Brooklyn office developers chasing tech tenants face slowdown

Bloomberg

Developers racing to turn Brooklyn into a thriving technology office market may be finding Manhattan a less-fruitful target for poaching tenants.
Leasing in Manhattan by tech, advertising, media and information tenants — known to real estate brokers by the acronym TAMI — fell in the second quarter to the lowest level in more than three years, according to Cushman & Wakefield. Such firms added just 1.21 million square feet (112,400 square meters) in the borough. That’s a 43 percent drop from the space leased in the first quarter.
Demand is cooling as development across the East River surges, with 9.6 million square feet of Brooklyn offices slated for completion by the end of 2020. Developers and investors behind projects including the former Domino Sugar plant, the Watchtower building and the retired Schlitz Brewery are aiming to draw TAMI tenants, and Brooklyn’s emergence as one of the U.S.’s top tech centers is threatened unless there’s a reversal of the slowdown.
“I’m not suggesting that a bubble has burst,” said Mitch Roschelle, real estate analyst at PricewaterhouseCoopers LLP. “It’s just that the growth in the incremental dollars going to tech has subsided a little bit. As markets like Brooklyn grow in popularity and become more expensive, they can price out these nascent ventures.”

FINANCING FALLS
Venture-capital investment in New York firms, including technology companies, fell to $1.4 billion in the second quarter. That’s 19 percent less than the previous three months and 40 percent drop from the second quarter of 2015, which was the biggest quarter in 15 years, according to to PwC. Nationally, VC financing was up 20 percent from the first quarter, and down 12 percent from a year earlier.
A rising supply helped increase Brooklyn’s office-space availability to 14.5 percent at the end of the second quarter from 13.1 percent a year earlier, according to brokerage Newmark Grubb Knight Frank. Asking rents nevertheless rose, averaging almost $40 a square foot — a 14 percent jump — meaning they’re getting closer to Manhattan’s leasing costs. In lower Manhattan, the cheapest of the borough’s three main submarkets, rents gained 9 percent to nearly $62 a square foot.
New York isn’t alone in dealing with slowing tech demand. In San Francisco, the epicenter of the U.S. tech industry, the office-vacancy rate rose to 7.3 percent in the second quarter, the first increase since 2013.

CONSTRUCTION SURGES
Brokers and developers remain confident that TAMI tenants will keep flocking to Brooklyn, where office construction has almost tripled since mid-2015. In Manhattan, the sector accounted for the largest percentage of second-quarter leasing, beating out the traditionally dominant financial industry, said Richard Persichetti, Cushman’s research director for the Northeast.
“Demand will still come from TAMI” as well as other sectors “as Brooklyn remains a hot market,” Persichetti said in an e-mail. Still, at least some Brooklyn office developments are likely to be pushed back to the next real estate cycle, he said. “There is no way to tell which projects will be built.”