Brooklyn's post-COVID office market is planting green shoots (2023)

Optimism is eternal in the community of Iglesias.

Southeast of arguably the world's largest and most expensive office district, Midtown Manhattan, lurks the long-cherished hope that something new and more progressive will emerge in its shadow.

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Blondel Pinnock is a believer. As president and CEO of the non-profit Bedford Stuyvesant Restoration Corporation, she has plans for 840,000 square feet of potential mixed-use land near the heart of the district. The Restoration Plaza project, which could take 12 years to develop, could cost up to $700 million. He currently has a $50 million municipal pledge.

Pinnock's firm is overseeing a 21st-century version of Restoration Plaza that would more than double the size of the complex, which has been the focal point of Bedford-Stuyvesant for more than half a century since the administrations of Mayor John Lindsay and Governor Nelson. . Rockefeller. Combining office space, retail (including an Applebee's restaurant and supermarket) and a cultural component that teaches young artists, the complex aims to provide residents with marketable skills and help businesses find skilled workers.

Pinnock learned of the difficulties that other projects in the community had to take off. But she remains determined.

"People are afraid of that, but as a woman who has worked in banking for the past 20 years, I know there are many business cycles and this one is just one," Pinnock told the Commercial Observer in late January. “It will take several business cycles before we are ready to lay the bricks for this building. I know some say this is crazy, but I can assure you that there will be several business cycles between now and the completion of this project."

Brooklyn has been New York's new emerging 21st century office market for over a decade. In the late 2010s, investors were busy funding projects to convert old industrial spaces into offices, build from scratch, or create shiny new offices on downtown land formerly owned by Jehovah's Witnesses living in upstate New York. .

The promise was always the same: Brooklyn had become a desirable place to live, with neighborhoods like Williamsburg, Greenpoint, Bushwick and Gowanus thriving like never before. In the center of town, apartment towers have sprung up, filled with the nouveau riche. And people want to work close to where they live and not spend hours in traffic jams or on the train.

Then life happened. For two years, a pandemic froze almost everyone in place. Manhattan struggled, its suddenly vacant space offering deals to normally cheap tenants, creating competition for Brooklyn, where none existed. And now there are concerns that a recession is on the horizon.

“With a 21.1% vacancy rate and additional inventory to be delivered in the coming quarters, the Brooklyn office market faces the challenge that there is ample supply in nearly every submarket while demand continues to come from a few select sectors. : education, government, nonprofits, and healthcare," said Franklin Wallach, executive managing director of research and business development atminers, in an email. “The creative industries continue to play an important role in Brooklyn's demand. But this was primarily based in Brooklyn, with limited instances of Manhattan tenants moving or expanding into Brooklyn."

That was the ongoing reality for the Brooklyn office market: lots of new supply and essentially niche demand, even before the pandemic slowed demand much further. Meanwhile, the offer keeps coming. According to Wallach, developers are expected to deliver about 3.66 million square feet of office space in Brooklyn by 2026. Most of the area is quiet. About 5.85 million square feet were added between 2018 and 2022, and about 55% are still available, Wallach said.

“During the pandemic, Brooklyn was not heavily affected by acquisitions and supply expansions, in part because there was already enough supply in the market,” he said.CBREMike Slattery, Associate Director of Field Research. "So there haven't been many spinoffs from these companies. The biggest challenge has been demand."

In total, about 1 million square feet of office space were leased in 2022, about 2 percent more than at the end of the previous year, according to a CBRE report. Asked rents increased 5% year-over-year to $48.91 per square foot.

The big concern, Slattery said, is that a looming recession could hit the entire commercial real estate market hard in 2023, including Brooklyn. Goldman Sachs estimates the probability of a "significant recession" this year at around 65%.

“We've cleared the pandemic hurdle, but some of the challenges remain,” Slattery said. “Working from home or remotely is still impacting the general office market across the country. And I think we're getting into an environment where we expect a recession. The economic headwinds make it very difficult to say whether there will be a big step towards further recovery. For several high profile projects near the banks of the East River with enviable views of Manhattan and its skyscrapers and the Brooklyn Bridge and the Manhattan Bridge and the Statue of Liberty across the harbor, this means that 2023 could be another survival year. collect the leases one by one without landing in the big headquarters that would cause uproar all over the world.

There are properties that compete for this price. Completed last year, the 35-story, 500,000-square-foot center at 1 Willoughby Square is Brooklyn's tallest office building. It has just passed 50 percent of the lease, according to CBRE, whose leaseholders are Paul Amrich and Neil King. "We're seeing a trend that looks pretty good right now," said Amrich, like King, vice president of the brokerage. "We're always looking at the market through what we call a channel, which is interest rate, paper, LOI (Letters of Intent), and we're looking at a very good channel right now."

Or see the Refinery, an iconic 19th-century factory building in the former Domino Sugar Factory in Williamsburg, where mostly residential towers were built. According to CBRE, which oversees refinery leases, there have been no deals since the company began advertising the space in earnest last summer. This was especially so after Two Trees, the company that develops Brooklyn's Dumbo borough, invested $250 million in building improvements, essentially building a new building on top of an old one, and secured two massive loans from lenders that wanted to connect them. with the project: $350 million from JPMorgan Chase for homes that are part of the development and an additional $80 million from M&T Bank.

In January, coworking giant WeWork announced it was laying off 300 of its employees and downsizing its Dock 72 center, a newer building in the Brooklyn Navy Yard designed to anchor WeWork. It was one of several tech giants to announce major layoffs and plans to eliminate excess office space, including through subletting, in recent weeks.

When asked for comment, Rudin Management, which developed the building with Boston Properties, said in a statement: "Dock 72 continues to attract world-class creative companies seeking office environments that reflect the future of the workplace. We signed three headquarter leases in the second half of 2022, all for growing companies that have moved from other Brooklyn locations. They are joining WeWork and Food52, which is moving out of Manhattan.”

The market also reserves surprises. According to CBRE, office leasing activity increased 91% quarterly in the last three months of 2022. In fact, activity in Brooklyn was 30% above the five-year average. And then there are pockets of vitality, some of which are quite unexpected. Several cryptocurrency startups have established a colony in Bushwick, a neighborhood of old houses and industrial buildings that few consider for offices. While the cryptocurrency suffered a widely publicized setback with the arrest of Sam Bankman-Fried in December for money laundering and wire fraud related to its FTX cryptocurrency exchange, it still has a core of believers working hard to keep the lights on.

And Industry City, a turn-of-the-century industrial park between the Gowanus Expressway and the water, secured enough leases with new "manufacturing" businesses to give Pinnock's Bedford-Stuyvesant Restoration Corporation hope for Restoration Plaza's prospects. :

"Something like that would be amazing."

This article originally appeared as part of the Tenant Talks newsletter.Consider subscribing to this and other Commercial Observer newsletters here.

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