Wednesday, March 07, 2007

Office market (and tax revenues) tanking for Atlantic Yards?

An article in the March issue of The Real Deal, headlined Downtown Brooklyn office vacancy rises, details the opportunity provided to companies by "the relatively new availability of large blocks of Class A office space in Downtown Brooklyn -- as well as low rents compared to Manhattan."

While we await the results of that positive spin, that certainly suggests that there may be even less demand for office space in the Atlantic Yards project than currently envisioned. That would mean even less tax revenue, which was already lowered significantly by a cut in office space.

Remember, the original promise was space for 10,000 office jobs. At last count, there'd be space for 1340 office jobs, though the number of new jobs might be 375. Now even that's jeopardized.

MetroTech losing tenants

The reason for the current downturn: Forest City Ratner's MetroTech Center has been losing tenants, as investment banks, insurance companies and other financial institutions have relocated or shrunk their back office space.

The RealDeal quotes the Downtown Brooklyn Partnership's Joe Chan, who had in November also cited an office space glut:
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.

That's a net loss of only about 70,000 square feet, rather than 350,000 square feet, just for the record.

FCR overestimates

In January 2006, I explained how the enviornmental review for the Downtown Brooklyn rezoning suggested that Brooklyn couldn't absorb the amount of office space originally announced for Atlantic Yards.

Still, Forest City Ratner consultant Andrew Zimbalist, in his June 2005 fiscal impact analysis, claimed that all was well:
The FCRC Atlantic Yards General Project Plan will eventually create 1.2 million square feet of first-class office space. The Alternative Plan will create 259,078 square feet of new commercial space. Since 1988, downtown Brooklyn has absorbed an average of 600,000 square feet of new office space per year. As of early April 2004, the vacancy rate of class A office space built in Brooklyn since 1985 was less than one percent.

Had the vacancy rate changed between April 2004--a benchmark chosen for Zimbalist's May 2004 original report--and June 2005? Zimbalist didn't check. Did the office space market tank only after the publication of his analysis?

Now office space is getting cheaper. Chan is seeking "creative industries" like architecture, engineering and graphic design firms, but they don't need such large floor plates, 30,000 to 40,000 square feet, so they'll have to be subdivided.

FCR reacts

And yes, Forest City Ratner will subdivide some of its space. Jim Stuckey, who handles the company's office space and serves as president of the Atlantic Yards Development Group, agreed that Brooklyn could attract such industries, telling the magazine, "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."

Other buildings in MetroTech remain underutilized; the Metropolitan Transit Authority-occupied, 425,000-square-foot building at 370 Jay Street is about half-empty.

Lower cost, but not too much

The Real Deal reports:
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, [Cushman & Wakefield's [Glenn] Markman said. "We will not see runaway rents," he added.

That centralized ownership involves Forest City Ratner.

Some skepticism

The Real Deal acknowledges some skepticism about the purported office boom, but closes with an optimistic Stuckey:
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.


Well, maybe.

Atlantic Yards errors

Consider the role of Atlantic Yards. The Real Deal states:
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.

Actually, the project is a state project and has nothing to do with any rezoning, since the state will override city zoning. Also, amount of office space would be either 336,000 sf or 1,606,000 sf. See p. 3. Also, while there would be some 6400 housing units, there would be 2250 affordable rentals.

AY office space

But the office space will sell:
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.

It's impossible for the Atlantic Yards office buildings to be "small," but perhaps what Stuckey meant was that the floorplates would be small. Stuckey offered an interesting spin, because whole point of Atlantic Yards was to be near a transit hub for large companies that would fill 2 million square feet of office space.

As Stuckey said at a 5/4/04 City Council hearing, dismissing alternative arena sites:
The Brooklyn Navy Yard could never result in the jobs that we would be able to create here, because you could not build the amount of office space that we are talking about building here.
And the Brooklyn Navy Yard would never permit us to build the amount of housing that we can build on this site, nor could Coney Island. It could not sustain it, it does not have the development ability and you could not attract the companies to go to those locations... As I mentioned before, this is a major mass transportation hub, there are 10 subway lines, and virtually every single, as I mentioned, Long Island Railroad Line comes through this site too.


But the question remains: is there a market? According to the New York Observer, landscape architect Laurie Olin was skeptical of the market for condos:
Even the three towers that directly ring the arena are not on Mr. Olin’s immediate radar. The developers, he said, would “love to see one of these going, but I haven’t heard them saying that there is this market crying out for condos at Atlantic and Flatbush.”

Then again, the first phase would take four years to build, so the market for residential space, and for commercial space, could change--and change again. Still, as of now, businesses looking for office space in Brooklyn are facing a glut, not a shortage.

Post columnist's amnesia

Today New York Post columnist Andrea Peyser rhapsodizes about Atlantic Yards, calling the area "horribly blighted" (she finds dangerous garbage--who's responsible?--but doesn't mention the luxury condos), quoting Bruce Ratner as saying there will be "parks" (the plan is for privately-managed "open space"), and declaring that Ratner's fans "always get shouted down" (um, Peyser wasn't at the 8/23/06 public hearing).

In April 2004, less than two years ago, Peyser wrote:
I offer 10,000 incontrovertible reasons why the planned Nets basketball arena in Downtown Brooklyn is not just a good idea, but a crucial one: Ten-thousand jobs.

Today, forgetting the decline in office jobs, she writes:
But Ratner gets turned on by building things. And that includes the socially responsible items - jobs and affordable housing. "We have to keep the middle class in New York!" he insisted.

She also writes:
Ratner, 62, and a self-described liberal Democrat, is a mass of contradictions.

According to a 2004 New York Magazine profile, "Access unlocks Peyser’s affections." However, contradictory facts elude her.

(On NoLandGrab, Lumi Rolley deconstructs more of Peyser's column, pointing out, among other things, that the developer of two malls across the street hardly needs a "Welcome to Brooklyn.")

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