Companies giving up the struggle to retain Midtown and Downtown Manhattan office addresses in the face of skyrocketing rents and scarce space are setting their sights on another downtown district, just across the Brooklyn Bridge.
The relatively new availability of large blocks of Class A office space in Downtown Brooklyn — as well as low rents compared to Manhattan — could help stimulate business migration to the borough.
Brooklyn’s biggest office complex, the MetroTech Center, has historically been largely populated by the back offices of investment banks, insurance companies and other financial institutions. Many of these tenants have recently pulled up stakes, creating sizable vacancies in hundreds of thousands of square feet of Class A space.
“These industries, with all of the mergers and acquisitions and greater pressure for real estate efficiency, are not looking for as much space for their back offices as they were a few years ago,” said Joseph Chan, president of the Downtown Brooklyn Partnership.
In the fourth quarter of last year, JP Morgan Chase and Empire Blue Cross moved back-office operations from Brooklyn. The companies vacated 250,000 and 100,000 square feet, respectively, of Class A space, Chan said.
This boosted Brooklyn’s Class A office space inventory to about 716,273 square feet at the end of January 2007, compared with 644,909 square feet at the end of January 2006, according to a Cushman & Wakefield report.
It’s one of the few parts of the city where premier office space is actually getting cheaper. In January 2007, Class A office space in Brooklyn garnered an average direct-leased rent of $33.78 per square foot, compared with $35.99 per square foot for the same period last year, according to Cushman & Wakefield.
Increased Class A vacancy levels to 8.8 percent from 7.9 percent in the prior-year period may have played a part in the drop in rents.
But that leaves landlords with a new task — finding tenants. “We’ve got inventory today that we can work with. It’s a real opportunity to draw in new industries,” Chan said.
The biggest potential wrinkle is that “new creatively driven industries” looking to Downtown Brooklyn for a home don’t need as much space as was left open on the relatively large floor plates by the recent spate of back-office vacancies, Chan said.
Companies like the architecture, engineering and graphic design firms that have already set up shop in nearby Williamsburg and Dumbo are the obvious choice to populate the Downtown area, but the 30,000- to 40,000-square-foot Class A floor plates are more than they need.
Building owners will have to subdivide these offices. Chan said he’d spoken to some property owners in Downtown Brooklyn about dicing up big spaces.
Two likely candidates for a new type of Brooklyn tenant include 15 MetroTech, the former Empire Blue Cross space, and year-old 330 Jay Street, which houses State Supreme and Family courts on its lower floors and has about 175,000 square feet of vacant space on its upper floors, said Glenn Markman, executive director at Cushman & Wakefield.
“At both [15 MetroTech and 330 Jay Street], the first preference was to have a single transaction, but it did not pan out a year ago,” Markman said. “At 15 MetroTech, [the owner] is now willing to do individual floors of 35,000 square feet. If [tenants] need smaller spaces of 15,000 to 20,000 square feet, it’s also available,” he added.
Jim Stuckey, executive vice president at Forest City Ratner, said that some of the floors of large Downtown Brooklyn office buildings will “lend themselves to being cut up.”
Over the past year, Forest City Ratner has started to segment 330 Jay Street, Stuckey said, adding that the firm has “started to lease it up in smaller chunks” that range from about 20,000 to 30,000 square feet.
While Stuckey would not say whether the mix of new tenants moving into the building could be categorized as creative companies, he agreed that Downtown Brooklyn’s departing back-office tenants are making way for the creative crop, including Internet and entertainment companies.
“What is different now in Brooklyn is that it has become a forward-thinking, hip, cool, place to be — the idea that it is for back office only is antiquated,” he added.
Forest City Ratner’s Atlantic Yards will add even more Class A office space. The project — made possible by the 2004 Downtown Brooklyn rezoning for commercial, residential and academic development — will have between 600,000 and 1.8 million square feet of office space, more than 6,400 units of affordable housing, a sports and entertainment arena and more than 400,000 square feet of hotel and retail space.
Stuckey expects architect Frank Gehry’s designs to attract a new breed of Brooklyn office tenant. He said the office buildings may be small and tenant-friendly, thanks to flexible layouts and the availability of shared services.
Underutilized public buildings in the MetroTech area offer additional opportunity for Class A office development. Chan cited the Metropolitan Transit Authority-occupied, 425,000-square-foot building at 370 Jay Street.
The Metropolitan Transit Authority vacated about half that space about a year ago when it moved to Lower Manhattan. Chan said the Downtown Brooklyn Partnership is seeking to work with the MTA to place the building on the market for private commercial purposes. “It provides a great opportunity as an incubator for smaller creative firms,” he said.
As Downtown Brooklyn continues to gain cachet as a residential and cultural hub, will its relatively low office rents stay at attractive levels?
The lower rents certainly improve the odds.
Downtown Brooklyn rents pale in comparison to skyrocketing Manhattan office rents, which are double the outer borough’s average, especially in Midtown.
“When firms begin to renew leases in Midtown Manhattan and Lower Manhattan is taken up and rents [in Midtown] are $60, $70, $80, they will push to Brooklyn,” Stuckey said.
Downtown Brooklyn office rents may increase, but centralized ownership that leaves most space in the control of two or three parties may allow some pricing stability in order to continue to attract the new wave of tenants, Markman said. “We will not see runaway rents,” he added.
Some argue that despite low rents and newly available Class A inventory, the wave of new office tenants in the area is more like a trickle. Jim Clark, division manager at Fillmore Real Estate, said the residential market has boomed since the 2004 rezoning, while office growth has been somewhat stagnant.
“A lot of things that were done Downtown went residential. The condo market is more profitable — the big rush was residential,” he said. During the Downtown Brooklyn rezoning, the commercial real estate market was somewhat cool in contrast to the hot residential market at the time. Stuckey said that the commercial real estate market is “now heating up,” and that Brooklyn office space will soon follow.