May 5, 2016
SUNSET PARK BRACES FOR A TIDAL WAVE OF CHANGE
Industry City’s recent announcement of a 500k SF block of space targeted at creative office users was an exclamation point, reminding us Sunset Park is a force to be reckoned with. But how will the neighborhood manage its explosive growth?
When Jamestown Properties, Angelo Gordon and Belvedere Capital bought the 6M SF Industry City complex in 2013, the idea of institutional capital flowing into warehouse space in Sunset Park was… shall we say, a novel idea.
No longer. Other big investors have since followed, as the complex attracts tenants like Time Inc, the Brooklyn Nets and The Gap.
Among investors is Madison Realty Capital, which closed on a buy of the 480k SF Brooklyn Whale Building at 14 53rd St. (the greyish building shown above) this past August for $82.5M.
A conversion of the property, which sits about a mile south of Industry City near the Brooklyn Army Terminal, was already in the early stages when the sale closed, says MRC co-founder Josh Zegen (pictured below).
“We’re attracting a lot of tenants who are being displaced from Manhattan as their leases are rolling,” he says, adding they’re not just coming from Manhattan.
With rents in areas like Dumbo now hitting the $70s/SF in some cases, Josh says some Brooklyn tenants are looking for rent relief.
He tells us tenants will pay between $25/SF and $30/SF at the Brooklyn Whale Building, and as by his guess, as high as the mid-$30s/SF at 341 39th St, another warehouse-to-office conversion MRC is in the process of closing a deal to buy.
If that sounds like a deal compared to Manhattan, that’s because it is.
But Kalmon Dolgin’s Jeff Unger gives some context to how fast that number has risen. In recent years, Jeff says he’s done a number of deals in Long Island City—another area that’s seen creative office fill much of the void as industrial tenants have struggled to stay.
He notes the $15/SF rents in that neighborhood about five years ago have roughly doubled.
Around Sunset Park’s waterfront, the kind of space now seeing asks of well over $20/SF was only fetching around $8/SF five years ago—a steeper rise in rents than has been seen in booming Long Island City, Jeff says.
The upward pressure on office and industrial space is having an impact on the multifamily market too, says Marcus & Milichap’s John Brennan. Rent-stabilized buildings in the neighborhood these days trade for between $260/SF and as high as $310/SF. By John’s math, that’s about a $40/SF to $75/SF jump in the past two years.
Jeff and his partner, Robert Klein, have the leasing assignment for 170 53rd St, a three-story, 164k SF warehouse building near the Brooklyn Army Terminal.
Jeff’s done plenty of manufacturing deals in the area, like the 50k SF lease for Koppers Chocolate at 850 Third Ave last summer.
But interest in this former manufacturing building has been all over the map: from a car dealership to a film studio and at least one co-working user. Just about every kind of tenant one could think of except the kind of industrial user the building was initially built for.
Its former occupant, Atlantic Glue & Paste, is headed for new digs in Bayonne, NJ.
Keeping industrial users in the area is part of Jennifer Sun’s job. Since last fall, she’s overseen the Sunset Park department at the New York City Economic Development Corp.
She says it won’t be done by discouraging tech users from coming in, because increasingly, tech and industrial are one and the same.
“A lot of people talk about manufacturing and tech in ways that create a false dichotomy,” she tells us. “The lines between these sectors are blurring.”
She cites Riva Precision Manufacturing, a tenant at Sunset Park’s Brooklyn Army Terminal, which the EDC oversees. The company blends traditional labor-intensive techniques with tech-driven methods for designing and fabricating jewelry for major brands.
One thing tenants that blend manufacturing and tech need, Jennifer says, are small spaces. The EDC recently finished rehabbing on a 55k SF building with 12k SF floor plates.
She says part of the aim is to attract startup tenants to the small spaces in the facility by offering them another thing they need: (relatively) cheap rent.
She says rents will be range from $14/SF into the low $20s/SF.
The EDC also is working to retrofit the 500k SF Building A at the Terminal for creative, tech and manufacturing tenants. Most of that space is on pace to deliver by the summer of 2017, with the rest coming online by 2018.
The EDC’s work in the area extends beyond the Terminal to the other end of the neighborhood, at 850 Third Ave, also called Liberty View Industrial Plaza. In 2014, the city agency invested $3.5M toward fitting out the space for a manufacturing incubator called Manufacture NY. It’s focused on jumpstarting new businesses in the fashion industry, and it’s housed at the sprawling 1.1M SF building.
Salmar Properties picked up the property from the U.S. government in 2011 with a string attached: It had to be put to industrial use. That’s just fine with Salmar’s Marvin Schein, who tells us his firm has invested about $120M in upgrades for modern industrial tenants—particularly in the fashion industry. (Amazon also has distribution space there, and last year Bed Bath & Beyond signed one of the biggest retail leases in Brooklyn in recent years, helping put the building on the map.)
Manhattan’s Garment District is in danger of not being the Garment District anymore, says Marvin. He says fashion tenants are leaving in droves. It’s not hard to see why. A Cresa market report from Q1 of last year pegged average Class-B rents in the Penn Plaza/Garment District submarket at $53.41/SF.
But for Sunset Park to become the city’s new Garment District, Marvin says, it’ll take some serious help from the city.
“I think that the city has to realize that if they really want to keep manufacturing, they need to do something dramatic to keep it,” he tells us. Something dramatic, he says, might look like a tax-free zone for manufacturing start-ups—something he says Salmar has been lobbying the city to consider.
But if recent shifts in tenancy are any indication, the neighborhood’s meteoric rise as a hip (not to mention less cheap) destination for creative tenants could face an uphill battle to stay affordable.
“These mom-and-pops landlords who bought industrial buildings for $40k or whatever, four decades ago—they’re being offered millions to sell now,” Marvin says. “Who can turn down that kind of money?”