They went in with big plans.
Creative types loved living in Brooklyn, and developers believed they’d love working there, too. Monday mornings already brought commuters from elsewhere in the city to Downtown Brooklyn and Dumbo, but there was more great industrial stock to refurbish and space to build new. C-suite executives from a cross-section of industries had moved into the borough’s brownstones and high-rises, and it seemed reasonable that they might push for local workplaces when it came time to sign new leases.
And so developers built, putting up Class A towers with big floor plates and top-of-the-line amenities — on spec.
Savanna erected a 24-story, 400,000-square-foot glass and metal office tower at 141 Willoughby Street with floor-to-ceiling windows, a landscaped terrace and yoga studio. Two Trees bought the landmarked Domino refinery on the Williamsburg waterfront for $185 million in 2012, and then spent $250 million and a decade to turn it into a Class A building whose amenities are a penthouse lounge with panoramic city views and a 40,000-square-foot Equinox fitness club. Edward J. Minskoff Equities broke ground on Dumbo’s first ground-up office building, designed by architecture firm Marvel, in 2021. JEMB Realty constructed the tallest office tower in the borough at One Willoughby Square. For the buildings that have opened, asking rents reach $110 per square foot, double the average in the borough.
It all might have been too much space anyway, but after the familiar downstream effects of Covid stay-at-home policies, floors at these finished buildings now sit empty, and nearly complete towers don’t have any leasing done.
Where they once imagined bustling campuses of programmers and other tech workers, some developers are instead pitching smaller companies, or potential tenants in education or health care.
“In today’s [Brooklyn] market, the 5,000-foot tenants are out there, but you have to do a lot of work for them, a lot of hand-holding; they’re mostly not credit tenants, you have no idea what the fuck you’re getting,” Two Trees principal Jed Walentas said at The Real Deal’s New York Real Estate Forum last month.
“It’s a different business model than having a broker and sitting and waiting for a 30-, 40-, 50,000 square foot tenant. That business is very hard right now, and that’s why … there are buildings that are just sitting there vacant,” he said.
“Unlike Hudson Yards and places in Manhattan, it’s not a headquarters location in today’s world. Maybe if the market was tighter, you’d see somebody make that jump. ”
While Manhattan tenants are snapping up Class A office space and giving a pulse to the ailing office market, leasing activity in Brooklyn has slowed dramatically since the pandemic. About 234,000 square feet of office space was leased in the first quarter, a 96 percent rise quarter-over-quarter — but still 12 percent below the five-year average, according to CBRE. Meanwhile, average asking rents have risen to $55 per square foot from $43 since 2019.
Depending on how long the new buildings continue to languish, the vision of making Brooklyn a place where well-off creatives work and live might end up a flop, taking the office bet down with it. Office values have tanked in the past five years, dropping almost 50% since 2019 from $445 per square foot to $235, according to data from Brooklyn commercial brokerage TerraCRG.
“Brooklyn got a little unlucky in the fact that a lot of this really cool office product was being developed and was in the process of being developed when the pandemic hit,” TerraCRG CEO Dan Marks said. “And it changed the way that people use the office, at least for the time being.”
If you build it
You could hardly blame the developers for their enthusiasm. Private office developers discovered Brooklyn in the late 1960s, and their towers attracted anchor tenants like the New York Telephone Company and Metropolitan Diagnostic Institute. Decades later, developers converted old industrial buildings in Williamsburg and Dumbo to offices, and TAMI tenants — those in technology, advertising, media and information — filled their floors. Companies like Etsy and West Elm were founded in the early 2000s in Brooklyn and have grown along with the borough. They are now two of its biggest tenants. Etsy occupies 200,000 square feet in Jared Kushner and RFR Realty’s Dumbo Heights complex, and West Elm is the anchor tenant at Midtown Equities’ Empire Stores nearby.
“The market has grown up with those companies,” said CBRE’s Joseph Cirone, who has covered the Brooklyn market for two decades. “You’re still seeing the rehabilitation take place in every nook and cranny of Brooklyn, and now you are also starting to see the next iteration of that, which is new construction.”
Some target companies have jumped at the chance to occupy the ambitious new office buildings. In 2022, after years in Dumbo, digital ad firm Huge inked a lease for 71,000 square feet at Rudin and Boston Properties’ Dock 72 in the Navy Yard.
But tenants taking over 15,000 square feet are almost exclusively from the health care, university, government and social services sectors, known among brokers as HUGS, Newmark broker Ryan Gessin said. Those tenants are servicing Brooklyn’s booming residential market, and filling much of its office space.
Educational institutions are signing some of the biggest leases since the pandemic. Pratt Institute inked a 63,000-square-foot lease at Dock 72, and Bedford Stuyvesant New Beginnings Charter School took 51,000 square feet at the Morris Adjmi-designed building at 217 North 10th Street. At One Willoughby Square, a public Montessori school occupies a full six floors at the bottom.
But it’s hard to imagine some of the borough’s historic tenants signing for such fancy spaces. Brooklyn Legal Aid, which moved out of Abraham Leser’s 111 Livingston Street, once the premier office building in the borough, after finding “white, bluish and grey fuzzy circular mold colonies,” was paying Leser Group around $40 per square foot.
Not headquarters material
Large corporate tenants are still hard to come by in Brooklyn, so developers have a new pitch for them: We’ll be your satellite office, like a personalized WeWork that’s so easy to get to that employees will abandon work from home.
But what’s accessible to one Brooklynite is a schlep for another: Reaching North Brooklyn from South Brooklyn is a headache. Dock 72 is in the Navy Yard, 20 minutes’ walk or a shuttle ride from the York Street F. The stroll from subway stop to Domino is 15 minutes.
“Unlike Hudson Yards and places in Manhattan, it’s not a headquarters location in today’s world,” Walentas said. “Maybe if the market was tighter, you’d see somebody make that jump. In this moment in time, I don’t see us getting a 300,000-foot headquarters group coming out of Manhattan.”
“You have the under 4,000-square-foot market, which are mostly local companies. They’re truly born in the borough, and oftentimes their C-level executives are local to that submarket where their office is.”
Dumbo is a proven commute. Still, Boston Consulting Group is responsible for one of the largest new leases in Class A Brooklyn stock, a 67,000-square-foot lease in the Empire Stores building at 55 Water Street in Dumbo, where the global consulting group has opened a satellite office.
Nearby at 29 Jay Street, Edward Minskoff said, his 11-story beige concrete building with multiple lounges, a wellness center and the requisite roof deck is drawing interest from the hoped-for TAMI and financial services companies.
He purchased the property in March 2020 for $61.6 million and secured a $97 million construction loan. So far he is sticking with the idea that this is headquarters material, only seeking full- or multiple-floor tenants. Asking rents range from $90 to $100 per square foot, offset by more than $22 in REAP benefits for companies relocating to above 96th Street in Manhattan or in one of the outer boroughs.
Although the building has the ability to break up the 20,000-square-foot floor plates into smaller offices, Minskoff would prefer not to.
“If we break up a floor and do pre-builts, that will attract smaller tenants,” he said. “We don’t feel it’s necessary at his point.”
Born in the borough
But many of the companies committed to Brooklyn are just not that big.
“You have the under-4,000-square-foot market, which are mostly local companies that are born and bred in Brooklyn,” Gessin said.
“They’re not relocations from the city, they’re not satellite offices for larger firms. They’re truly born in the borough, and oftentimes their C-level executives are local to that submarket where their office is.”
Two Trees is resigned to this reality. The firm has decided to break up some of the 30,000-square-foot office plates at the Refinery at Domino, turning the third and fourth floors into groups of small office suites. Asking rents in the building are $68 to $76 per square foot. The building is attracting tenants like the tech company Eko, which was looking to upgrade from a Williamsburg WeWork.
Eko inked a lease for 3,200 square feet just a few blocks away at the Refinery and will move in this month.
“We wanted to stay in Williamsburg because our team is there — all our Gen-Z are now living in Williamsburg and Bushwick, so it also makes sense to keep them there, and we really like the vibe of the neighborhood,” said Michal Shtofman Aviram, the company’s vice president of marketing. “Williamsburg now is like Soho 15 years ago. Everything is happening there.”
And at One Willoughby Square, aside from the school, the tenants are the kind of small and midsize companies that form the backbone of the Brooklyn market: family office Walnut Ridge Capital, digital ad agency Big Spaceship and consulting firm Gemic.
It takes a lot of small leases, or a lot of patience, to rent 100,000 square feet of Class A, but landlords who can hold on long enough — either through workouts with lenders or by dipping into deep pockets — remain optimistic that a turnaround will come.
There are signs of life. At Dumbo Heights, the four-property office portfolio’s value was reported to be $207 million, down from $640 million five years earlier, and occupancy had fallen to 73 percent from 94 percent in 2018. Yet somehow, Kushner and RFR got a $480 million refi in May, giving them time to fill the vacant space.
“I don’t know if it’s a little bit longer or a lot longer, but if they can just hold on, we’re obviously bullish on Brooklyn,” Marks said. “We think that these are great office buildings and tenants are going to enjoy being in them — it’s just we’re in this moment where it’s really hard to absorb that space.”