After the recession of 2008, the state of New York put together a program called Start-Up NY that looked to attract technology start-up companies to the five boroughs. The one borough that seemed to take advantage of the program more than others was Brooklyn. For decades, Brooklyn trailed Manhattan in commercial development, but the influx of tech start-ups due to the Start-Up NY program gave Brooklyn its chance to make a mark on the New York City skyline.
It did not take long for developers to project a strong potential in Brooklyn in terms of commercial and residential development. Millions of square feet in new construction and commercial building repurposing was planned, and the total for repurposing projects expected to be completed by 2020 now stands at 23. This will add another estimated seven million square feet in space that has to be filled. The plan was to attract residential and commercial clients to Brooklyn with small start-ups and companies moving from Manhattan. But as time goes by, that Brooklyn momentum seems to have slowed down.
Brooklyn’s Commercial Development and Business Landscapes
Office space development in Brooklyn kicked into high gear around 2014, and the plan was to give Manhattan developers a run for their money. Instead of building mostly new Brooklyn commercial property, developers decided to focus more on repurposing existing commercial structures and properties. At the time all of this started, the economic conditions in Brooklyn were very positive. But now that many of the larger projects are being completed, developers are finding it more difficult to rent space.
Brooklyn has developed a reputation for being a place where artists and tech companies can live and work. Initially, the lower rents in Brooklyn residential properties when compared to Manhattan had caused a mass migration of people into the Brooklyn area. But gentrification throughout the Brooklyn borough has caused rent prices to rise, and now rents in Brooklyn are so high that Manhattan properties no longer look that expensive.
The main goal for any developer of commercial property is to find an anchor tenant that commits to 100,000 square feet or more of available space. In Brooklyn, there are no non-government tenants that exceed 75,000 square feet. The New York City Fire Department is the largest tenant in Brooklyn commercial office space at 339,993 square feet, and three out of the four next largest rentals are from the government-backed co-op program WeWork. Not only does Brooklyn currently lack a non-government anchor tenant of any kind, there is no anchor tenant in the borough’s foreseeable future.
Changing Economic Conditions In The Boroughs
The economic conditions in Manhattan are changing, and that is not a good thing for Brooklyn commercial property. The Manhattan office space market is slowing down, which means that rents and associated costs are also coming down on existing properties. Companies looking for office space can no longer be lured away from Manhattan by lower costs in Brooklyn because the new developments in Brooklyn are charging Manhattan-level rents. As long as this trend continues, it is going to be difficult for Brooklyn to get the attention of corporate renters and leasers.
The truly large commercial tenants such as IBM and Facebook are still choosing Manhattan over Brooklyn as they commit to hundreds of thousands of square feet of office space. Because Brooklyn’s commercial presence is relatively new, tenants are only committing to short-term leases. But in Manhattan, IBM and other large anchor tenants are committing to several years. Manhattan developers are also offering build-to-suit options and lower costs on tenant remodeling needs, which is something Brooklyn cannot compete with.
Residential Draw Not Working As Thought
Brooklyn counted on its draw as a residential housing destination to help grow its commercial development industry. The reason Brooklyn wanted people to live and work within the borough stems from another reason why people often choose Manhattan over Brooklyn for commercial development. Many people who work in New York City choose to either live in New Jersey, or the New York City suburbs instead of the boroughs. Manhattan is an easy commute for people who live outside of the city, but the Brooklyn commute is much longer and requires more time.
Brooklyn also faces the struggle of being isolated from the main business components of New York City. The harbors and financial business centers of New York are all located very close to Manhattan, which is something that Brooklyn can do nothing about. Creating a captive audience of residents who work in businesses located on Brooklyn commercial property is one of the only ways Brooklyn can surpass Manhattan in commercial development.
The developers and planners in Brooklyn also failed to keep in mind that basing your commercial development plans on start-up businesses takes time to develop. While there are plenty of small businesses that are growing in Brooklyn, it will take years before any of those businesses are large enough to be anchor tenants in a Brooklyn office space development. Office space rentals peaked in 2015 for Brooklyn, but vacancies in 2017 are projected to come close to seven percent. That leaves a lot of new developments that will be very empty.
What Does The Future Hold With So Many Vacancies
Developers look at the rise in Brooklyn vacancies as a trend that will eventually even itself out. Many Brooklyn business experts point to the large number of tech start-ups in the borough as sources of future anchor tenants that will help to fill some of the properties that are currently ready, and those that will be completed.
Brooklyn is also becoming a favorite borough for New York City departments and projects. The borough expects city investment in commercial office space to continue to increase, and there are hopes that more government anchor tenants will help to attract the more lucrative non-government tenants that Brooklyn has been counting on.
As for the lack of non-government tenants that are committed to 100,000 square feet of space or more, developers are counting on improving economic conditions to spur interest from more companies in Manhattan. Once the Manhattan commercial office space market starts to pick up again, Brooklyn can tout its lower rents and state-of-the-art commercial properties as superior to Manhattan’s and attract more commercial tenants.
While Brooklyn developers say they are not concerned about future tenant commitments for Brooklyn properties, the pace of commercial development in the borough is projected to slow down after 2020. While developers insist that this slowdown is cyclical, most observers believe developers are going to take a wait and see attitude to future projects before committing more resources.
The Battle For Commercial Supremacy
Aside from Manhattan, it appears that Brooklyn was a borough that thrived after the 2008 recession. There was a wave of residential development in Brooklyn that was followed by a flurry of office space construction. But now many experts are wondering if maybe the hype for Brooklyn commercial property was too much. As more Brooklyn office space gets built or repurposed without having any major anchor tenants, developers might start to feel like the roll of the dice with Brooklyn was a risky call.
With Manhattan, there is more than prestige that brings in tenants. Manhattans’ position as the physical center of the New York City financial world and its proximity to low-cost living options have made it one of the hottest commercial real estate markets in the world. If Brooklyn wants to challenge Manhattan for commercial supremacy, the borough has to realize that there is still a lot of work to do.