Brooklyn’s Office Market Awaits Its Own Flight to Quality
The borough's newer projects have modern advantages, but they confront some of the same challenges as older offices
On a quiet street in Brooklyn’s Gowanus section sits 92 Third Street, an arched-windowed, red-brick hulk from the borough’s industrial past — a former candle factory, according to its broker.
The entire 94,000-square-foot building is available for sale, according to listing site Loopnet. For now it’s 57 percent leased, but a broker said those tenants are on short-term leases and could be moved out in haste if the right kind of taker comes along.
To Sean Kelly, that broker and a partner at Brooklyn’s Ariel Property Advisors, the building is indicative of what’s been happening in New York’s most populous borough (only three U.S. cities, including New York itself, have more residents). The road to Brooklyn’s hipsterization, as widely visualized in the years before the pandemic, has faced nothing but obstacles in places like 92 Third, a building that Kelly called “beautifully renovated.”
“They may have some tenancy, but it’s not fully occupied,” he said. “They struggled with their tenants.”
David Badner, a broker with Norman Bobrow & Company, which has the listing on the property, said he expects things to work out for the owner Samson Management of Queens, which bought the building about a decade ago from Livwrk, a company that specializes in commercial turnarounds.
“Gowanus is coming now,” Badner said of the area’s residential growth. “We just recapped the facility and we have a new 10-year lease. We also signed the retail space. We have an offer on half of the remaining space and we’ve been showing it, almost weekly.” (He could not say who the lease was with because it’s not quite done.)
Half a decade ago, the ring of Brooklyn neighborhoods from Sunset Park — Gowanus is the next section north from Sunset — up to Greenpoint, the line between Brooklyn and Queens, along the eastern edge of New York Harbor, was hyped as New York City’s next great office market. Residential properties near the waterfront were filling up with post-graduate millennials, many with technology training, all eager to work in a place a little closer to home, a place they could bike to, and not have to hop on a subway to Midtown or Lower Manhattan like the generations before them.
Then came a pandemic and the ongoing trend of working remotely at least part of the week. Many of the tech companies proved in that period that, while they might employ a young Brooklynite workforce, as for actually leasing office space there, it was a different story.
Now the Brooklyn office market is picking up the pieces, and many real estate professionals are wondering if it will ever be like it was — if the office market will ever regain the momentum it had before the term COVID-19 was conceived.
Some 6 million square feet of Brooklyn office space was either being renovated or built from the ground up in 2018, with an expected delivery in 2022, according to information released at the time by brokerage Colliers (CIGI).
That was always going to be a lot of space to fill no matter what. Now, according to brokerage CBRE (CBRE), only about 119,000 square feet of Brooklyn office space was leased in the fourth quarter of 2023, a 19 percent quarterly drop. What’s more, the total for 2023 was 620,000 square feet, down 37 percent from 2022. “The scarcity of office demand drove several owners to shift their space to non-office uses,” wrote researchers from CBRE in its fourth-quarter market report.
Availability was 21.8 percent, down slightly from the previous quarter, and average asking rent was $53.27 per square foot and close to a recent high, up 9 percent annually in the fourth quarter, a phenomenon the report attributed to the removal of lower-priced space from the market. Availability, which includes space that is vacant plus that slated to become vacant within 12 months, is down from a post-pandemic peak of 24.3 percent in the first quarter of last year. The conversion of the former Jehovah’s Witnesses headquarters at 25-30 Columbia Heights, known as Panorama, has some 680,000 square feet inside and another 55,000 square feet outside.
“Being a Brooklyn proponent, I wish that it was immune from market conditions and had that resiliency,” said Ariel’s Kelly. “Unfortunately, what I can tell you specifically is that in the past three months, the net overall evaluations we have done is probably up 200 to 250 percent, and most of that is driven by assets that clearly will not be able to be refinanced into short-term debt.”
With some $2.2 trillion of commercial real estate debt maturing before 2028 nationwide, it’s inevitable that some of it might wind up in special servicing or somewhere worse down the line, like in default or put up for auction.
The best thing that can happen in that situation is an extension in which a lender gives a borrower a break of a year or two. Often that is in return for bringing in more equity, sometimes in the form of a high-interest mezzanine loan or preferred equity, which means that the original borrower gives up its position as the recipient of whatever revenue the property throws off if there is a sudden rise in income, such as when someone moves in and starts paying rent.
And that means the new money probably has the same vision that the original developer had — that the market will inevitably grow and pent-up demand will overflow, just later than originally surmised.
“We are optimistic about not just the office market in Brooklyn but the Brooklyn market overall going into 2024,” said Dan Marks, a partner and team leader at TerraCRG, a Brooklyn-based commercial real estate brokerage. “Do I think there will be a transition period where people are doing more hybrid work? Yes, but I think ultimately there will be more of a return to normal office hours, working hours.”
However, Marks also said he expects to see lenders run out of patience on at least some of Brooklyn’s most forward-looking projects.
“If the business plan is not able to generate the revenue, landlords have capitalizations that have to be respected,” he said. “We have not seen a tremendous amount of that here up to this point, but that could just be a function of the churn of the rates that people were locked into. It’s very possible those loans are coming due.”
Brokers on the other side of the East River in Manhattan talk about a bifurcated market where there is a flight to quality, with the best Class A space resuming its attraction as if the pandemic and its aftermath never even happened. On the other side of the bifurcation is the Class B and Class C space where owners might hope the buildings can be converted into housing or some other more in-demand use, though not every office building is conducive to that kind of repositioning. Residential renters and buyers usually demand enough light and air to make the living spaces less dependent on artificial or electronic sources.
So far, according to research firm Trepp, the top of Brooklyn’s office market has avoided sinking into delinquency. The top four properties backed by securitized commercial mortgages facing imminent maturity in the borough are 15 MetroTech Center, part of an office park in Downtown Brooklyn built in the 1980s, with a current balance of $127 million; followed by 55 Prospect Street ($53 million), 117 Adams Street ($48 million) and 77 Sands Street ($46 million). The latter three were part of a portfolio of Jehovah’s Witness industrial properties that sold in the mid-2010s to be converted to office. The fifth property is 6010 Bay Parkway ($44 million), which remains current, though with a maturity in October.
There are four Brooklyn developments with the potential to become iconic for the borough. One is Panorama. There is also the Refinery at Domino, the landmarked shell of a sugar refinery in Williamsburg that was renovated as state-of-the-art offices at a cost of $250 million — essentially a modern building constructed inside the shell of a 19th-century structure.
There’s also Dock 72 at the Brooklyn Navy Yard. Rudin Management and Boston Properties built it from the ground up, and WeWork remains its anchor tenant despite the coworking giant declaring bankruptcy last year. Then there’s 25 Kent Avenue, a ground-up 500,000-square-foot office project in Williamsburg that was designed to feed off technology-oriented millennials who were finding places to live in that neighborhood.
The owners of these projects hope they will fall on the positive side of the bifurcation — that they have such compelling stories, they will inevitably be home-run investments, even if it’s taken years longer than in their original plan.
Elyssa Marcus, vice president in charge of asset management and acquisitions for Rubenstein Partners, the Philadelphia-based investment group behind 25 Kent, said the 5-year-old property today is about 33 percent rented. With deals currently in the pipeline, however, that share could rise at least 20 to 30 percent. Marcus said the building is financially sound, and she expects it will remain that way.
“Things have really picked up in the last six to eight months,” she said. “We’re hitting our asking rents.” She said those were in the “mid- to high $70s” a square foot, which would make them well ahead of the borough average.
Two Trees Management’s David Lombino, the company’s managing director overseeing the Domino development, said in a statement that the project is “perfectly positioned for a huge year in 2024.”
“We are seeing incredible demand for Brooklyn office space that is integrated into thriving residential communities like Dumbo and Williamsburg,” Lombino said over email. “In Dumbo, we signed more than 70 leases in 2023, one of our busiest years. At Domino, Ten Grand is fully leased with growing tenants already looking at potential expansion into the Refinery, where Equinox is anchoring an exciting retail program and the first leases will be announced in the coming weeks.”
Los Angeles-based CIM Group, which controls the Panorama project, declined to be interviewed for this story.
A Rudin spokesperson said that company was “proud to be a part of the thriving ecosystem that has been cultivated at the Brooklyn Navy Yard. Dock72 is already home to a dynamic roster of innovative tenants including Huge (a division of Interpublic Group), Food52, WeWork, Small Planet and Melange. These companies are drawn to Dock 72’s top-of-the-line office space as well as its world-class wellness and amenity program.”
TerraCRG’s Marks said he thought family-owned multigenerational real estate companies like Rudin and the Walentas family-
controlled Two Trees would be positioned to do better in a downturn than institutions, having survived previous downturns.
“We’re in a challenging market now,” Marks said. “These are absolutely incredible projects, in good locations. [Refinery and Dock 72 have] long-term family offices that have patience and resources through these types of downturns.”