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Manhattan CRE prices spark a mass exodus of startups to Brooklyn

TechCrunch TechCrunch 4/06/2016 David Mandell

Manhattan, once the mecca for technology and innovation on the east coast, is now losing ground to the outer boroughs. Massive growth has led to high rents and lack of space for burgeoning businesses. Demand for office space by tech companies increased 177 percent from 2002-2012, representing 25 percent of New York City leases. To that end, the vacancy rate in NYC is just 9 percent (compared to 15 percent nationwide), creating supply and demand issues that are grossly impacting rents.

But the startup nation is great at finding solutions to their problems. Because the problem is high-priced prime locations, they’re simply expanding their definition of prime and extending the Alley to a place where they can afford to grow their business — Brooklyn.

With the development of formerly working-class neighborhoods like Bay Ridge and the Brooklyn Waterfront well underway, land developers and brokers are now pushing commercial space in these non-traditional areas, making the distinction between residential and commercial neighborhoods even grayer. Undaunted and receptive, tech companies are packing their bags and venturing across the Bridge.

Companies like Etsy and MakerBot, as well as startups like goTenna and Honeybee Robotics, are pioneers settling in non-traditional spaces in DUMBO, downtown Brooklyn and the Brooklyn Navy Yard — now dubbed the Brooklyn Tech Triangle. Tech companies are taking over old factories and warehouses and creating shared workspaces, incubators and office buildings for the creative class. Tenancy in this area grew 22 percent in just three years, to the point where an increasing lack of commercial space in the Triangle is creating a wider circle of opportunity for Brooklyn-bound ventures.

Livestream left Chelsea and moved their headquarters to Bushwick, where they found 45,000 square feet of space surrounded by old factories from which to launch and grow a series of new initiatives for their business. One of the top five CRE deals in March 2016 was for a 550,000 square-foot industrial space in Clinton Hill just south of the Navy Yard that will specifically target tech and creative tenants who can no longer find or afford space in DUMBO, Williamsburg, Fort Greene and downtown Brooklyn.

PivotDesk is also seeing this trend play out. When compared to the Flatiron district, PivotDesk saw an 80 percent increase in space availability on their platform in Crown Heights, Clinton Hill and the Brooklyn Navy Yard since 2015, and a 300 percent growth in request for Brooklyn space from 2014 to 2015.

Rapid business growth in response to a growing populous attracted to lower rents have drawn Manhattanites to the Other Manhattan.

However, the need for space continues to grow. Where people go, jobs go.

Employment increased 45 percent in the Brooklyn Tech Triangle, catalyzed in part by Fortune 500 companies like J.P. Morgan, which moved 2,000 jobs to downtown Brooklyn in 2014, and Time Inc., which moved 300 of its technology, content solutions and editorial innovation employees to Industry City in Sunset Park, Brooklyn. On the flip side, computer developers are thriving in Brooklyn and refusing to commute to Manhattan, thus compelling companies to move where they can find rich talent that will help their businesses flourish.

New York City is also responding in kind. Programs like the Relocation Employment Assistance Program (REAP) provide $3,000 in annual tax credits for each employee, and the New York City Commercial Expansion Program (CEP) provides $10 per square foot rebates for  up to five years, which can mean big savings for startups looking to hang onto some cash. Even the Industrial & Commercial Abatement Program (ICAP) awards property tax refunds for up to 25 years to building owners who complete significant renovations on their properties.

And then there is transportation. Plans to build theBrooklyn Queens Connector (BQX) — a light rail streetcar system — are in the works to connect the Brooklyn and Queens waterfronts. But that will take some time, and the City will be forced to find alternative ways to better connect these traditionally underserved Brooklyn neighborhoods with new transportation options like expanded Select Bus Service and bike lane routes.

A new South Brooklyn ferry service will launch in summer 2017, linking Brooklynites with the Financial District and Midtown. The private sector will also bridge the divide. Uber is already increasing its market share of rides as compared to yellow cabs in Queens and Brooklyn. Bike-sharing programs that are so popular with the tech community in New York City will fill the gaps, and carpooling and ridesharing apps like Via and Gett will take off in a big way.

Rapid business growth in response to a growing populous attracted to lower rents have drawn Manhattanites to the Other Manhattan, but this massexodus is fast hitting the wall of supply versus demand, which will compel companies that are part of the creative economy to become even more innovative in finding affordable solutions as rents start to increase.

When easier transportation becomes available in DUMBO, Williamsburg, The Navy Yard and Gowanus, these outer borough destinations will become even more attractive to tech companies that want to attract top talent and avoid astronomical rent.

Shared office spaces are already in high demand, and we expect companies will take on larger spaces to secure their foothold in Brooklyn and simply monetize their excess space until they grow into it. And when Brooklyn becomes the next Manhattan, startups will just reinvent another city and grow into other outer boroughs — starting with Queens.

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