s modern office space is among the highest in the nation.

Developer and landlord Forest City Ratner controls most of the market, with about 5.2 million square feet in six buildings. Most of those buildings are in the MetroTech Center complex, as well as three additional buildings, including 1 Pierrepont Plaza.

Forest City has just 3 percent vacancy in its portfolio, data from CoStar Group shows. But it acknowledged that about 18 percent of the portfolio is available, either directly through Forest City or indirectly through existing companies in the form of a sublease.

“Our direct market is very, very strong,” said Ali Esmaeilzadeh, a vice president at Forest City Ratner who heads leasing in Brooklyn (note: correction appended). He noted that direct space commands higher rents than sublease space.

(Other area landlords include JPMorgan Chase, which owns 3 and 4 MetroTech, and Muss Development, which owns the 850,000-square-foot 335 Adams Street.)

Brooklyn’s slow office market is a contrast to its active Downtown residential market that’s seen buyers and renters flock to new towers like Belltel Lofts, Toren and the Brooklyner, among others. In addition, the area’s older Class B market has a lower availability rate of about 16.6 percent and even boasts slightly higher asking rents, an anomaly driven by the higher demand for Class B space, figures from JLL show.

But the commercial market in the area could be getting a major boost.

The Polytechnic Institute of New York University, which already occupies space in several Downtown Brooklyn buildings, has been in high-profile discussions to buy 370 Jay Street. And several sources say it is now also considering taking space in 4 MetroTech Center, which is owned by JPMorgan Chase.

Moreover, optimists say the high availability rate in Downtown Brooklyn does not accurately reflect the fact that the area is becoming more popular as an office destination.

“Over the past five years, we’ve seen new industries like media, advertising and technology relocate to, and grow in, Downtown Brooklyn,” said Thomas Conoscenti, director of real estate and planning for the Downtown Brooklyn Partnership, a nonprofit development corporation.

“With anchor institutions like NYU-Poly taking a more active role in the market, we expect that trend to continue,” he added.

Fading dream

Lured by low rents and 25-year tax abatements that began with the construction of the first MetroTech building in 1990, tenants flocked to the complex early on. By the late 1990s, it was nearly completely leased up with support space for firms like Bear Stearns and Chase Bank, news reports at the time said.

But over the following years, the market started to weaken.

And since at least 2004, the Class A availability rate has been on a nearly steady upward push from a tight 7.4 percent to its current level above 26 percent as of the end of 2011, the most recent figures from Cassidy Turley show.

Unfortunately for commercial landlords, average rents have risen only by a hair in the last few decades.

And in some cases, rents have fallen.

In 1985, developers were expecting a tenant to pay prices in the mid-$20s per square foot. Today, average asking rents are in the low $30s, but for some sublease space — for example in 15 MetroTech Center — asking rents are just $19.50 per square foot, data from CoStar shows.

In addition, several sources said that at the 900,000-square-foot 4 MetroTech, JPMorgan Chase does not want to lease to potential government tenants, such as the city’s Human Services Administration. The firm, sources said, is concerned that such a service-oriented city agency would not mix well with its corporate image.

A spokesperson for JPMorgan declined to comment.

“They are a bank; they are not in the leasing business. … If they were a property owner, they would have a more aggressive schedule [for leasing up space],” one Brooklyn real estate source said.

Another headwind is that the generous, 25-year Industrial and Commercial Incentive Program real estate tax abatements the city gave to incentivize the construction of MetroTech, where the last tower was finished in 2005, have started to expire. That makes the cost of leasing space there grow rapidly each year.

“It puts [Downtown Brooklyn] at a competitive disadvantage vis-à-vis New Jersey,” which has an extremely aggressive incentives program, said Lee Winter, director of the business incentives practice at Cushman. “Those costs will ultimately be passed through to tenants.”

Positive signs

While few expect a major turnaround soon, there are signs the negative trend could be coming to an end, some brokers say.

“We have seen a lot of recent activity,” said Forest City’s Esmaeilzadeh. “There’s been a lot of pickup in terms of prospective tenants in Downtown Brooklyn. Very recently we have started to see a lot of tech companies and ‘do-it-yourself’ firms looking at Class A.”

Gary Greenspan, executive vice president at Cushman, who along with Cushman’s Mitchell Barnett represented Morgan Stanley at 1 Pierrepont Plaza, said he expected the market to improve.

“It’s not going to change in the next 12 to 18 months. [But] it isn’t going to get worse,” Greenspan said.

And the availability rate, an ever-shifting number, is likely to drop further. One source said about 133,000 square feet of space had been subleased at 15 MetroTech, but not yet announced; and that Morgan Stanley was likely remaining on floors 10 through 13 in Pierrepont Plaza, cutting the availability there listed in CoStar from more than 400,000 square feet to about 160,000 square feet.

Landlords and agents have been quick to trumpet large leases in the market, including a string of deals in May 2011 at 2 MetroTech, including 120,000 square feet taken by the U.S. General Services Administration, and 90,000 square feet leased by NYU-Poly.

And while NYU is embroiled in a contentious expansion plan in its backyard in Washington Square, its engineering and technical school is looking to Brooklyn, where it will be cheered if it expands further. If it buys 370 Jay Street or opts to purchase or lease 4 MetroTech Center, as some sources say it might, it would be a shot in the arm for the area’s Class A market.

In addition, although CoStar shows nearly all of 4 MetroTech as available,

JPMorgan has quietly filled approximately 400,000 square feet of it with users such as its own home loan divisions from other locations. However, those internal tenants could vacate quickly to make room for a paying tenant or a new owner, sources said.

Plus, the market is tightening in Jersey City, which some view as the main competitor for Brooklyn’s Class A space.

“You are seeing some very good new demand coming in,” JLL’s Wheeler said. “Jersey City does not have a lot of large-type [space], whereas the Class A [in Brooklyn] is ready to go.”

  • While this story is accurate factually, the focus might instead be Chase’s space and how it is handled by the bank. The trend is positive at Forest City, which is the next story to be told, with several quite large leases at 2 Metro, One Pierrepoint done or in the works. And Muss’s 330 Adams and 12 Metro are in good shape. Plus the arrival of one of the city’s largest local employers – NYU – completely changes the game.