Brooklyn Bound: Companies Eye Brooklyn Offices Post-Coronavirus

With millions of square feet of new office space that’s considerably cheaper than Manhattan, will Brooklyn’s office market be the unexpected beneficiary of COVID-19?

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The coronavirus pandemic could turn into a much-needed shot in the arm for Brooklyn’s sluggish office market.

SEE ALSO: Certain Industries Likelier to Embrace Work From Home Long-Term

While the borough has been staring down the barrel of millions of square feet of new office space coming online, it has failed to attract many trophy tenants relocating from Manhattan.

However, experts say that the health crisis has caused some firms to look to Brooklyn instead of Manhattan to bring their offices closer to their workforce and save money during a recession.

“We’ve been starting to see, for now anecdotal, examples of companies that otherwise have an office or would have an office in Midtown South or Manhattan looking for either a satellite location or to replace their Manhattan office in Brooklyn,” said Ofer Cohen, the founder and president of Brooklyn-based brokerage TerraCRG. “The [heads of these companies] typically live in Brooklyn and when COVID hit they were trying to figure out what the future holds for them. Suddenly, having the office in Brooklyn made a lot more sense.”

New York City has been the country’s epicenter of the virus — with more than 24,000 deaths linked to coronavirus — and has started to lift its restrictions this month as the number of confirmed cases and deaths drop.

But even as employees start gearing up to return to the office after months at home, many are still scared to jump back onto public transportation to commute to the office.

“The difficult part about living in Brooklyn is the 45-plus minute commute if you work in Manhattan,” said Johanna Greenbaum, the chief development officer for the Brooklyn Navy Yard Development Corporation. “I think that companies were already looking at Brooklyn and many have moved — like Rent the Runway — because that’s where their workforce is, that’s where people want to live. It doesn’t always make sense to expand exactly where your current footprint is, particularly now when the idea of being on the subway for 45 minutes is not that attractive to folks.”

The desire to have offices closer to workers comes perfectly timed with the borough’s millions of square feet of space that has come online or is set to open soon, said Regina Myer, the president of the Downtown Brooklyn Partnership. These include JEMB Realty’s One Willoughby Square in Downtown Brooklyn and Two Trees Management’s 10 Grand Street in Williamsburg.

“In response to the health crisis, Downtown Brooklyn is really well-positioned because we have some projects that are coming online that really represent the future,” Myer said. “We’re going to have great, state-of-the-art products which we haven’t had.”

So far, there haven’t been any leases signed yet to prove the thesis of companies flocking to Brooklyn post-COVID-19. But Two Trees — which also owns 20 Jay Street, 45 Main Street and 55 Washington Street in Dumbo — said interest has skyrocketed recently with several deals ready to cross the finish line soon.

“We have been getting more inquiries than we had in the past several weeks,” said Alyssa Zahler, the director of leasing for developer Two Trees. “We’ve seen proposals come through in the last week or two. Nothing to speak of yet, but we’re getting close.”

The 150,000-square-foot 10 Grand Street — part of Two Trees’ redevelopment of the Domino Sugar Factory site — nabbed its first tenant in December when shampoo maker Prose signed on for 12,000 square feet. Zahler said in recent weeks some companies sent proposals for leases in the property without touring the space in-person, something that would be “completely bizarre” a few months ago.

“I think one of the highlights of an asset like 10 Grand is you could be 6,000 square feet and have your own floor and have your own identity,” she said. “In a COVID environment, that makes those floors more valuable from a health and safety standpoint because you have the ability to control your own environment.”

Tenants eyeing Two Trees’ Brooklyn portfolio have been a combination of companies looking to relocate from Midtown South or Soho and others looking to get out of nearby coworking spaces for more permanent digs, Zahler said.

But even with increased interest, Brooklyn has a plethora of space waiting to be filled.

There are currently 2.31 million square feet of new construction or redevelopment projects in the works around the borough, according to CBRE. Brooklyn also has 635,000 square feet of space undergoing major renovations.

Recent projects include Rubenstein Partners and Heritage Equities’ 500,000-square-foot office, manufacturing and retail development 25 Kent in Williamsburg (which nabbed streetwear brand Kith as an anchor tenant in December) and the Rudin family and Boston Properties’ 675,000-square-foot Dock 72 in the Brooklyn Navy Yard (which has not announced a single-tenant aside from WeWork since it opened in October).

Dock 72, the 16-story office building in the Brooklyn Navy Yard, whose anchor is WeWork.
Dock 72, the 16-story office building in the Brooklyn Navy Yard, whose anchor is WeWork. Photo: Emily Assiran/For Commercial Observer

Tenants who have started flocking to the suburbs for satellite offices during COVID-19 have mainly been taking 18 or 24-month long deals while looking for spaces available for immediate occupancy, said David Falk, president of the Tri-State region of Newmark Knight Frank. Companies are said to be looking at satellite offices in areas including Stamford and Greenwich, Conn. and towns in northern New Jersey.

Falk expects many tenants to be looking for the same in Brooklyn, something that the newer construction might not be able to offer.

“The new construction is all raw, and it’s pricey, so that’s going to be challenging because these are short-term deals,” Falk said during a recent Commercial Observer broadcast. “This trend of a satellite office has been more temporary to get through the next few years and, again, if you have raw space in brand new buildings I’m not sure that’s the perfect match.”

Brooklyn tends to attract tenants taking between 5,000 to 50,000 square foot digs, and despite closing out last year with its highest annual leasing on record with 1.82 million square feet, hasn’t had a large company relocate from Manhattan and take a huge chunk of space in the new construction.

“Brooklyn, on the expensive side, still hasn’t been proven yet if people will pay up to be in the same rental range that you can find in some parts of Manhattan,” Falk added.

Michael Phillips, the president of Jamestown which owns a portion of Sunset Park’s Industry City, said during the broadcast he thinks the supply of new products coming online in the borough will cause “a little bit of softness in the Brooklyn market.”

The pandemic forced employees to work from home for several months, with some companies like Twitter expanding their remote work policies indefinitely and others considering shrinking their offices after seeing the success of remote work.

However, not everybody’s convinced the pandemic will cause the death of the office and Brooklyn’s leasing to stall.

“People can’t work from home forever,” TerraCRG’s Cohen said. “It’s quite clear for most people that most office workers want to come back … [and] Brooklyn is offering a lot more interesting, attractive and flexible approaches to office space.”

And Cohen doesn’t think the borough’s office market still needs to prove itself, even if half-a-million square foot deals are rarer than Manhattan.

“Brooklyn is a viable place for companies, you don’t need to prove it,” he said. “You don’t need to prove that entrepreneurs, creatives, tech and media want to be in Brooklyn, because it’s already here. The question is how does this office market evolve into the next phase of growth, where bigger and bigger companies and employers are moving here. That’s just going to take time.”

The borough had a strong start to 2020 — before the pandemic essentially froze the city’s real estate market — with the Whittle School & Studios taking Tishman Speyer’s entire 620,000-square-foot The Wheeler development in Downtown Brooklyn.

The Navy Yard also scored a win last year when popular upstate grocery chain Wegmans opened its first New York City outpost at Building 212 while, upstairs, the 130,000 square feet of manufacturing and creative office space is about 40 percent filled.

“The Navy Yard has provided an affordable product, more attractive in the post-COVID moment,” Greenbaum said. “A number of light manufacturing has come to us seeking space … our teams have been very busy.”

And the importance of localized manufacturing became clear during the pandemic, Greenbaum said. Many of the Navy Yard’s tenants quickly switched gears to produce personal protective equipment (PPE) desperately needed for hospitals.

“We often rely on the idea that we’ll just be able to order it from somewhere,” Greenbaum said. “When you couldn’t get any supplies through normal supply chains, it became very apparent that having a creative community that can pivot their work, that could make PPE for the City of New York, was incredibly important.”

Brooklyn also offers a discount compared to Manhattan space — something that could be on the mind of companies looking to cut costs during a recession.

Average office rents for Brooklyn were $43.88 per square foot in the fourth quarter of 2019, according to the last numbers available from CBRE. In June of this year, Manhattan had asking rents of $81.64 per square foot.

While some of Brooklyn’s new construction could carry heftier price tags, companies can still qualify for the state’s Relocation and Employment Assistance Program (REAP) to offset the cost.

The program — which started in the 1980s — gives employers an annual tax credit of $3,000 per employee for 12 years if it brings jobs to Brooklyn, Queens, the Bronx, Staten Island or certain parts of upper-Manhattan. In April, Albany extended the REAP program for another three years.

“I think brokers and tenants often neglect the fact that there are lucrative incentives,” Two Trees’ Zahler said. “I don’t think you can overstate how important that incentive really is.”

The REAP benefit has been a big part of Two Trees’ recent efforts to attract companies to its Brooklyn properties. The developer has created an online calculator for prospective tenants to see how much tax credits they could get through the program.

“We want out tenants to come here to take advantage of those incentives,” Zahler said. “Not everybody knows about it and people sign leases without taking those incentives.”