Forest City: "blighted" railyard won't get developed until 7 towers built first, 3 on arena block, 4 on SE block; rents over $50/sf suggest market's back (so do they need modular?)

The Atlantic Yards plan was approved, in significant part, to remove the "blight" of an undeveloped railyard, a gash in the landscape separating neighborhoods. (See the 2009 Modified GPP.)

However, a Forest City Ratner executive yesterday indicated, for the first time to my knowledge, that the six planned towers over the railyard would not be constructed until seven other towers are built first. (Construction over the railyard, between Pacific Street and Atlantic Avenue and Sixth and Vanderbilt avenues, requires an expensive deck.)

After three towers are built on the arena block, then come four on the southeast block, currently used as an interim surface parking lot, stated Forest City Ratner Executive VP MaryAnne Gilmartin, who spoke at an investor update held at the Barclays Center arena, which was webcast. (See coverage of discussion related to the arena.)

Gilmartin also indicated that the first Atlantic Yards tower, due to break ground on Dec. 18 at the corner of Flatbush Avenue and Dean Street adjacent to the arena, still awaits financing and that the developer had not yet decided on modular construction, which would make it the tallest modular building in the world. (Other evidence indicates they are going modular.)

Still, she said, the rental market for apartments looks ever better for Forest Forest City. That raises a question as to whether the professed justification for modular--to save money on time and labor--still holds.

A change in buildout schedule

While the timing of the tower buildout was not set in stone, when Atlantic Yards was passed in December 2006, the Final Environmental Impact Statement indicated that the four towers in the western section of Phase Two--between Sixth Avenue and Carlton Avenue--would be built before the seven towers between Carlton and Vanderbilt Avenue. See graphic below:

According to the Empire State Development Corporation's (ESDC) December 2010 Technical Analysis, the plan to build later on rather than sooner on the southeast block didn't change:

Development of each site is still generally expected to occur from west to east in a clockwise direction, starting with the arena block. As each building is completed, irrespective of its actual sequencing, it must conform with the 2006 Design Guidelines for that site and provide the necessary permanent facilities such as public access, open space, below-grade parking, infrastructure retention/detention capacity, and other commitments.

From June 2003 proposal

Actually, that document was completed a year after the ESDC signed a Development Agreement that gave Forest City Ratner 25 years to complete the project, with 15 years to start the platform after the project Effective Date, when the agency delivered vacant possession of the Phase 1 Properties to the developer. (That happened in May 2010.)

Note that, as proposed in June 2003 before Atlantic Yards was officially unveiled, that southeast block was not even part of the project and not seen as blighted. It was added by December 2003, perhaps because it was the only piece of terra firma outside the arena block and thus available for both construction staging and below-ground parking.

The ESDC still must start and complete a court-ordered Supplemental Environmental Impact Statement regarding the second phase of the project; this presumably changes things somewhat.

Lack of approval?

Early in the event, Forest City Enterprises CFO Bob O'Brien offered a cryptic comment about Atlantic Yards: "When you look through that $940 million under development, a substantial amount sits here, at Atlantic Yards, which is 6,000-plus units, long-term. We don't have approval for all of those 6,000 units--that effort still is going to continue... And so, allocating that cost over what period of time and however many units is going to take years to happen."

Was her referring to the fact that there must be a Supplementary Environmental Impact Statement regarding Phase Two of the project? Maybe. But that's not expected to seriously affect the approval of those towers.

The boom in Brooklyn

Early on, CEO Bruce Ratner talked about the long road to getting the arena built, and the future of Atlantic Yards, saying it relied both on hard work and a bit of luck.

"The luck piece of it, I think, was the Brooklyn market," he declared. "I don't think we ever, ever anticipated overall that Brooklyn would be as hot and important as it is. Not only in media, in art, in journalism, in food, but also in real estate. I would venture to say it's probably the best residential market, maybe in the country. Manhattan is also very good, but Brooklyn, I would say, is probably even stronger."

"Frankly, I'm a bit surprised myself," he continued. "I've always had a lot of confidence in it. Obviously, our Atlantic Yards project is evidence of that. I believe really for 15 or 20 years that this would be a very good residential market in Downtown Brooklyn."

Note that the first four towers on the arena block were initially supposed to contain offices. The first and largest tower, planned to rise on a triangular site over what is now the arena plaza, is on permanent hold.

"I don't think I quite guessed Williamsburg, but I certainly did guess Downtown Brooklyn," Ratner continued. "I always thought it was ripe for--one of the unusual things about Brooklyn, unlike Manhattan, not a lot of is zoned high-rise.... You see see, what we have, just to the left here,  6000 units, is of great value... It is very valuable to have land, it's very hard to find land that's zoned with high density zoning in Brooklyn. Along the waterfront, yes."

Of course, Atlantic Yards is not quite zoned for high-rise. Rather, the state overrode zoning to allow Atlantic Yards to be built at the density Forest City deemed economically necessary.

From slide show for investors

The Atlantic Yards plan

Gilmartin, speaking to investors, said Forest City plans 1500 units on the arena block. The first tower, B2, is being built on a site "fairly close to the size of 80 DeKalb," the tower Forest City built at Fort Greene Park.

"Much of what we're doing with B2 has been done in the likeness of 80 DeKalb, which has turned out to be a tremendous building for us," she said. B2 should have about 363 units, half at market-rate, half subsidized (though with few larger units).

From slide show for investors

Meeting the market

"It is a building that, in many ways, drafting in behind the strength of the Brooklyn market," Gilmartin said. "It is really the center of gravity for much of which is culturally hip and relevant today. The notion of high rise, amenitized living has been proven out in the construction of a number of buildings that enjoy robust rents, very low vacancy rates, strong absorption, and minimum concessions. These are rents that are in the mid-50s."

At $54 a square foot, a 450-sf studio would rent for $2,025 a month; a 700 sf 1 BR would rent for $3,150 a month; and a 950 sf 2 BR would rent for $4,275 a month. (The subsidized units would be far less for low-income households, maybe 30% less for middle-income households.)

"This is just what we see today," she continued. "And we see very, very, very generous increases in rents at 80 DeKalb as those units are re-rented. We're very enthusiastic about this building."

Note that rents approaching $55 are well above the rents expected in  2013 and 2014 in the August 2009 KPMG report on Atlantic Yards commissioned by the ESDC, a report that concluded that Forest City's expectations were "moderately aggressive." Instead, it looks like the Brooklyn market has boomed.

From KPMG report

Going modular?

"We have designed this building in two ways," Gilmartin said, repeating the plans for conventional and modular construction, which would "allow us we believe to save a significant amount if we do it."

"We will announce which building we're building prior to commencing construction," she said, "but we are ready for either building."

One analyst asked about the building's cost and financing. Gilmartin said it was no time for specifics, as "we are actively working to secure and close the financing." She said they were "far enough along on the financing that we have a general understanding of what the equity will be."

How long would it take to build?

Gilmartin said it would take 18 months to reach substantial competition, then another few months for close-out of construction--to build a conventional building. A modular building should go faster.

What about unions?

"We are a union shop," Gilmartin responded. "Part of what makes the modular discussion, and the decision to go modular a big decision is that it will have along with an understanding with labor to do it with union labor, at a price point that deviates from construction costs. And that is one of the things we're completing on our to-do lists... [It's] not conventional union construction in terms of methodology or wage rate."

Would rents be different between a modular or conventional build?

"It's an issue we spent a lot of time on," Gilmartin said. "We brought in outside experts. We believe if we go modular, it would be invisible to the consumer. This building should perform at the level of finish, fit and feel commensurate with a conventional building, so it is priced accordingly."

She wasn't asked whether buyers would be expected to have any nervousness about either the fact that it would be the world's tallest modular building or they'd be living next to an arena, with busy crowds outside on most days for a period of time.

When's the platform?

One analyst asked if, given the rents today, whether building a platform for towers over the railyard works. (The far western segment of the railyard, perhaps one-fourth of the 8.5 acres, has already been used for part of the arena block.)

Platform designs, Gilmartin said, "have become quite sophisticated and simplified at the same time," given other developers' plans to build on the West Side Yards in Manhattan and other projects.

While Forest City has planned scenarios "where we build the platform at certain estimated costs," she said, "certainly the focus of the day is the arena block... There's a second block, 1129, which is terra firma... These four buildings here... we have seven buildings that we will build before we commence construction on any platform buildings. And so, we're working on it, but I can tell you that the focus today is on the arena block."

Creating a sense of place

Where, one analyst asked earlier in the meeting, has the company created the most value?

O'Brien pointed to Forest City's "core market strategy," relying on certain hot metro areas. And while retail malls were once "tremendous value creators," there's less opportunity today.

"When you create a sense of place, when you take what was an old wire factory, an abandoned wire factory in downtown Cambridge, and turn it into University Park at MIT--people know where University Park at MIT is," he said. "People want to be there. There's a wonderful park there.... It benefits tremendously from the fact there's institutions of higher education there."

"But there's a big barrier to entry," O'Brien continued. "It's hard to develop in New York, it's hard to develop in Boston and DC. Those barriers allow us, over time, to create and grow value in the portfolio that we have. We see less opportunity in building--that's why we're getting out of strip [mall] center business... From our perspective, creating a sense of place in urban America, particularly in the cities that we mentioned...[is the goal]."

Of course, in Brooklyn, they demolished renovated--and renovation-worthy--factory buildings for Atlantic Yards.