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. 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. Read on for the second installment of our Q&A on Downtown Brooklyn with John Horowitz of Marcus & Millichap and Albert Laboz of United American Land.
Vice president/regional manager, Marcus & Millichap
Why has the office market taken so long to respond?
The office market has only recently spiked as Brooklyn was always seen as a cheaper alternative to Manhattan to live but not a place where employees wanted to work. However, as more people, particularly young adults, moved to Brooklyn, they chose to stay even when they can afford to move to Manhattan. Eventually, employers came to recognize that their employees were happier if they could work within walking or biking distance from home. Thus, the demand for office space began to increase, but supply was limited. The last 18 months, you’ve seen the supply start to catch up to the demand.
What do you think of the decision by the developer of 420 Albee Square, JEMB Realty, to switch to its plans to office from residential? How big of a risk is JEMB taking?
I think it’s a great decision. Competition on the residential side remains strong, but supply is extremely limited for office space. Currently, the occupancy rate for office space in Brooklyn is 97%. That is the opportunity that exists in Brooklyn. This lack of supply and increasing demand leads to decisions, such as that made by JEMB Realty, and to the strong demand for the Watchtower properties currently on the market. While building office space on spec is always risky, given the current demand in Brooklyn, I think it is a smart, calculated risk.
Can Downtown Brooklyn compete with neighborhoods like Dumbo in the near future?
There is no reason why Downtown Brooklyn can’t compete. It’s more convenient to public transportation, which is what all employees want. While it doesn’t have the cachet of Dumbo or Dumbo Heights, the central location will appeal to all types of companies and employees. The only thing stopping a company from relocating today is the lack of inventory. Once that is addressed, it wouldn’t surprise me at all to see a major company relocate to Brooklyn.
Principal, United American Land
I hope it’s going to be built given the uncertainty in the market, including the oversupply of condos in Manhattan. Brooklyn has arrived already but this kind of development validates the power of Downtown Brooklyn, which is only two subway stops from Manhattan and costs 35 percent less than Manhattan. In terms of the end product, a condominium in Manhattan priced at $2,800 a square foot would be $1,700 a foot in Brooklyn.
How much have land/development prices in Downtown Brooklyn risen over the last few years and how does that compare with the rest of the city?
Land prices have gone up dramatically in the last four to five years. Back then, $150 a foot was high, allowing you to build a rental for that. Now the pricing is up to $300 to $350 or even $400 a buildable square foot depending on the size, but you can no longer build a rental for that price, compared to Manhattan, where the cost per buildable square foot starts at $700 and goes up from there depending on the location.
Why has the office market taken so long to respond?
As the chairman of the Fulton Mall Improvement Association and a large stakeholder, I was part of the team that helped in the rezoning of the Downtown Brooklyn area in 2004. When the city rezoned the area, their goal was to make Downtown Brooklyn the next central business district, since we were at that time competing with Jersey City for office tenants. When the new zoning was implemented, it was post 9/11, when the cost of Downtown Manhattan office space was very, very inexpensive. A developer would have to get $45 dollars a foot to build a brand-new office building in Downtown Brooklyn, yet Downtown Manhattan was renting in the low $30-a-foot range and getting incentives from the city. It meant the commercial space for tenants we envisioned never materialized. So couple that with the boom in the residential sector in the late 2000s, and developers just focused on building apartments which were in demand.
What do you see as the biggest challenges to development and investment in Downtown Brooklyn? Is the market getting too saturated on the residential side?
Uncertainty surrounding 421a will put a wet blanket on pricing. For somebody new coming into this market, it will be problematic because you’re not sure where the city is going or how much affordable housing is going to be required. These are major issues that have to be resolved by the city. Also, retail is very, very strong, and as such the rents are very, very high, but we need to attract restaurants and bars to meet the new demand, and with the retail rents at such a high point it could be challenging. On Fulton Street, you’re talking $300 to $400 per square foot. On the approaches, including Bridge Street, Willoughby Street, Lawrence Street, the rents are between $100 to $150 dollars a foot, and at that pricing it might be difficult to attract the quality restaurants, bars and attractions to meet the needs of the new residential population.
What kind of development or investment opportunities are you eyeing in the Downtown Brooklyn area right now? Any deals you can share with us?
We’re mindful of the demand for office space, so we have a couple of sites that we’re planning. On the residential side right now, we’re in the middle of developing 505 Fulton Street, above H&M and Old Navy, where we are creating 120,000 square feet of luxury loft rentals. The 120 units will be a Tribeca-style loft space, with 15-foot-high ceilings, 10-foot high windows and nothing like the cookie-cutter apartments you see elsewhere in this market.