The Real Deal New York

Who’s winning the Brooklyn office battle?

New mega complexes, from Dumbo Heights to the Empire Stores go head-to-head in the borough’s fierce fight for tenants

January 01, 2016
By Mark Maurer

Industry City (Photo: Tobias Truvillion)

Industry City (Photo: Tobias Truvillion)

In the Brooklyn office market, the race is on. Builders of massive developments in former industrial districts are feverishly trying to lock in tenants, ranging from startups to the Fortune 500 set, as the borough sees surging demand on the commercial front.

This month, The Real Deal looked at some of the buzziest sites — Dumbo Heights, Empire Stores, the Brooklyn Navy Yard, Industry City and others — to see how far along they are in their lease ups and how they differ from one another.

What we discovered is that prospective tenants are hungry for affordable rents and looking at very specific locations based on where their pool of talent lives. Collectively these projects are drastically altering the borough’s office landscape and pushing the Brooklyn office market to a new tipping point.

LIVWRK's Asher Abehsera

LIVWRK’s Asher Abehsera (Photo: Tobias Truvillion)

In some cases these competing projects are nabbing the same tenants. The office-sharing giant WeWork, for example, will serve as an anchor tenant at both the Brooklyn Navy Yard and the Dumbo Heights complex.

Given its industrial history, Brooklyn has long been scarce on office space.

All told, Kings County has 48 million square feet of office space, a drop in the bucket compared to Manhattan’s 398 million square feet, according to a third-quarter report from commercial brokerage CBRE. But the borough has 5 million square feet of office and light manufacturing under construction that’s scheduled to hit the leasing market through 2018 — and an additional 3.6 million planned or proposed, the brokerage’s data show.

And the new developments are already going head-to-head.

Brooklyn-Chart

“These [new] complexes have already begun competing with each other because they hold significant blocks of space,” said Zev Holzman, a broker at Savills Studley who was part of a team that represented Time Inc. in its 55,000-square-foot lease at Industry City.

In general, low vacancy rates have continued to keep at least pockets of the market tight. While the borough-wide vacancy rate was actually a high 14.2 percent, according to CBRE, the Downtown Brooklyn submarket had the lowest rate in the city, at 3.3 percent. And in a telling sign, the report was CBRE’s first quarterly analysis for Brooklyn.

One reality keeping much of the market tight is the limited number of large sites available in the borough.

“Besides these large complexes, there are not that many opportunities to really have a big impact on the market,” said Dan Marks, a broker at the Brooklyn-based commercial firm TerraCRG.

But amid changing trends in office design — namely, a growing preference for edgier and more industrial environments — prospective tenants are interested in more than just giant footprints. Ben Waller of ABS Partners Real Estate, which is handling leasing for Heritage Equity Partners’ Bushwick Generator project, said, “Every firm from Manhattan checking out Brooklyn expects an outdoor space or something unique like 20- or 30-foot-high ceilings.”

Below is a look at some of the projects changing the makeup of the Brooklyn office market.

Dumbo Heights

Dumbo Heights, one of the more high- profile developments in the pipeline, is in the homestretch in its hunt for tenants.

Dumbo Heights

Dumbo Heights

The 1.4-million-square-foot complex is sandwiched between the overpasses of the Manhattan and Brooklyn bridges in the Jehovah’s Witnesses’ former Watchtower buildings.

In 2013, developers Jared Kushner and Aby Rosen and LIVWRK’s Asher Abehsera teamed up to buy the coveted six-building site for $375 million. Now they are spending $100 million on the renovation.

The conversion — which will carve up the buildings into 953,000 square feet of office space, 80,000 square feet of retail, a hotel and roof decks — will breathe life into a desolate corner of Dumbo.

Indeed, the developers have already leased up to 62 percent of the office space and 70 percent of the retail. And soon the ground-floor retail will be occupied by trendy food vendors like Dig Inn, Dos Toros and the Japanese restaurant Domodomo along with Randolph Beer.

WeWork, the first tenant to move in, has leased space at two of the buildings, 77 Sands Street and 81 Prospect Street, and is set to bring 1,200 people to work there. It will soon be joined by trendy e-commerce retailer Etsy, mobile marketing agency Prolific Interactive and the design firm Frog, which is relocating from Manhattan. The developers have also set aside 150,000 square feet of “smart spaces,” or short-term leases, running between 12 and 30 months, which they are currently leasing.

According to Abehsera, all that’s left to fill at the complex — where average asking rents are in the high $50s per square foot — is 380,000 square feet of office space at 175 Pearl Street and four floors at 77 Sands. The developers, he said, have opted to hold off on leasing 175 Pearl because the building needed more extensive renovation work.

“We did heavy leasing on the other four buildings so we could let this one mothball until it was ready,” Abehsera said.

The eight-story, 190,000-square-foot property will have 25,000-square-foot floor plates and will be targeted at a single anchor tenant, he said. Leasing will kick off in the middle of this month.

Abehsera argued that Dumbo Heights is not competing with other Brooklyn office complexes, but rather Financial District buildings that have comparable floor plates and are geographically closer.

Yet the developers are not looking for just any old mega tenant. They’re targeting the creative and tech fields. Financial services and insurance firms are likely not a perfect fit, nor are businesses looking for back office space, Abehsera said. Creative subsidiaries of those firms could work though, he added.

And unlike Industry City and the Brooklyn Navy Yard, there will also be no light manufacturing.

In addition to the five office buildings, hotelier Ian Schrager is opening a 600-key Public hotel in the sixth building — his first hotel in Brooklyn. It will include a nightclub, a 70,000-square-foot private swim club and a 200-seat restaurant modeled after the famed Rainbow Room.

Abehsera, who in a New York Times story described Dumbo Heights as “our little hipster kibbutz,” said the complex is ideal for creative firms ready to move their businesses to the next level.

“Some companies have grown up and want 2.0 versions of themselves,” Abehsera told TRD. “But they have to ask themselves the soul-searching question: ‘Is the Brooklyn culture a part of our story?’”

A rendering of the office space at Empire Stores

A rendering of the office space at Empire Stores

Empire Stores

Midtown Equities’ Empire Stores, a batch of seven buildings located on the waterfront in Brooklyn Bridge Park, is Dumbo Heights’ closest rival.

In 2013, the Cayre family’s Midtown Equities, along with Rockwood Capital and the HK Organization, beat out nine other firms to ink a 96-year lease for the city-owned property, with plans to convert the contiguous warehouses — once used for coffee storage — into office and retail.

Under Mayor Michael Bloomberg, the city envisioned Empire Stores as a tech hub.

The developers are now converting the properties into one giant complex with 380,000 square feet of office space and 70,000-square-feet of retail.

Empire Stores, which began leasing office space in late 2014, is asking some of the borough’s priciest-ever office rents, ranging from $65 to $85 per square foot, the latter for unobstructed views of Manhattan.

The furniture store West Elm — which launched in Brooklyn in 2002 and is currently headquartered a block away at Two Trees Management’s 45 Main Street — claimed 135,000 square feet of office space before official leasing began. And while the developers have locked in other tenants, they have yet to publicly announce them.

At press time, the site had leases out for spaces ranging from 45,000 to 150,000 square feet, according to David Beare, director of leasing at Midtown Equities.

West Elm — which also took 15,000 square feet of retail — is preparing its spaces now and will be the first tenant to move in.

Other retail tenants include the Italian restaurant Cecconi’s, which is affiliated with the Soho House; a takeout outpost of the nearby farm-to-table restaurant Vinegar Hill House; a food market; and the high-end bicycle shop Shinola. There is one retail space remaining.

Beare said the complex’s most direct competitors are Midtown South buildings, where rents are comparable in the $70s and $80s per square foot.

The difference is, for that price in Midtown South “you’re not getting private outdoor space or floor-to-ceiling windows,” Beare said.

Richard Warshauer, senior managing director at Colliers International, called Empire Stores “an outlier.”

“The companies signing there want to make a statement: ‘We’re not following the leader,’” he said.

Dock 72 Brooklyn Navy Yards WeWork

A rendering of Dock 72 at (credit: S9 Architecture)

Brooklyn Navy Yard

This month, developers Boston Properties and Rudin Management plan to break ground on a rare asset in Brooklyn: a Class A, ground-up office building.

The $380 million, 17-story, 556,000- square-foot project known as Dock 72 is the centerpiece of the 300-acre Brooklyn Navy Yard’s push to incorporate pure office uses amid its heavily industrial landscape.

WeWork will anchor the project with a 222,000-square-foot space. So far no other tenants have been announced.

Floor plates range from 30,000 to 55,000 square feet, with asking rents from the low-$60 to mid-$70 range per square foot, according to Rudin CEO Michael Rudin. Tenants will move in the first half of 2018. 

Rudin said while Dock 72 is new construction, it will have the warehouse-type feel that’s often attractive to creative and tech firms.

But Dock 72 is not the only project underway at the site.

The city, which owns the Navy Yard, is looking to unite tech tenants and traditional manufacturers at the site.

Plans call for the conversion of a 17-story, 1-million-square-foot warehouse called Building 77 into a manufacturing property with two floors of penthouse office space.

Unlike Dock 72, the floor plates at Building 77, which span 120,000 square feet, can be subdivided, according to the Brooklyn Navy Yard Development Corporation’s CEO, David Ehrenberg.

“We’re looking for a marquee tenant that can benefit from the Yard and proximity to its industrial tenants,” Ehrenberg said.

A rendering of Industry City in Sunset Park

A rendering of Industry City in Sunset Park

Industry City

The tide changed in 2013 for Industry City when Jamestown Properties, Angelo Gordon & Co. and Belvedere Capital bought a 50 percent ownership stake in the massive 16-building, 6.5 million-square-foot industrial campus in Sunset Park.

The 30-acre waterfront complex, formerly known as the iconic shipping facility Bush Terminal, is now undergoing a $1 billion renovation. And it needed it: Some of the buildings date back to as early as 1895.

The owners intend to invest $890 million, which will be contingent on clinching $115 million of public funds and city approval for zoning changes to the area.

But the partners are not sitting on their hands as they wait.

They scored a major coup when they landed the media giant Time Inc., which signed a 15-year lease for office space that includes a studio for a new automotive website. The company — which publishes Time, People and Sports Illustrated — said it plans to move 300 employees into the space by this month.

Savills’ Holzman said Time Inc. was dead-set on planting a flag in Brooklyn.

“In Manhattan, it’s hard to be plugged into that world of innovators and makers,” Holzman said. “The deal helps to legitimize Brooklyn as an option, so I think you’ll see more of [them.]”

Meanwhile, the Brooklyn Nets’ 70,000-square-foot practice facility is opening in Industry City in February. 

And the developers have also signed on new tenants such as desktop 3D printer manufacturer MakerBot. 

At press time, about 2.6 million square feet of the 5.5 million that’s built out was occupied or spoken for. The remaining 2.9 million square feet is either vacant or being used as storage. The proposed rezoning would allow Industry City’s owners to fill nearly all of the vacant and storage space with “innovation economy” uses.

“The previous owners struggled, like private firms with multi-story buildings tend to do,” said Andrew Kimball, CEO of Industry City and former CEO of the Brooklyn Navy Yard Development Corporation. “The days of the 1950s are gone and they’re not coming back. We’re making a big bet on the community of makers, innovators and academic collaborators.”

Some are skeptical of the long-term undertaking.

Industry City is undergoing a gigantic change from a sleepy manufacturing property to a truly mixed-use one,” Colliers’ Warshauer said. “It’s going to be a long, long time before the office space gets leased up and replaces the storage.”

Asking rents at the complex are far lower than at the other big Brooklyn sites — and more in line with the surrounding neighborhood. They range from $15 to $35 per square foot, while the nearby area averages in the $20s.

Elsewhere in Sunset Park, another massive structure, the 1.3 million-square-foot Liberty View Industrial Plaza, has recently undergone a $100 million renovation.

The Salmar Properties-owned complex, which was built in the 1920s, retains a manufacturing bent, though e-commerce giant Amazon inked a seven-year deal for a distribution center there in November.

In the pipeline

Brooklyn Navy Yard is not the only site getting a new ground-up office building.

Toby Moskovits

Toby Moskovits

Toby Moskovits’ Heritage Equity Partners has also made headlines for its 400,000-square-foot speculative office project at 25 Kent Avenue in North Williamsburg.

And there are other large swaths of office space set to hit the borough — though some are not even out of the ground or in the leasing stage yet. They include Italian developer Est4te Four’s 1.2-million-square-foot Red Hook Innovation Studios and Two Trees’s 500,000-square-foot office space at the Domino Sugar Factory redevelopment.

In addition, two large conversions are on the near horizon: Westbrook Partners and RXR Realty plan to overhaul a warehouse in Clinton Hill, and Quinlan Development Group and a partner are turning a self-storage facility into offices in Downtown Brooklyn. Plus, the city is bringing 500,000 square feet of industrial space to the Brooklyn Army Terminal.

Still, some question whether the Red Hook and the East Williamsburg-Bushwick markets can actually foster a community in the vein of Dumbo and Sunset Park.

A rendering of Innovation Studios in Red Hook

A rendering of Innovation Studios in Red Hook

“I’m most skeptical of investment in fringe areas like East Williamsburg and Bushwick, where it is very hard to charge more than $50 per square foot,” Abehsera said. “The numbers don’t quite work.”

But, for select tenants, that is part of the appeal, Waller said.

“They like that there’s no community in Bushwick because they can create their own space and stand alone,” ABS Partners’ Waller said.

Madison Realty Capital, a major mid-market player best known for residential development and investment, is also jumping into the game — converting 250,000 square feet near the Brooklyn Navy Yard and 460,000 square feet in Sunset Park. Both renovations are set to wrap in 2016.

“There is already a lot of momentum, but more marquee names in tech and media will drive much of the future demand,” said Josh Zegen, co-founder of Madison Realty Capital.

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