Downtown Brooklyn’s second act: Q&A, part I

From the May issue: The buzz surrounding Downtown Brooklyn’s skyline has lately reached a fever pitch. Last year, JDS and the Chetrit Group unveiled plans to build Brooklyn’s tallest tower, a 73-story residential skyscraper that would be twice as high as anything surrounding it. The investment represents a stark contrast to where the neighborhood was just over a decade ago.

“People considered the ZIP code to be socially unattractive, as opposed to a community that offered a diversity of culture,” said MaryAnne Gilmartin, president and CEO of Forest City Ratner, which owns the downtown MetroTech Center and is building its Pacific Park development adjacent to the area.

Since a 2004 rezoning, nearly 41 million square feet has been built or is in the works in Downtown Brooklyn.

Most of that has been residential, but attention is now expanding to the office market. In November, the developer of 420 Albee Square, JEMB Realty, scrapped its plans to build a residential tower and will instead switch to office. “We’re no longer relegated to the back office tenant,” said Albert Laboz, principal of United American Land. “Now we’re getting primary tenants who are the creative, TAMI crowd.”

The Real Deal asked a panel experts to weigh in on the Downtown Brooklyn real estate market. Read on for the first web installment with MaryAnne Gilmartin of Forest City Ratner and Seth Pinsky of RXR Realty.

MaryAnne Gilmartin
President/CEO, Forest City Rather

The neighborhood’s rezoning in 2004 has been credited with spurring tremendous development. But it was largely driven by residential development. Why did that happen?

Downtown Brooklyn’s rezoning went in a completely different direction than was planned. I don’t think anybody, including Forest City, ever imagined the residential market would kick in like it did. We thought we’d see a third central business district thrive and an expansion of the office market as a result of the zoning, but that didn’t happen. It started with the food movement and then the artists. They all flocked to Brooklyn. Certainly, government policies, including the allowance for taller buildings to spur the office market, allowed for market forces to respond so that residential development took over.

What kind of buyers and renters are flocking to Downtown Brooklyn and how has this changed over the last few years?

It’s really about the spread when living in Brooklyn versus Manhattan. When you are hearing about the marking down of condominiums originally priced at $40 million or $50 million, that is not the real world. If interest rates continue to stay low and jobs continue to be created, city dwellers will have the financial security to buy in the city. If you look at the $1,500-per-square-foot condo in Brooklyn then look at what’s available in Manhattan, there is such a stark comparison. For the same quality you’re looking at north of $2,000 a square foot in Manhattan. That’s what we’re betting on in Brooklyn. If you’re a renter, an apartment at our luxury tower at 80 DeKalb goes for $60 a foot, which nobody believed would happen in Brooklyn. But then you have a similar building in Manhattan, like the Gehry building, where rents easily pierce $80 a foot. If I’m chasing $20 of spread, I think I’ve got a pretty nice runway in Brooklyn.

It’s no secret that new office complexes like Dumbo Heights and Empire Stores are wooing firms from the tech sector. Can Downtown Brooklyn compete with neighborhoods like Dumbo for TAMI-sector tenants? Do you envision a major company moving its headquarters to Downtown Brooklyn in the near future?

When you think about office markets and where people locate, discussing location is much more powerful than it was in the 1980s. The TAMI worker, the TAMI professional and student, all want to be in Brooklyn. The relative cost of a company to relocate to Brooklyn is highly compelling. The fact that there’s an engineering school going up on Jay Street, for example, allows for the creation of the new kind of 21st-century worker in Brooklyn. The traditional finance sector that was located in MetroTech has been replaced by NYU, Tough Mudder and Makerbot. They’re looking for a competitively priced space run by grown-ups.

What do you see as the biggest challenges to development and investment in Downtown Brooklyn?

The biggest threat we face in Brooklyn today is that land prices are being driven up so much by demand. Added to that is the absence of 421a. You can’t build unless you have a tax benefit. Without it, you can’t make the numbers work. So you have to offer a combination of “as of right” benefits, including reduced energy costs and relocation benefits. Those benefits are essential to making the numbers work. It still costs the same amount to build a new building in Brooklyn as it does in Manhattan, but we have to factor 30 percent less in rent. To remove these kinds of benefits, which are renewable every few years because it’s a legislative process, would be a death knell for the emerging office market in Downtown Brooklyn. If you’re going to use 421a as a bellwether for dysfunctional politics, you’re going to get a chilling effect on those benefits.

What kind of development or investment opportunities are you eyeing in the Downtown Brooklyn area right now? Any deals you can share with us?

Obviously we’ve got our work cut out for us over in Pacific Park, but I’m a big believer in the office market. Brooklyn is ready for a sophisticated office tower; the idea that it could be built on Flatbush and look straight across at the Manhattan Bridge would be ideal. It requires a lot of work and a bit of patience. Jay Street has also been a confused street for a while. We haven’t had a kind of entrance to MetroTech there, and you sort of trip into it. There’s some unused air rights that NYU has in that area that could be interesting.

Seth Pinsky
Executive vice president/fund manager, metro emerging markets at RXR Realty

Why has the office market taken so long to respond?

First, until a couple of years ago, there was an absorption issue as large blocks of space in existing buildings such as MetroTech sat empty. This has not only cleared in recent years, but today the Brooklyn office market is among the tightest in the country. Second, until the last five years or so, most tenants looking at Brooklyn were doing so because of the cost advantage of Brooklyn relative to Manhattan. What has changed in recent years, however, is that increasingly companies are looking to Brooklyn for office space, not based on price competitiveness but for a more fundamental reason. Namely, that Brooklyn has talented workforces that want to be employed near where they live. Even as the market has tightened and the value proposition of Brooklyn has improved, the rents that businesses are able to pay have still lagged the value that other users (e.g., high-end condominium purchasers and even high-end residential renters) could pay for the same real estate. If condominium prices begin to soften as they may be doing at the high end across the city or if rents flatten or dip due to the delivery of so much new supply in Downtown Brooklyn in the next couple of years, it is certainly possible that we will finally see substantial office development in Downtown — an evolutionary step that would be very positive for the economy of New York.

How much of an impact do you think Mayor de Blasio’s proposed streetcar system, known as the BQX, will have on Downtown Brooklyn in terms of land prices? In general, what are the infrastructure and public space improvements that will be key to the future of Downtown Brooklyn?

As anyone who rides the subway sees on a daily basis, the growth in ridership on the subway system (as is the case with all of our other transit systems) has been so taxing that these systems are having a hard time coping. Accordingly, Mayor de Blasio is correct in pursuing initiatives such as the BQX, as well as an expansion of the East River Ferry system launched under the Bloomberg Administration, in order to grow our transit network, to relieve pressure on existing lines and to bring efficient connectivity to places that currently do not have it. I certainly hope that, going forward, the BQX and other expansion projects prove to be feasible and financeable.