Brooklyn Office Bust

Development firms such as Rockwood Capital and Boston Properties' have seen success in redeveloping Brooklyn commercial projects to put on the market in Dumbo and Brooklyn Navy Yard.

This comes after various companies sought new office spaces in the Brooklyn borough and were willing to sign leases at astronomical rents.

One example is Etsy, the online marketplace, that signed a 200,000 square foot lease at Dumbo Heights in the summer of 2014. However, since then, Brooklyn's office market has gone from being virtually ignored to being overwhelmed by developers who are working to push deeper into the borough.

Why is it that some developers are not as successful in this new market?

The original perception was that potential tenants would come as long as Brooklyn is 'cool'.

And the numbers showed this trend. Developers thought the demand for hip and cool office spaces would gain traction.

At the moment, there are 23 office projects underway in Brooklyn; and according to Cushman & Wakefield, this would add approximately 7 million square feet to the commercial real estate market by 2020.

This new supply would amount to 20 percent of Brooklyn's 45 million square foot market. While in Manhattan, this new commercial supply would make up about 7 percent of the market.

Now, those numbers are not bad at all. But what does this mean?

It means that leasing activity could not keep up the pace. In the first quarter of 2017, the 430,000 square feet leasing activity, in Brooklyn, had doubled the volume of the previous year. However, there were 900,000 square feet of new commercial space on the market at the same time. There is too much inventory.

Some real estate experts are looking to logistics companies who need the large space to maintain their companies' workflows and productivity.

Real estate firm Est4te Four sold six parcels of land to New Jersey-based logistics company Sitex for $110 million which they will use for industrial purposes.

These logistic companies require less-costly space, therefore, they do not need all of the development work.

Thor Equities will still move forward with their plans for Red Hook Point. It will be an 818,000 square foot commercial complex next to Ikea at 280 Richards Street.

Some at Thor believe that the limited supply of office alternatives in Red Hook has made their development projects more appealing.

However, you need money to fund these projects. And to do this, developers will need to line up a high-paying commercial tenant to justify getting the project off of the ground and if you do not believe us, commercial brokers at ABS Partners Real Estate who specializes in these Brooklyn deals will agree.

Industry City was converted from shipping and manufacturing warehouses into office space and people are jumping on the bandwagon.

The 500,000 square foot Brooklyn Whale Building, in Sunset Park, was scooped up by Madison Realty Capital in 2015, and the following year, they bought a pair of former industrial buildings that both span 163,000 square feet across from Industry City. These properties have been marketed to office tenants.

Not too far away, you will find adhesives maker AP&G marketing its 165,000 square foot warehouse to tenants looking for office space.

Realty firms are still seeing high demand in Sunset Park because has one of the cheapest rents in the New York City markets.

With all of the new developments happening in various places in Brooklyn, office availability has increased for the third consecutive quarter, to approximately 18 percent. Manhattan, in comparison, is considered balanced between landlords and tenants, and the availability rate is around 10 percents.

Salmar Properties' Liberty View Industrial Plaza and Brooklyn Army Terminal has a combined 669,000 square feet of office space in Sunset Park.

The Brooklyn Navy Yard is expecting to get 1.3 million square feet of property space in the coming years. This competition has fueled others to buy.

Madison Realty bought a 215,000 square foot warehouse at 29 Ryerson Street and the next years, RXR Realty and Westbrook Partners bought the 670,000 square foot building neighboring them at 47 Hall Street. Both are being converted into office space.

This trend has also taken itself to Bushwick.

A handful of developers are looking to tempt large tenants who will dish out the money for warehouse-office conversion projects in Bushwick. But at the same time, many landlords have better luck with smaller tenants.

Some notable conversions are Lincoln Property's 125,000 square foot warehouse at 455 Jefferson Street and Normandy Real Estate Partners' 261,000 square feet office space at 333 Johnson Avenue.

Lincoln Property's project is asking for rents in the mid-to-high $50s per square foot; which is not too different from Dumbo's rents but is way over the Brooklyn borough's average asking rent of $37.50.

According to a broker at Ideal Properties Group, they believe that it is these price-pushing projects that are in danger of being undercut by lower-priced competition in the area.

Many longtime owners in Bushwick have kept their warehouses vacant because they anticipated neighborhood rezoning that could pave the way for residential construction. Because this did not come to fruition, these property owners offered up their spaces at lower rents than new developments.

The current average asking rent in Williamsburg, Greenpoint, and Bushwhich is approximately $42 per square foot during the first quarter of 2017.

The Heritage Equity Partners and Rubenstein Partners' project shows promise with 25 Kent, in a nontraditional office market like Williamsburg.

It will be an eight-story structure built from the ground up that this borough has not seen in more than a decade and the asking rents are in the low $70s per square foot.

The owners are looking to hook an anchor tenant to take somewhere between 100,000 and 200,000 of the total 430,000 square feet of commercial space.

The last time Brooklyn has encountered a deal like this was in the summer of 2015 when WeWork inked a 222,000 square foot lease to anchor Dock 72 at the Brooklyn Navy Yard.

The dealers leading the leasing effort at 25 Kent says there are challenges with being the first to bring a new kind of building to a neighborhood and tenants will have to be educated.

Others believe the Williamsburg office market is not riskier than it was when 25 Kent was first conceptualized. And they feel the risk has diminished because of the residential and hotel developments in the area. But do remark that they are not sure if some of these projects will make it through the pipeline to completion.