Office Tenants Flee Manhattan Rents for Brooklyn

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.

Most of the Class A space is in MetroTech, a large office complex in Downtown Brooklyn that was built by Forest City Ratner from the early 1990s through 2005. The developer owns six office buildings, with 3.7 million square feet, in MetroTech’s 5.2 million square feet.

JPMorgan Chase owns the other two office buildings in MetroTech. Forest City Ratner also owns three more Class A buildings near MetroTech, including a 19-story 700,000-square-foot tower called 1 Pierrepont Plaza.

“When MetroTech was first created in the early 1990s, it was primarily for back-office employees at large financial institutions,” said Glenn Markman, an executive director at Cushman & Wakefield. “But it has become much more diverse, with law firms, nonprofits, media and advertising all moving there.”

By far the largest deal this year was struck by American International Group, the troubled insurer. It signed a lease in March for 120,000 square feet in 12 MetroTech, a 30-story building that was completed in 2005.

The new space had been fully occupied by some workers in the company’s accounting and legal departments, said Joe Norton, an A.I.G. spokesman. He said the 10-year lease at MetroTech carries an annual rent of $33.50 a square foot for the first five years, and $37.50 for the second five years, which is considerably less than rents in Manhattan.

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. Weil Gotshal & Manges, a global corporate law firm that is known for its bankruptcy practice, was the building’s first tenant 40 years ago.

Weil recently decided to give up 25,000 square feet of its space there and signed a lease through 2020 for the entire ninth floor — around 35,000 square feet — of 15 MetroTech, a 19-story building that opened in 2003. It plans to move about 100 employees from its accounting, human resources and technology departments there.

Some smaller companies have decided to move all of their employees to Brooklyn. For example, El Diario, a Spanish-language newspaper, took more than 23,000 square feet at 1 MetroTech. The Ms. Foundation for Women, a nonprofit organization for women’s causes, signed a lease for 15,000 square feet at 12 MetroTech, while Heartshare, a nonprofit organization focused on children, has taken almost 33,000 square feet at 12 MetroTech.

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. The site for that project is within walking distance of Downtown Brooklyn.

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.

“If we build one, that doesn’t mean we wouldn’t build the other,” Ms. Gilmartin said.

But Ms. Gilmartin said Forest City Ratner would not build any new office space in Brooklyn until it had adequate advance leasing. She said that before the credit markets froze up this fall, the banks could finance buildings with 50 percent advance leasing. Although it is too soon to say what might happen once the credit markets thaw, she speculated that bankers might want greater advance leasing, perhaps as much as 60 to 75 percent.

So the office market in Downtown Brooklyn might remain tight for some time. There is 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.