Thursday, May 26, 2016

Forest City's Gilmartin: Brooklyn residential bet depends on spread vs. Manhattan; incentives needed for office market

There are some interesting quotes from Forest City's CEO in the Real Deal's Downtown Brooklyn’s second act: Q&A, part I: Forest City's MaryAnne Gilmartin and RXR's Seth Pinsky offer their takes.

First, the reasons

So, why did residential outpace office development after the 2004 rezoning?
I don’t think anybody, including Forest City, ever imagined the residential market would kick in like it did. We thought we’d see a third central business district thrive and an expansion of the office market as a result of the zoning, but that didn’t happen. It started with the food movement and then the artists. They all flocked to Brooklyn. Certainly, government policies, including the allowance for taller buildings to spur the office market, allowed for market forces to respond so that residential development took over.
It started with the food movement? C'mon, Smorgasburg didn't start until 2011. The artists were in Williamsburg, not Downtown Brooklyn decades earlier. (They got kicked out of DTB for MetroTech.)

People were moving to condos and rentals in Downtown Brooklyn because they offered new residential units near transit at a relatively low price point, given the price of land and tax breaks (as noted in the doc My Brooklyn). As to the "third central business district," everyone knew the projections were overblown.

Brooklyn vs. Manhattan

She was asked what kind of residential buyers/renters are coming to Downtown Brooklyn:
It’s really about the spread when living in Brooklyn versus Manhattan.... If you look at the $1,500-per-square-foot condo in Brooklyn then look at what’s available in Manhattan, there is such a stark comparison. For the same quality you’re looking at north of $2,000 a square foot in Manhattan. That’s what we’re betting on in Brooklyn. If you’re a renter, an apartment at our luxury tower at 80 DeKalb goes for $60 a foot, which nobody believed would happen in Brooklyn. But then you have a similar building in Manhattan, like the Gehry building, where rents easily pierce $80 a foot. If I’m chasing $20 of spread, I think I’ve got a pretty nice runway in Brooklyn.
In other words, luxury, luxury, luxury--aiming at people who see Brooklyn as a bargain compared to Manhattan. Greenland Forest City is aiming at around $1500 psf for 550 Vanderbilt.

(Remember how Atlantic Yards was supposed to help solve Brooklyn's housing crisis? See flier at right.)

And we'll see whether they can get $60 psf in the market-rate units at 461 Dean Street, which may have an asterisk attached, given its proximity to the Barclays Center and its history of modular troubles.

New office demand

She was asked if Downtown Brooklyn compete with neighborhoods like Dumbo for TAMI-sector [technology, advertising, media, and information] tenants and if a major company headquarters would come to Downtown Brooklyn:
The TAMI worker, the TAMI professional and student, all want to be in Brooklyn. The relative cost of a company to relocate to Brooklyn is highly compelling. The fact that there’s an engineering school going up on Jay Street, for example, allows for the creation of the new kind of 21st-century worker in Brooklyn. The traditional finance sector that was located in MetroTech has been replaced by NYU, Tough Mudder and Makerbot. 
That's because the "traditional finance sector" has shedded jobs, or moved them out of Brooklyn or remotely, so Forest City has had to scramble to find smaller tenants for MetroTech.

It's interesting that Gilmartin did not directly answer the question about a major company moving its headquarters to Brooklyn--surely Greenland Forest City, if it builds more than a million square feet of office space in the B4 tower and at Site 5 (aka the "Brooklyn Behemoth," for now on hold), would want an anchor tenant.

Biggest challenges

Asked about the biggest threats, Gilmartin cited rising land prices and the absence of the 421-a tax break:
You can’t build unless you have a tax benefit. Without it, you can’t make the numbers work. So you have to offer a combination of “as of right” benefits, including reduced energy costs and relocation benefits. Those benefits are essential to making the numbers work. It still costs the same amount to build a new building in Brooklyn as it does in Manhattan, but we have to factor 30 percent less in rent. To remove these kinds of benefits, which are renewable every few years because it’s a legislative process, would be a death knell for the emerging office market in Downtown Brooklyn. 
Land prices "are being driven up so much by demand"? She can't really complain. Didn't Forest City sell a development site at 625 Fulton for a nice sum? And doesn't Greenland Forest City control a whole bunch of development sites?

Gilmartin, like the Downtown Brooklyn Partnership she co-chairs, seeks permanent incentives to make the numbers work. Perhaps we won't see office towers rise in Atlantic Yards/Pacific Park until those benefits are renewed and/or made permanent.

What's next?

Asked about upcoming deals, Gilmartin responded:
Obviously we’ve got our work cut out for us over in Pacific Park, but I’m a big believer in the office market. Brooklyn is ready for a sophisticated office tower; the idea that it could be built on Flatbush and look straight across at the Manhattan Bridge would be ideal... There’s some unused air rights that NYU has in that [MetroTech] area that could be interesting.
"Brooklyn is ready for a sophisticated office tower" sounds like "we're ready to build at Site 5," with our Shanghai government-owned partner/overseer, as long as the state agrees and we can put some expensive condos on top.

As for "some unused air rights that NYU has," well, that was a key, I suspected, to the amazingly under-the-radar 2008 absorption by NYU of Polytechnic University (which then became NYU Poly, then, after a donation, was renamed NYU Tandon).

Pinsky's take

The Real Deal Q&A is also worth reading for the answers from RXR Realty's Seth Pinsky, a former city official, who talks about how the Brooklyn office market has grown because it's closer to the workforce, how office buildings may become more attractive if residential rates soften, and why he likes the mayor's proposal for transit expansion (others disagree).

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