FCR confirms planned increase in AY office space, decrease in condos

We have further confirmation Forest City Ratner plans more Atlantic Yards office space than previously announced, 1 million sf rather than 336,000 sf, an apparent recognition that the condo market is in trouble and a hope, based on some mixed evidence, that the office market will pick up.

Also, if the pattern regarding office space in Downtown Brooklyn extends to Atlantic Yards, most of the jobs would be firms relocating from Manhattan to Brooklyn; thus the jobs wouldn't be new.

The New York Times, in an article yesterday headlined Office Tenants Flee Manhattan Rents for Brooklyn, reported enthusiastically on the office market in Brooklyn, focusing on Forest City Ratner (and failed to mention that FCR is the partner of the parent New York Times Company in the new Times Tower).

AY office space: 1 million square feet

The article stated:
Plans are in the works that would profoundly change the scale of the office market near Downtown Brooklyn. The most drastic is the long-delayed $4 billion Atlantic Yards project...

MaryAnne Gilmartin, executive vice president for commercial and residential development at Forest City Ratner, said the project would add up to one million square feet of office space, including a 600,000-square-foot tower. In addition, the company says it has the capacity to add almost one million square feet of office space in the MetroTech development.

Keep in mind that FCR originally announced 2.1 million square feet of office space, involving the four towers wrapping the arena. That allowed them to promise 10,000 new jobs, though that total was dubious from the start, given lowered demand and the fact that many jobs likely would be relocated rather than new. (Image from 2004 flier.)

Ultimately, the projection was lowered 336,000 square feet, and that figure still appears on the official Atlantic Yards web site (right).
That amount of space could house 1340 jobs; 1 million square feet could house 4000 jobs.

Delays pending

There's no reason to think that the new office space is coming soon. The Times reported:
But Ms. Gilmartin said Forest City Ratner would not build any new office space in Brooklyn until it had adequate advance leasing. She said that before the credit markets froze up this fall, the banks could finance buildings with 50 percent advance leasing. Although it is too soon to say what might happen once the credit markets thaw, she speculated that bankers might want greater advance leasing, perhaps as much as 60 to 75 percent.

Beyond that, note that increasing construction costs, including the Frank Gehry premium, should mean that Atlantic Yards office space is more expensive than Downtown Brooklyn office space, making it somewhat tougher to attract tenants.

For Building 1 in the Atlantic Yards project, the developer is looking for an anchor tenant, essentially-cold calling, the Times reported in March.

Changing plans

As approved, Building 1 was to contain a mix of uses, including office space, condos, and a hotel. However, in May, the developer announced that Building 1 would consist only of office space, with 650,000 square feet, but was waiting for an anchor tenant.

Why was housing eliminated? Perhaps FCR concluded that the condo market had softened. Indeed, the developer chose not to build condos at its Beekman Tower in Manhattan.

Also, as I reported last month, FCR p.r. firm Geto & DeMilly's web site, in renderings and a site plan from May, show both Site 5, at the far west end of the project footprint, and Building 1 would contain office space (yellow). The tower at Site 5, on land now occupied by P.C. Richard/Modell's, was previously supposed to be condos.

Brooklyn office market picking up?

I wrote last year that the Brooklyn office market is tanking, but it seems to be picking up--though not as dramatically as the Times indicated.

Brooklyn offers a cost advantage, with asking rents now $30.52, significantly lower than those in Manhattan; major tax breaks cut the effective rent nearly in half, to $16, the Times reported.

Note that these tax breaks are targeted to keep companies now in Manhattan from moving to New Jersey or Westchester and instead to stay in the city. In other words, the office jobs are relocated rather than new, even though Forest City Ratner promised new jobs.
Vacancy rate much like 2006

The Times reported:
The vacancy rate there in modern, well-equipped buildings — what brokers refer to as Class A office space — fell to 7.9 percent in the third quarter, from 9.4 percent in the first quarter, according to Cushman & Wakefield, the commercial real estate concern.

The Downtown Brooklyn office market has only about 8 million sf of Class A space. The Times reported that leases signed this year total nearly 300,000 square feet.

But the math on the vacancy rate is a little fuzzy. Of 8 million sf, 9.4% is 752,000 sf and 7.9% is 632,000. That means a net pickup of only 120,000 sf, not 300,000 sf.

The vacancy rate is only fractionally better than that at the end of January 2006, when it was 644,909 sf, according to a Cushman & Wakefield report cited last year in the Real Deal.

FCR "sitting pretty"?

The article ended on an up note:
So the office market in Downtown Brooklyn might remain tight for some time. There is some sublease space on the market; and JPMorgan Chase is looking to rent out a large block of space in its buildings in MetroTech. But Ms. Gilmartin said that 99 percent of Forest City Ratner’s space in MetroTech is leased. “We are sitting pretty now,” she said.

Presumably much of the remaining 632,000 sf is controlled by JPMorgan Chase.

Had the article taken a wider view, Gilmartin's statement could have been treated with much more skepticism. Forest City Ratner can't be sitting all that pretty, given that the flagship Atlantic Yards tower is nowhere near construction.