Wednesday, September 24, 2014

FCR's Gilmartin on Atlantic Yards affordability levels, the partnership with Greenland, community engagement, and the DTB office market

Forest City Ratner CEO MaryAnne Gilmartin appeared on a panel at the Massey-Knakal Real Estate Summit held at the Brooklyn Museum on Tuesday, September 16. (I have broader coverage of the event in City Limits' Brooklyn Bureau, Where the Brooklyn Boom is Headed.)

While Gilmartin's comments on the stalled B2 modular building--saying it's not a referendum on such construction--drew some notice, she spoke about a wide range of other issues, including affordable housing in Atlantic Yards/Pacific Park Brooklyn, Forest City's alliance with Chinese developer Greenland, and the Downtown Brooklyn office market.

On affordable housing

Gilmartin easily used the new name for Atlantic Yards, however much it for now seems unrealistic. "Pacific Park Brooklyn is in large part about affordable housing: 2250 units. With this administration, we are launching two all-affordable buildings," she noted. The towers will contain about 600 units.

"I can say that this administration believes that affordability needs to come in ranges and spectrums, and that it’s not just about low-income housing," Gilmartin said. "If a young urban professional wants to live in a dense urban core, that the city needs to find ways to encourage that to happen."

Indeed, the affordability in these towers skews toward middle-income households, departing from promises in Forest City's much promoted Community Benefits Agreement.

It's true that affordability comes in a wide range, but Gilmartin, especially to those in the real estate industry, has positioned Atlantic Yards as a middle-income affordable housing program more than one for the poor--not inaccurate, but certainly a departure from the way the project was presented and a mismatch with its fervent supporters.

"So, the mission at Pacific Park Brooklyn is to create a range of affordable housing types, and income [ranges]," she said. " I think these two buildings, in many ways, are going to be bellwether on that proposition, because the ranges of income are wide, but all they quality for affordable housing under the city’s definition."

"At the same time, it's a large site that can also accommodate luxury housing as well as condominiums," Gilmartin said. "That makes for good placemaking, and I think that's what project was supposed to be about from the very onset."

Actually, the project from the onset was supposed to include 4500 rental apartments and four office towers with space for 10,000 jobs. At least three of those office towers were swapped for housing, and now there would be 1930 condos along with the 4500 rentals.

Gilmartin allowed that significant aspects of the affordable buildings remain unresolved: "how do you incentivize developers to build larger units" when subsidies are attached to the unit count, not size or square footage, she asked, bringing up a fundamental issue. City administrations like to count units, since that gets them closer to numerical goals.

Indeed, the first tower, B2, falls well short of Forest City's professed pledge to devote 50% of the units, in square footage, to family size units. The next two all-affordable buildings will meet that or at least come closer, with 35% of the units two- and three-bedrooms.

 "I think there's more work to be done," Gilmartin said regarding family-size units. "We're doing it building by building, and every building will be a conversation with the city around exactly how we put that building together."

A "conversation" suggests negotiation around both the configuration of the building, in terms of unit size, as well as the range of affordability.

On building residential in Brooklyn

"It's quite difficult to imagine an oversupply issue in Brooklyn," said Gilmartin, who called condos "a great allocator of land costs… You've got to figure out how to get it on the market quickly and make it sing."

She cited the mix in a high-density building in the urban core as containing condos, rentals, and retail at the base, with the rents providing "that ongoing annuity."

Vacancies, Gilmartin said, are nonexistent but rather "pricing dislocations… if your units aren't moving, you move the pricing." Even in "the darkest days of recession, we barely got over 3% vacancy."

Asked about rezonings, she noted that the Downtown Brooklyn rezoning already took place and there are not a lot of places "where density is possible, in scale," beyond the waterfront. There are "very few places where you can create the scale and density like Pacific Park Brooklyn."

On Greenland Group

With Forest City's recent partnership with the Greenland Group (which bought 70% of Atlantic Yards/Pacific Park going forward), and given other Brooklyn projects funded by Chinese investors, Gilmartin was asked, what is the Chinese investment impact on Brooklyn?

MAG: So because Greenland was looking for scale and density, they build in 80 provinces in China, they are a $50 billion company, on the Fortune 500 list they are 359. This is a real company, they understand infrastructure and they understand real estate.

"In many ways, they are an ideal partner," Gilmartin replied. " They happen to be Chinese and they are a state-owned entity, but they understand our business, and they have come to understand the way we build in here in this country and particularly in New York."

"So now that we have signed on with them and they are full-on partners, there are ten Chinese nationals working out of our office," she continued. "We are joint venture partners in every sense of the word. We are running the day to day partnership. But what's interesting about the introduction of a new player in the marketplace is that they build a lot, and they have a lot of relationships, and they intend to build a lot more. So I think this has been not only great for the project, because now we are able to work toward an eight-year build... It also has opened our eyes, ways in which, in terms of contracting, supply chain issues, and just scale and infrastructure, they have been a value-add."

An eight-year build would be even faster than the 11-year deadline (to 2025) to build the affordable housing.

Gilmartin was philosophical about the implied uneasiness regarding China. "Whether it’s a good thing for this country, well, we already know who owns our debt," she said. "I don’t think this is a shocking proposition if you pay attention to world events. I think the question is: will they understand the American way and build the way we build, and I think all indications are that they are really good partners and that it’s going to provide a great success at Pacific Park Brooklyn."

That may be true. Then again, Forest City once had high hopes for its partnership with Skanska USA, and that has dissolved in a bitter dispute regarding the first modular building.

On community engagement

When the panel was asked about community engagement, Gilmartin replied, "We believe in community engagement.. it’s a decade-long story. I think the project is for the most part better because of community engagement.. we have the Community Benefits Agreement... We have active participation by local electeds [elected officials] as well as the Community Boards."

I'm not so sure anyone has "active participation" though elected officials and Community Boards do get briefed periodically.

On the Downtown Brooklyn office market

Gilmartin contrasted the current market in Downtown Brooklyn with that in the days of Mayor Ed Koch, when potential tenants would step out of their limos, take a look at the rough landscape, "promptly get back in, we’d never hear from them again."

She noted those were days when there was really great value available for companies, especially Wall Street firms moving back office jobs, aiming to lower their occupancy costs.

Gilmartin said rents would double if the high-class office space in Downtown Brooklyn were in Midtown Manhattan. "It;s been one of the unfortunate best-kept secrets," she said noting a changing profile of tenant, including those related to technology and academia, such as NYU.

(Indeed, just last week Brooklyn Friends School relocated to MetroTech.)

Workers at technology companies often either live in Brooklyn or want to live in Brooklyn, she said. Forest City "used to have a little bit of complex, thinking we had '80s buildings, not hip enough" compared to "all the fabulous space in DUMBO" owned by Two Trees, she said.

But such tech firms "want the same thing most companies want: they want quality space, access to transit, they want the ability to grow and contract... we can do that at MetroTech," she said, lamenting that it's not easy to get rents past $40 per square foot.

"With further constraints on supply, we will start to see those numbers going up," she said. "It costs the same amount to build a building in Brooklyn as in Manhattan... so those rents really have to be high enough to justify new construction... we're not quite there, but I think we’re going to get there."

She didn't mention Forest City's opportunity to build an office tower at the Atlantic Yards/Pacific Park site, replacing what is now the temporary arena plaza, nor Forest City's thoughts about even building office towers via modular construction.

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