Thursday, April 05, 2012

If Downtown Brooklyn office space has a "staggering 26.8% availability" (as per The Real Deal), what does that say about the projected Atlantic Yards office space?

Remember how the four Atlantic Yards office towers were a slam dunk, according to Forest City Ratner's paid consultant, sports economist Andrew Zimbalist, because office space as of 2004 was supposed to be doing fine?

Well, The Real Deal reports on Brooklyn’s Class A woes: Borough’s Downtown market sees highest availability in office space in more than a decade. The article does leave out some important context:
  • that the demand for office space drove the Downtown Brooklyn rezoning, which instead enabled residential towers and hotels
  • that the promised Atlantic Yards office space was crucial to the count of permanent jobs and the total tax revenue
The number of planned office towers at the AY site was cut from four to one, but that one building hasn't been developed, without an anchor tenant.

So, the article suggests that Bruce Ratner's snappy comment to Crain's New York Business in November 2009--"Can you tell me when we are going to need a new office tower?"--remains very much valid:
The office market in Downtown Brooklyn was once going strong with a full slate of long-term leases, and a roster of financial firms like Bear Stearns & Company, which were locating back offices there to flee expensive Manhattan rents.
But today its high 90 percent occupancy rate masks a staggering 26.8 percent availability rate — from downsizing tenants and expiring leases in its 8 million square feet of modern, Class A office buildings...
The growth of vacant and available space has been a long time in the making, as financial firms reduced head counts, moved staff overseas, or decamped to New Jersey.
The promise of Atlantic Yards

As I wrote in March 2006, Zimbalist, while predicting Atlantic Yards would eventually create 1.9 million square feet of first-class office space, made no mention of a study of Downtown Brooklyn redevelopment issued a month earlier, which estimated a glut of office space.

In their June 2004 critique, Gustav Peebles and Jung Kim pointed out that Zimbalist didn't point out how so much of the then-well-occupied Class A office space in Brooklyn is at Forest City Ratner's MetroTech development, which has relied heavily on subsidies and government tenants to fill the space.

What's going on

According to The Real Deal, Forest City Ratner  has about 5.2 million square feet in six buildings, mostly in MetroTech, and while it has just 3 percent vacancy in its own portfolio, "about 18 percent of the portfolio is available, either directly through Forest City or indirectly through existing companies in the form of a sublease."

The article suggests that the market could get a boost because of potential growth by Polytechnic Institute of New York University, which could buy the MTA building at 370 Jay Street. And there are "new industries like media, advertising and technology" coming to Downtown Brooklyn--though those don't require nearly as much space as Wall Street firms' back offices.

It turns out, according to The Real Deal, that rents are not just flat, they've declined in inflation-adjusted terms, from the mid-$20s per square foot in 1985 to average asking rents  in the low $30s, but with some sublease space under $20.

And the subsidies are running down, as the 25-year tax abatements for some buildings are starting to expire.

Time for Seth Pinsky to get to work?

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