Downtown Brooklyn’s second act

After a 2004 rezoning spurred residential development, the neighborhood is now vying
to become a tech hub

May.May 01, 2016 01:21 PM
From left: Albert Laboz, MaryAnne Gilmartin and Seth Pinsky

From left: Albert Laboz, MaryAnne Gilmartin and Seth Pinsky

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.”

MaryAnne Gilmartin
President/CEO, Forest City Ratner

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. 

Timothy King
Founder/managing partner, CPEX Real Estate

What kind of statement does the arrival of a supertower make about the neighborhood and where it’s headed?

It was simply a matter of timing and pricing.  When we moved into our building at 81 Willoughby Street, The Brooklyner was the tallest building in Brooklyn. A few years later it was Stahl’s 388 Bridge, a year later, Avalon Bay Willoughby West. The JDS project is special. It includes the iconic landmarked Dime Savings Bank building at 9 DeKalb, which will be a very special retail venue. If you look at the combined acquisition costs for the Flatbush and DeKalb properties, take into consideration the dollar cost average by backing out the retail and stacking the air rights. I’m sure JDS and the Chetrit Group are very comfortable with their basis. These are smart guys with proven track records
of executing. 

How much are rents up by in the last few years and how does that compare to other neighborhoods? Is there room for more growth or will rents plateau as new product comes on line?

Rents are above $60 per square foot and climbing. When Downtown Brooklyn was rezoned, the rental market was probably $35 per square foot. When the market crashed, we had a shortage of rental units and the market quickly went from $40 to $50 and steadily climbed from there. Rents will grow across the board another 6% to 10%. It’s important to consider unit sizes as well. The five highest rental markets in Brooklyn are Brooklyn Heights, Williamsburg, Dumbo, Downtown Brooklyn and the Heights. The top three are supply constrained. 

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?

At the height of the last cycle we saw one site sold for north of $200 per square foot and it was a small site, around 60,000 square feet. At the time the market was $115 to $150 per square foot. We’ve now seen trades that eclipse $400 per square foot with at least one close to $500. But to assess this fairly you have to bifurcate the deals and back out the retail because in some instances the retail is projected to command $200 to $300 per square foot. Essentially the market is double where it was before the crash. We’ve seen similar growth in Manhattan, Long Island City and Astoria, Queens. But it’s hard to generalize. 

You represented the sellers in the deal in 2014 to sell 420 Albee Square to JEMB Realty. What do you think of the firm’s decision to switch its plans to office from residential?

Firstly, I am proud that CPEX brokered the trade to JEMB. Here’s the thing, different investors have different investment preferences, hence that’s why our professionals are on teams that sell a particular type of real estate, i.e., office, industrial, retail, residential, multi-family and mixed-use. JEMB is more retail- and office-focused than residential.  You have to weigh different factors here. They are already testing the market to get a feel for the demand, pricing and may even have some signed leases before putting a shovel in the ground.  If office rents are in the $50 to $60 range, with ICAP tax abatement, it’s not so surprising to see JEMB choose office over residential. It means lower construction costs and more efficient floorplates, among other incentives.

In November, Adam America Real Estate and Slate Property Group teamed up with Chinese real estate giant China Vanke to build a $50 million, 33-story condo tower in Downtown Brooklyn. And of course, the China-based Greenland Group has a 70 percent stake in the residential portion of Pacific Park. Do you think Chinese investors will pull back in light of China’s market turmoil?

As long as EB-5 exists and the U.S. remains a safe haven, foreign investors will continue to invest in gateway cities.

Roger Fortune
Vice president, Stahl Organization

Stahl’s condo project 388 Bridge Street opened in 2014 to strong sales. What kind of buyers and renters have been flocking there and how has this changed over the last few years?

In 2014, buyers at 388 Bridge Street were most likely to be young professional singles and couples without children. In 2015, an increasing number of buyers were families with young children. The building has also attracted foreign buyers seeking a home in New York as well as empty nesters. 388 offers the design, quality and amenities of luxury Manhattan condominiums but with amazing views and light.

Aside from the Barclays Center, what projects have been game changers in the neighborhood?

City Point creates a major destination for food, entertainment and shopping in Downtown Brooklyn that will be unlike any other, while Brooklyn Bridge Park creates a destination for sailing, sports, families and food. The BAM Cultural District’s multiple new developments — particularly Theatre for a New Audience & BAM South — help make a great neighborhood even better.

In general, what are the infrastructure and public space improvements that will be key to the future of Downtown Brooklyn?

Willoughby Square Park is a crucial component of the “greening” of Downtown Brooklyn — creating open space for residents, shoppers and office workers in the neighborhood.

John Horowitz
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.

Albert Laboz
Principal, United American Land

What kind of statement does the arrival of the JDS and Chetrit supertower make about the neighborhood and where it’s headed?

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.

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