Space for Tech to Grow
The New York City economy is strong, vibrant, and evolving. While healthcare remains the City’s largest employer and financial services its engine of economic output, high-tech and creative industries are growing rapidly, changing the dynamics of the economy. New York City is only second to Silicon Valley in terms of size and rate of growth of its technology cluster. The Partnership for New York City estimates that over the past decade the financial services industry grew by 2.4% annually, while high tech and creative industries averaged a 5.3% and 4.1% annual growth rate, respectively. The rapid growth of tech and creative businesses has enabled New York City to command 13% of national market share for economic output in the creative sector alone.
The rapidly evolving tech and creative industry is spread throughout the City with clusters in Midtown South, which has been renamed Silicon Alley; near the High Line along 9th Avenue; and in the Brooklyn Tech Triangle. These centers of tech and creation are the future of the New York City economy. The Tech Triangle—with its three distinct nodes of Downtown Brooklyn, the Brooklyn Navy Yard, and DUMBO—is uniquely positioned to grow as a hub of New York City’s tech and creative industries.
Urbanomics’ 2012 Economic Impact Study estimated that approximately 9,600 individuals worked in the Brooklyn tech and creative industries in 2012, occupying 1.7 million square feet of space in the Tech Triangle, approximately 7% of the 25 million square feet in total supply. The study found that based on projections, existing Tech Triangle tech companies are expected to grow to nearly 18,000 individuals and occupy 3.1 million square feet of space. The New York City Economic Development Corporation (NYCEDC) anticipates that High-Growth Industries, of which tech is a significant component, could demand 20 million square feet of space by 2025 citywide.
The fast moving, constantly evolving tech industry does not fit neatly into the Department of Labor North American Industry Classification Codes (NAICS), and as a result there are a range of studies that attempt to quantify the size of the tech industry in New York City. Depending on how one defines “tech and creative,” in 2012 the industries employed between 101,000 and 171,000 individuals in New York City (an average of 136,000). Translated, Urbanomics’ estimated 9,600 tech employees in the Triangle represented between 7% of total New York City tech employment (based on an average of 136,000 tech employees). Assuming the current growth rates continue, between 121,000 and 176,000 individuals could work in New York City’s tech sector by 2015 (an average of 148,000).
HR&A projected potential future demand scenarios for tech space, ranging from net new demand of 900,000 to 2.2 million square feet in the Tech Triangle by 2015. Based on these scenarios, it is plausible that the Brooklyn tech sector could represent 10% to 15% of total New York City tech employment by 2015, occupying a total of 2.6 million to 3.9 million total square feet within the Triangle if the initiatives described in this plan are implemented.
Tech and creative businesses prefer to cluster near companies providing similar services to capitalize on agglomeration effects, as is the case for most other industries. A shortage of space that is available to tech companies is the single greatest challenge threatening the continued growth of the Brooklyn Tech Triangle. Companies want to grow here and relocate here, and although there is presently very little attractive space on the market, there are millions of square feet of space that would be perfect for these tenants sitting underutilized throughout the area. Landlords facing rehabilitation costs to bring their spaces to market and a residential market that would yield three times the sales price choose instead to keep buildings empty or collect revenues from storage, waiting to take these buildings residential in the future. Moreover, tech tenants typically lack the credit required by landlords and banks for construction loans.
Specifically, the challenges to meeting the space demands across the Tech Triangle include:
- Challenge 1: There’s a shortage of space that meets tech firms’ needs within the current real estate supply.
- Challenge 2: The rapidly evolving business structure of most tech companies prevents them from meeting traditional real estate and public incentive expectations.
- Challenge 3: Rents payable by tech companies do not justify the cost to construct new commercial space.
- Challenge 4: Tech does not recognize that all points of the Tech Triangle can meet their business and real estate needs.
A number of initiatives have been proposed to address these challenges, a few of which are highlighted in more detail below:
Master Lessee Program
The Master Lessee Program will align tech tenants’ leasing preferences with traditional landlord financing requirements. As new and growing businesses, tech companies typically have limited credit and prefer short-term leases (e.g., two to three years), while traditional landlords prefer tenants with institutional-quality credit who can commit to longer lease terms (e.g., 10+ years). This initiative would designate a creditworthy organization, backed by an institutional lender, to build a pool of potential tech subtenants while also managing a portfolio of up to 200,000 rentable square feet of office space in buildings in MetroTech or along Fulton Mall.
Because the Master Lessee is contributing the upfront capital work, landlords will be expected to offer the Master Lessee rents which are modestly below market to help the Master Lessee amortize capital costs. The Master Lessee would sign a standard 10-year gross lease with the building landlord and assume the obligation (and risk) of finding a new subtenant if the current subtenant vacates the premises prior to expiration of the Master Lease. The Master Lessee would also provide the Landlord with credit and coverage of turnover costs (vacancy and refurbishment) in addition to upfront capital contributions. The Master Lease would set the terms of the subtenant lease, and subtenants would have to commit to the pre-negotiated terms established by the Master Lease. The Master Lessee would identify and pre-qualify a pool of potential tech subtenants through marketing and outreach. When a space becomes available, the Master Lessee would market the space to its pool and identify an interested subtenant. The subtenant would then sign the pre-negotiated term sheet, and pay an administrative fee, equivalent to one month’s rent, to the Master Lessee. This administrative fee would help cover the Master Lessee’s administration and programing costs as well as the rents owed to the Landlord during periods of vacancy. The subtenant would pay the Master Lessee market rents in return for a “plug-and-play white box” and the ability to terminate the lease early with no penalty.
Status Update: Backed by funding from the City of New York, the Downtown Brooklyn Partnership (DBP) is moving forward to build out and lease approximately 10,000 square feet on or near the Fulton Mall. Occupancy is expected to occur by Spring 2014.
Target Strategic Sites
There are a number of key sites, including existing warehouse or storage buildings, government-owned sites, and sites of parking lots, which could provide new commercial space. By creating a Special Innovation District with tools to incentivize conversion of existing spaces and new development, these sites present significant opportunity to open up new desirable office space and grow the cluster:
The Watchtower Properties, zoned for commercial and manufacturing uses, represent up to 700,000 square feet of space for tech firms. Currently used predominantly for warehousing purposes, the conversion of these buildings for new tech space would provide an obvious stepping stone location for growing DUMBO firms and spaces for new tech arrivals. The activation of these buildings would start to tie Downtown Brooklyn and DUMBO closer together. With their large floorplates, the buildings are not ideal for residential uses and should be considered critical opportunity sites for expanding the supply of commercial space.
The triangular lot at the corner of Prospect Street and Washington Street is currently used by the New York City Department of Transportation. As a temporary reinvention of this site we propose opening this as a public plaza with a balloon landing location in the center. As a new building site this lot could be rezoned as a contextual R7-1 with 437,000 square feet of developable space. This has potential as a residential dormitory and retail activation at the ground. To the right is a generic zoning massing, which can be further refined to allow a new access route under the Brooklyn Bridge onramp linking on a diagonal to Old Fulton Street.
High Street City Tech/Concord Village
In the shadow of the Watchtower sites and disconnected in the East-West direction by the Brooklyn Bridge onramp, this key site could help strengthen the linkage between Downtown Brooklyn and DUMBO. Currently an underutilized peninsula space surrounded by Adams, Sands, and Pearl Streets, the site identified is two lots—a three-story building owned by City Tech and a privately run parking lot (not Concord Village parking), which is an extension of the Concord Village property. If assembled with an easement for connecting High Street across, this would anchor and extend Pearl Street as well as support a necessary East-West connection in the half mile between Prospect Street to the North and Tillary Street to the South. An extended High Street would connect to the existing High Street station (A/C) entrance on the East edge of Adams Street and could be extended further by either an expanded tunnel connection below the Brooklyn Bridge onramp or a stop light and on-grade connection at this location.
Municipal-Owned Buildings in Downtown Brooklyn
One of the biggest opportunities for new tech space in Downtown Brooklyn is government-owned buildings. With a footprint of over 1.2 million square feet of commercial space surrounding Cadman Plaza, municipal-owned and -occupied buildings such as the Brooklyn Municipal Building at 210 Joralemon Street, 65 Court Street, and the US Post Office and Courthouse at 271 Cadman Plaza East could be renovated and repurposed to create a new urban campus for entrepreneurs and startups as well as new retail opportunities to activate the ground level experience. By repurposing these assets, government could avoid having to spend additional money to renovate these aging facilities, while modernizing its footprint in newer, more efficient buildings.
Special Innovation District
The Special Innovation District is intended to create more active space for the innovation economy in existing storage and warehouse buildings. Currently there is a considerable amount of underutilized space, including more than 1.2 million square feet of space just within the five largest self-storage and warehouse buildings between Flushing Avenue and Park Avenue. The Special Innovation District would allow some residential uses to subsidize the conversion of low-employment short-term storage and underutilized industrial buildings into high-employment innovation economy commercial and light industrial space. These uses would also fit with the emergent live-work preferences of tech sector and innovation economy workers. This model could potentially be applied to other targeted areas along the Brooklyn-Queens waterfront.
Conceptually, the Special Innovation District would allow:
- The owner of short-term or underutilized industrial space to sell their property at a price in keeping with commercial/light industrial use to a mission-driven nonprofit or a deed-restricted private owner who will convert the space to high-employment commercial/light industrial use. In exchange, the prior owner receives a credit that allows building ground-up 80/20 housing elsewhere in the district.
- The owner to sell or long-term lease a portion of the building to a mission-driven nonprofit, in exchange for the ability to convert the balance of the building to housing. Alternatively, the owner could accept a covenant on a portion of the space for commercial/light industrial space in return for the ability to convert the balance of the building to housing.