US Real Estate Emerging Market: Converting Upper Floors of Unused Brooklyn Retail Space into Offices
The timing may be right for investors to consider maximizing unused upper floors of retail buildings located in downtown Brooklyn. Converting these floors into office space is an emerging real estate market trend, given the various developments in the area which will make it prime space for companies to set up offices.
According to the Wall Street Journal (WSJ), an encouraging indicator of this emerging trend is the recent $270 million deal between developer Tishman Speyer and Macy's. The developer purchased the top five floors of the Macy's Fulton mall, including the air rights above the building. Tishman Speywer is planning to convert a part of the property into approximately ten floors of office space.
Tishman Speyer Co-CEOs Jerry Speyer and Rob Speyer said in a statement that the Macy's partnership will enable the company to produce a "transformative mixed use development" in one of America's leading destinations for "creative workers and new economy companies," reports the Brooklyn Eagle. Tishman Speyer's planned office development will feature 16-foot ceilings, outdoor spaces and easy access to the city's subway lines. The project is expected to begin for both the retail and office side in spring 2016 and will be completed by fall 2018.
Tucker Reed, president of the Downtown Brooklyn Partnership, a nonprofit development corporation, told the WSJ that the Tishman project will "awaken the opportunity" for other investors and developers to maximize unused retail spaces. The WSJ report also cited how various residential and retail developments in the area also helped to boost the need for office spaces. Over the past few years, the Brooklyn neighborhood has seen several additions of residential units which attracted hotels, restaurants and other retailers, particularly on the Fulton mall area. This would be attractive to both start-up and established companies as well.
Tim King, managing partner at Brooklyn-based CPEX Real Estate LLC, said that creative and technology companies are not looking for traditional office building, but would rather be in "funky spaces." King added, "Those buildings on Fulton are close to perfect for these sorts of operations."
The WSJ report also mentioned that while this may be a good opportunity, converting retail spaces into offices will be challenging. The expense to convert many low-rise buildings that have smaller floor areas than Macy's Fulton mall will be costly and may not justify the risk, said experts. Extensive remodeling would also need to done to update floors into modern office spaces, given that many high rise buildings hasn't been used in years.
Lastly, landlords will also need to apply for a change in the building's certificate of occupancy and subject it to local authorities' property inspection. Despite all these factors, CPEX Real Estate's King is still optimistic about the office development opportunity, given that renovation will increase the total value of the company. King said, "It's like found money to restore those spaces to viable use."