Brooklyn Offices Catch Media-Tech Boom as Vacancies Drop

Sept. 4 (Bloomberg) -- David Lombino, director of special projects for Two Trees Management, talks to Bloomberg’s David Levitt about his company’s plans to redevelop the former Domino Sugar refinery in Brooklyn as a mixed-use residential and commercial real estate project. Brooklyn has attracted the attention of developers seeking to capitalize on the growth potential of its office market. (Source: Bloomberg)

The 1890s-era warehouse sits across from the Brooklyn Navy Yard, a relic of the New York borough’s industrial past. Originally a shoe factory and later a root-beer bottling plant, its arched windows were bricked over long ago.

The building, home of Lockaway Self Storage since 1989, is part of some 20 million square feet (1.9 million square meters) of properties in Brooklyn and Queens that are ripe for conversion to offices, according to Tucker Reed, president of the Downtown Brooklyn Partnership. The organization is seeking to create a “world-class” business district across the East River from Manhattan in the city’s most populous borough.

Developers are beginning to see Brooklyn as an alternative office locale for New York’s technology and media firms, many of whose employees already live in the area. The industrial buildings evoke a feel similar to Manhattan’s midtown south, where demand has driven rents out of reach for some tenants in those fields, while the borough is experiencing a broader renaissance as retail districts flourish and home prices surge.

“In vast numbers, the tech and creative class of this city is choosing to live in Brooklyn,” Reed said. “And so when they’re making their location choices, a lot of them like to associate their companies with where they live.”

Projects in the works include Two Trees Management Co.’s plans to turn the idle Domino Sugar refinery building on Williamsburg’s waterfront into about 630,000 square feet of offices. Manhattan investors Jared Kushner and Aby Rosen agreed in July to buy six properties near the foot of the Brooklyn Bridge for a potential office conversion, while a partnership including Jamestown Properties is planning to revamp Industry City, a 6 million-square-foot complex in the Sunset Park area.

Tech Triangle

Brooklyn’s “tech triangle” -- the Navy Yard area, downtown and the former factory district known as Dumbo, for down under the Manhattan Bridge overpass -- is already home to almost 10 percent of New York City’s technology and media firms, according to a report by Reed’s group, released in June. They include Etsy Inc., an online consumer-goods merchant with more than 350 employees at its Dumbo headquarters; and MakerBot Industries LLC, a developer of three-dimensional printers that recently moved to MetroTech Center, a downtown office complex.

At 20.9 million square feet, Brooklyn’s office space is less than a third of the 65 million square feet in Manhattan’s midtown south, the area roughly between 30th and Canal streets. If most of the 20 million square feet of industrial space Reed estimates were in Brooklyn, it would create a market almost the size of downtown Philadelphia’s.

Tightening Market

Brooklyn’s office availability rate -- space that’s vacant or scheduled to become empty within 12 months -- dropped to 7.8 percent at the end of June, from 13.4 percent 15 months earlier, according to data from brokerage Newmark Grubb Knight Frank. Landlords sought an average of $32.13 a square foot in the second quarter, up from $19.04 a decade ago.

That compares with midtown south’s 10.4 percent availability rate and average asking rent of $47.49 a square foot. In lower Manhattan, where shrinking financial companies have left landlords with more than 6 million square feet of space to fill, the availability rate was 16.1 percent and rents averaged $41.90, according to the brokerage.

With little to no affordable space available in midtown south, creative tenants would consider a refurbished industrial building in Brooklyn before moving into Manhattan’s glass-and-steel skyscrapers, according to Robert Sattler, vice president of brokerage Cresa New York.

“If it’s created, the tenants will come,” he said. “It’s just the vibe they’re trying to be part of.”

Housing Boom

While the push to expand its office space is just getting off the ground, Brooklyn is already in the midst of a housing and construction boom. The area “enjoys probably the hottest real estate market in the country now, particularly for residential,” Bruce Ratner, chairman of Forest City Ratner Cos., said in a Bloomberg Television interview last week. His company developed the 3.7 million-square-foot MetroTech campus and Barclays Center, the year-old downtown arena that last month hosted MTV’s Video Music Awards.

The median price of Brooklyn homes that sold in the second quarter was $550,000, the highest in more than a decade of record keeping, according to New York-based appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

Growth of Manhattan’s technology industries has been fueling the residential boom, according to Adam Friedman, director of the Pratt Center for Community Development at Brooklyn’s Pratt Institute.

Beyond Williamsburg

“The past two years have been unbelievable,” with gentrification spreading well beyond Williamsburg, along the East River, to more-distant Bushwick, Bedford-Stuyvesant and Crown Heights, where there’s been a wave of rebuilding.

“There’s been a very, very dramatic increase in housing costs in those neighborhoods,” Friedman said. “I’ve had this discussion with brokers: Who is moving to these houses? It’s the creatives. It’s people who work for Google.”

The commercial real estate market may face more of an uphill climb in luring tenants from Manhattan, which remains the epicenter of commerce and is where big technology companies from Yahoo Inc. to Facebook Inc. have their New York base. The firms that do choose to rent in Brooklyn are more likely to be startups with less-established businesses, Sattler said.

“Among the clients I represent now, the larger ones haven’t considered it an option,” he said of Brooklyn. “It’s really the small ones, the privately owned companies whose principal concern is the bottom line.”

Domino Site

In Williamsburg, Two Trees plans to spend at least $50 million for its conversion of the Domino Sugar refinery building, a city landmark that dates to the 1890s. The brand’s famous yellow sign, now atop a concrete silo, will crown the refurbished building, the only structure on the site that would be spared demolition as part of a broader redevelopment.

Two Trees, run by the father-and-son team of David and Jed Walentas, is using its successful redevelopment of Dumbo as a model for the proposed Williamsburg project, which calls for 2,284 apartments, a park and 79,000 square feet of stores.

New York’s newly developed all-residential enclaves “don’t integrate well into the existing communities,” said David Lombino, director of special projects for Two Trees. “If you go there during the week, on a weekday around noon, they’re very desolate. You don’t feel energy.”

In Dumbo, with more than 2 million square feet of offices and about the same in residential, “if you go there on a weekday, it feels electric,” he said.

Watchtower Buildings

Kushner and Rosen are leading a group that’s under contract to purchase six properties in the area for $375 million. The buyers intend to redevelop the 1.2 million square feet of space in what’s known as the Watchtower buildings, according to a statement in July announcing the deal. Josh Raffel, a Kushner spokesman, and Alyson Leiter, a spokeswoman for Rosen, declined to comment on the transaction.

Sunset Park’s Industry City overhaul is being overseen by Andrew Kimball, former chief executive officer of the Navy Yard Development Corp. The waterfront complex will be used to house technology and “innovation-based” tenants, according to Jamestown. The Atlanta-based company is teaming with Angelo Gordon & Co. and Belvedere Capital, its partners on Manhattan’s Chelsea Market, a former cookie factory that has retail and offices.

‘Three Tests’

The Industry City conversion would be similar to what Kimball helped accomplish at the Navy Yard, a onetime military shipyard created by President John Adams at the dawn of the 19th century. The 300-acre (120-hectare) campus is now home to more than 330 companies including Steiner Studios, New York’s biggest movie- and TV-production facility.

The Domino, Watchtower and Industry City projects will be “the three tests” for the borough’s potential as a major office market, Cresa’s Sattler said. “If all those do well, then you might see others looking to convert. But I don’t think it’s anything that’s going to happen overnight.”

One challenge to expansion is that with housing demand so heated, it makes more sense for property owners to choose residential over commercial development, according to Sattler. A second is attracting the right kind of tenant.

“There’s got to be a big user that goes in there first,” he said. “We need one of those large Silicon Valley-based tech companies to be the leader before everybody else follows.”

City’s Role

City incentives would help spur development of affordable office space, such as those that have encouraged building of affordable housing, according to Reed of the Downtown Brooklyn Partnership.

While his group sees the growth of creative companies outpacing more traditional industries, “we have a dwindling supply of space to accommodate them,” Reed said. “There needs to be some policy decisions or landlord education or something that is going to start to address that looming space shortage.”

Reed’s group also advocates using the mostly vacant -- and in some cases inaccessible -- offices above the stores in downtown’s Fulton Mall, a strip now occupied by merchants including shoe stores, a pawn shop, a Shake Shack eatery and such national retailers as Aeropostale and Macy’s.

Store demand is so strong, “in some cases they’ve knocked out the staircases to the upper floors in order to maximize the retail square footage,” Reed said.

The city has done a comprehensive study of Brooklyn’s office needs and expects to release results soon, Julie Wood, a spokeswoman for MayorMichael Bloomberg’s office, said in an e-mail. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Dumbo Warehouses

Bloomberg’s office today said the Empire Stores, a collection of vacant industrial buildings in Dumbo, will be redeveloped by Midtown Equities LLC in partnership with Rockwood Capital and HK Organization for a mix of uses including office, restaurant and retail space. The seven contiguous warehouses, built in the 1800s, primarily were used for coffee storage until they were abandoned in the 1960s, according to a statement.

Larendee Roos, agent for 1 Carlton Associates, owner of the Lockaway Self-Storage warehouse, said that the company is exploring a number of options for the 100,000-square-foot property, including converting it to offices.

The landlord would prefer a mix of uses, including a retail center that would be a miniature version of Boston’s Quincy Market, where local residents and nearby workers could buy food and other necessities, she said. In that scenario, the upper floors of the five-story, red-brick building could become offices, said Roos, who has had preliminary talks with the Navy Yard Development Corp. about the concept.

Evolving Market

“We’re trying to be thoughtful about what is going to be best for the community and the overall footprint” of the building, said Roos, estimating she gets at least one call a week about a potential buyer interested in the property.

Reed said he sees Brooklyn’s office market evolving as a complement to Manhattan’s rather than a competitor, with more established technology companies and venture-capital firms choosing midtown south and startups going across the East River, just an F-train ride away.

“A lot of these firms work together, they form partnerships,” Reed said. “They like to be around and share their culture.”

To contact the reporters on this story: David M. Levitt in New York at dlevitt@bloomberg.net; Elizabeth Dexheimer in New York at edexheimer@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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Photographer: Scott Eells/Bloomberg

A child passes in front of Lockaway Self Storage building in the Brooklyn borough of New York City. The building is part of some 20 million square feet of properties in Brooklyn and Queens that are ripe for conversion to offices, according to Tucker Reed, president of the Downtown Brooklyn Partnership.

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Photographer: Scott Eells/Bloomberg

A child passes in front of Lockaway Self Storage building in the Brooklyn borough of New York City. The building is part of some 20 million square feet of properties in Brooklyn and Queens that are ripe for conversion to offices, according to Tucker Reed, president of the Downtown Brooklyn Partnership. Close

A child passes in front of Lockaway Self Storage building in the Brooklyn borough of New York City. The building is... Read More

Photographer: Craig Warga/Bloomberg

The idle Domino Sugar refinery building stands in the Brooklyn borough of New York City, on Aug. 26, 2013. Close

The idle Domino Sugar refinery building stands in the Brooklyn borough of New York City, on Aug. 26, 2013.

Photographer: Scott Eells/Bloomberg

The Lockaway Self Storage building at 1 Carlton Ave. stands in the Brooklyn borough of New York City, on Aug. 30, 2013. Close

The Lockaway Self Storage building at 1 Carlton Ave. stands in the Brooklyn borough of New York City, on Aug. 30, 2013.

Photographer: Craig Warga/Bloomberg

Two Trees Management Co. plans to spend at least $50 million for its conversion of the Domino Sugar refinery building, a city landmark that dates to the 1890s. Close

Two Trees Management Co. plans to spend at least $50 million for its conversion of the Domino Sugar refinery... Read More

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