Dock Soup: Checking In on Brooklyn’s Office Behemoth Dock 72
With WeWork tanking, what is to become of Dock 72, the office behemoth it was anchoring on the Brooklyn waterfront?
The gleaming, 675,000-square-foot glass building on Brooklyn’s waterfront, Dock 72, opened last fall after nearly three years of construction. The project — a joint venture between the Rudin family and Boston Properties (BXP) — was built on a former dry-dock in the Brooklyn Navy Yard and received a tremendous amount of fanfare; it had an ambitious design and landed one of the most coveted names when WeWork (WE) signed as its anchor, taking about a third of the property.
Months after opening, however, WeWork is reeling and the developers have not announced any new deals for the remaining space. Boston Properties previously said leasing was slower than expected and there have been reports that companies’ interest in taking space at the WeWork has ground to a halt. While Brooklyn Navy Yard has undergone a massive redevelopment in recent years, it’s still about a 15-minute walk from the closest subway station and lacks some of the worker amenities that other neighborhoods in the city have.
“I think they’re probably going to struggle to rent it for a while,” said an executive with knowledge of the Brooklyn market. “It’s a very transportation challenged site, and it’s still amenity challenged.”
John Powers, Boston Properties’ executive director for its New York region, admitted in the company’s most recent earnings call that deals at Dock 72 have been harder to get signed than originally expected.
“On the leasing side, it’s been very slow,” Powers said during the Jan. 29 call. “We do have a proposal and we are trading paper on a 50,000-[square]-foot full-floor, which we are optimistic about, but we’ll have to see how it comes out.”
But even with the slow leasing start and anchor WeWork’s recent troubles, Bill Rudin, the CEO of Rudin Management Company, is still confident the $390 million bet on the Brooklyn office market will pay off.
“We’re very positive in terms of what the future holds for the building,” Rudin told Commercial Observer.
The borough’s office market has had a strong start to 2020, with Whittle School & Studios taking 620,000 square feet in Downtown Brooklyn. And the surrounding Navy Yard has scored wins with Wegmans opening at Building 212 to much fanfare in October 2019 while, upstairs, the 130,000 square feet of manufacturing and creative office space is about 40 percent filled. That, along with plenty of interest from tenants, has Rudin optimistic the deals will start to come for Dock 72 in the next few months.
“Our leasing activity and tours have increased significantly since the building opened in October,” said Rudin, adding the developers were close to finalizing several deals at the project.
The 16-story Dock 72 is the first ground-up office development in decades in the 200-acre Brooklyn Navy Yard — a former shipbuilding facility on the bank of the East River — and started construction in 2016. Rudin and Boston Properties partnered with WeWork who took 220,000 square feet on the third through sixth floors and all of the seventh and eighth floors. WeWork will also operate a top-floor conference center, plus a gym and wellness center on the second floor.
Other amenities in the works for the building include a landscaped communal terrace, a lounge with a fireplace and a kitchen with a full-service bar on the 16th floor.
“This building is kind of a pioneering project,” said Timothy King, the managing partner at brokerage SVN | CPEX.
Dock 72 is asking for rents in the mid-$50s to high-$60s per square foot, slightly above the average $43.88 per square asking rent in the borough last year but still significantly cheaper than the $723 per square foot average in Manhattan, according to CBRE data.
However, WeWork is in a much different place than it was when it first partnered with the developers in 2014 on Dock 72. By the time the ribbon was cut for Dock 72 in October 2019, WeWork had just weathered its roughest few months on record: Following a failed initial public offering, which pulled back the curtain on its money-burning business model, its valuation plummeted by about $39 billion, its co-founder and CEO Adam Neumann was pushed out, it laid off thousands of employees and virtually stopped opening new locations. With landlords around the world biting their nails over the potential that WeWork could give back its leased space — with the struggling coworking company reportedly looking to get out of 100 deals in its portfolio — that could leave gaping holes in some properties like Dock 72.
“If I was Boston or Rudin, I’d be praying that those guys stay in business until I get the rest of the space rented,” the executive with knowledge of the Brooklyn market said. (WeWork was reportedly close to running out of cash until investor SoftBank Group swooped in with a multibillion-dollar bailout and takeover of the coworking firm, which occurred the same month Dock 72 opened.)
Crain’s New York Business reported in December 2019 that occupancy in WeWork’s Dock 72 location only increased by 10 percent since it opened — now at about 40 percent — and interest from tenants has dried up. A spokesman for WeWork declined to comment on the outpost’s occupancy rates.
WeWork has also offered space in Dock 72 at more of a discount than some Manhattan outposts. A “hot desk” in Dock 72 — which allows a worker to sit in common areas — starts at $475 per month while one in Soho starts at $760 per month, per the WeWork website.
“Since opening last fall, WeWork at Dock 72 continues to see strong interest and attract new members of all sizes with best-in-class workspace, amenities and views,” the WeWork spokesman said in a statement.
To bridge the transportation gap from the subways, the Navy Yard has been offering weekday shuttle service to and from subway hubs in Dumbo and Atlantic Terminal, while also promoting the ferry stop at the base of Dock 72.
“It’s a fairly accessible and an attractive location,” said Whitten Morris, a managing director of JLL’s Brooklyn team. “Maybe the pace isn’t as fast as everybody wants, because everybody wants everything yesterday, but the pace is occurring at its own natural progression. As the months and years unfold, I do think they’ll be a lot of success there.”
Rudin said WeWork’s troubles haven’t impacted Dock 72 at all and he’s confident the company will survive, especially after it named real estate legend Sandeep Mathrani as the new CEO earlier this month. Powers, in last month’s Boston Properties earnings call, said WeWork has been paying rent on all its space in the property.
Part of the problem, both Powers and Rudin said, has been that the nearly 30,000 square feet of amenity space in the property still hasn’t opened yet. It was originally slated to be completed by the end of 2019 but now developers expect it to finish in April.
“When you start a project in a new area and do something that’s very, very unique, it does take a little more time for people to understand it,” Rudin said. “One of the things that we have been constantly talking about are our unique amenities. We need to deliver those amenities and people need to see them and experience the food hall we’re creating with Union Square Hospitality and Filk to really understand what we’ve created.”
“We think once you see that, that will have a very strong positive impact on our leasing,” he added.
Ofer Cohen, the founder and president of Brooklyn-based brokerage TerraCRG, said it’s always been a struggle to pre-lease buildings before they are completed because many tenants want to move in immediately, especially in the Brooklyn market.
“Businesses, in general, are looking for a plug and play,” Cohen said. “People want the buildings to be finished because they can’t plan two years ahead.”
Rudin said they’re offering a lot of flexibility in the amount of space tenants can take and have built out the sixth-floor space as pre-built units. Cohen said that’s key for new developments in the borough since most Brooklyn tenants want between 5,000 and 50,000 square feet for offices.
“Now that all these projects are built, the developers are responding to the market and creating different size spaces there’s going to be a little more velocity in leasing,” Cohen said. “Boston and Rudin really did a great job at this building. Now that the sizing is being addressed and the building is finished, and all the stuff is up and running we should start hearing some announcements soon.”
But Brooklyn has a plethora of new space to be filled. More than 2.31 million square feet of new construction or redevelopment of office space are in the works or came online in the borough, according to a CBRE report. Aside from Dock 72, these include the Rubenstein Partners and Heritage Equities’ 500,000-square-foot office manufacturing and retail project 25 Kent in Williamsburg and JEMB Realty’s 500,000-square-foot One Willoughby Square in Downtown Brooklyn.
“There is very strong demand for office space in Brooklyn, but there has not yet been the sort of trophy eye-popping tenant that takes a half-million square feet relocating from Midtown,” King said. “That kind of validates the notion that there are tenants looking for giant spaces in the Brooklyn office.”
But all told, last year was still an unparalleled year for the borough’s office market. Brooklyn closed out 2019 with 1.82 million square feet of annual leasing, the highest on record for the borough, according to CBRE.
The biggest deal of the year was the New York City Department of Citywide Administrative Services taking 138,802 square feet at 12 MetroTech Center in Downtown Brooklyn followed by streetwear brand KITH signing a 57,679-square-foot lease to anchor 25 Kent and ditch its Noho headquarters.
The majority of office activity in the borough has been focused on Dumbo, but space has become harder and harder to find in that neighborhood, so tenants have started to branch out to the Navy Yard and Williamsburg in recent months.
“They have very little space available,” Morris said. “Tenants that might have been looking there are spreading the geographic requirements of where they would like to go.”
Rudin compared Brooklyn to Lower Manhattan in the 90s — when nobody thought office tenants would move to the area — and said his family is in it for the long-haul with Dock 72.
“We’re confident in our product and that the space will rent and become a contributor to the economic vitality of the Navy Yard and the city,” he said.
King expects a big-name tenant to finally take a large chunk of space in the borough this year, which will open up the floodgates for other companies to follow suit.
“There’s a little bit of a herd mentality,” he said. “Pioneers get arrows in their back; settlers get the land. It’s not unusual to see others following.”