New York, NY – Office Tenants Flee Manhattan Rents for Brooklyn

New York, NY – Among office tenants, bargain hunting is back in style. After years of paying skyrocketing rents in Manhattan, some companies have decided to cross the East River.

“Our lease is up next year, and when we looked around the city, it was difficult to find the kind of space we wanted at a reasonable price,” said Byron E. Lewis, the chairman and chief executive of UniWorld Group, a New York advertising agency that focuses on African-American consumers.

UniWorld moved in 1989 to its current headquarters in SoHo, an old printing loft at 100 Avenue of the Americas, between Watts and Grand Streets. At that time, office rents were much cheaper there than in Midtown Manhattan. But the company’s lease expires in August, and Mr. Lewis said that SoHo had become too expensive.

So he decided to move the agency’s headquarters – including all 130 employees – to 1 MetroTech, in Downtown Brooklyn. UniWorld has rented the entire 11th floor in a 23-story building. Its lease, signed in September, is for around 37,000 square feet, roughly the same size as the office it now has. The company will move next summer.

Although vacancy rates are rising in Manhattan, mostly because of layoffs in the financial industry, office space is actually becoming more scarce in Downtown Brooklyn.
The vacancy rate there in modern, well-equipped buildings – what brokers refer to as Class A office space – fell to 7.9 percent in the third quarter, from 9.4 percent in the first quarter, according to Cushman & Wakefield, the commercial real estate concern.

At least nine Manhattan companies, including UniWorld, have signed new leases for Class A space in Downtown Brooklyn this year. The leases – for properties ranging in size from 4,000 square feet to 120,000 square feet – total nearly 300,000 square feet.

Although that would not make much of a dent in Midtown Manhattan, the Downtown Brooklyn market is relatively small. It has only about eight million square feet of Class A space, compared to nearly 180 million square feet in Midtown.

The average asking annual rent for all Class A office space in Downtown Brooklyn was $30.52 a square foot in the third quarter, down from the historic high of $31.44 in the first quarter, according to Cushman & Wakefield. That is only a third of the average asking rent in Midtown Manhattan, which was $92.59 a square foot in the third quarter.

In some of the most desirable Manhattan towers, rents can be stunningly high. For example, asking rents at the General Motors Building, on Fifth Avenue between 58th and 59th Streets, are about $150 a square foot.

Cost savings can go well beyond the rent. The city provides tax incentives to lure businesses from Manhattan to the other boroughs instead of moving to New Jersey or Westchester County. The Relocation and Employment Assistance Program gives companies a $3,000 tax credit for each employee against city business taxes every year in the first 12 years after the move.
That would cut costs at a rate equivalent to $16 a square foot, assuming average density.

Keith Caggiano, a senior vice president at CB Richard Ellis, the broker that represents Forest City Ratner, says there are other potential savings as well. For example, he said, there is no commercial rent tax in Brooklyn, compared with a 3.9 percent tax in Manhattan, which kicks in when a company’s rent exceeds $250,000 a year.

“Downtown Brooklyn is also becoming more of a vibrant residential community, which I think bodes well for its future as an office market,” Mr. Caggiano said.

Plans are in the works that would profoundly change the scale of the office market near Downtown Brooklyn. The most drastic is the long-delayed $4 billion Atlantic Yards project, designed by Frank Gehry, where Forest City Ratner plans to build a basketball arena and up to 16 towers with apartments and offices.

MaryAnne Gilmartin, executive vice president for commercial and residential development at Forest City Ratner, said the project would add up to one million square feet of office space, including a 600,000-square-foot tower. In addition, the company says it has the capacity to add almost one million square feet of office space in the MetroTech development.

There is also some sublease space on the market; and JPMorgan Chase is looking to rent out a large block of space in its buildings in MetroTech. But Ms. Gilmartin said that 99 percent of Forest City Ratner’s space in MetroTech is leased. “We are sitting pretty now,” she said.