Make Commercial Space Affordable Too

Make Commercial Space Affordable Too

Make Commercial Space Affordable Too
May 22, 2015

Last month, Mayor Bill de Blasio outlined a number of innovative proposals to alleviate the city’s affordable housing crisis, adding more detail to what has clearly been one of his administration’s top policy goals. But the city also needs a game plan for ensuring that there is enough affordable commercial space. 

The city’s almost unprecedented economic boom in recent years has caused commercial rents to skyrocket and vacancy rates to plummet, particularly in the less traditional office districts that have proven so attractive for tech startups, creative agencies, design firms and other fast-growing companies. 

Midtown South, home to the city’s largest cluster of tech firms, had the lowest vacancy rate of any major central business district in the nation in the first quarter of 2015, at 6.1 percent. Rents in the district rose to $62.02 per square foot, an all-time high. The commercial vacancy rate in DUMBO, another desirable hub for tech startups, design firms and creative agencies, has long hovered near zero. And in nearby Downtown Brooklyn, the vacancy rate is now around 3 percent, down from 8 percent a few years ago. 

What’s driving this is a remarkable burst of job creation. The city exceeded its previous private sector employment peak in 2013, and has added a couple hundred thousand new jobs since then. Overall, the city has had a net gain of 425,000 jobs since 2009.

Unlike previous booms, the growth is not being driven by investment banks, law firms and traditional media companies looking for floors of Class A office space. Much of the new demand for commercial space is coming from fast-growing Internet startups, creative companies and even some light manufacturing firms. Between March 2010 and March 2015, employment in the city’s tech sector jumped by 48 percent, while the number of jobs also increased significantly in advertising (up 35 percent), architecture (up 31 percent) and film and TV production (14 percent). 

Most of these firms can’t afford the rents in new Class A buildings and have shown a strong preference for being in older office buildings or industrial lofts outside of the city’s two main central business districts. 

Fortunately, the growing demand for space is finally beginning to spur new commercial development in Williamsburg, DUMBO and Sunset Park. This is a hugely positive trend that city economic development officials should support. But there are other strategies the de Blasio administration could employ to unleash the potential of commercial spaces that have long gone vacant or underutilized.  

For instance, the city should establish new incentives to preserve and upgrade Class B and C office buildings. So many of the city’s tech startups and creative firms today rent space in these older office buildings, which tend to command sharply lower rents than Class A office towers. Unfortunately, a growing number of these buildings have been converted into condos and hotels. According to the New York City Economic Development Corporation, the supply of Class B and C buildings across the five boroughs has decreased by 1.6 million square feet since 2000.  

New tax exemptions or low-cost financing for tenant improvements could make it financially attractive for Class B and C owners to preserve their buildings as office spaces. 

City economic development officials would also be wise to develop new planning and financial tools to recapture some of the dozens of buildings in up-and-coming commercial districts that are being used for storage. I counted at least 26 self-storage facilities in Long Island City, a neighborhood with a burgeoning tech cluster but surprisingly few affordable spaces for innovation businesses. Buildings that are being used entirely or primarily for storage proliferate in other parts of the Brooklyn and Queens waterfront where there is enormous demand for commercial space but precious little inventory available. At Industry City in Sunset Park, for instance, 30 percent of the tenants are using their space for storage. 

Many of these are loft buildings that would be ideal for tech firms, creative companies and light manufacturers. But the buildings are very profitable and the owners have little incentive to make changes. New city financial incentives could make it worthwhile for owners to convert some storage facilities into more job-intensive uses.  

Finally, the administration should look to unlock some second-floor retail spaces that sit empty in a number of the city’s thriving commercial districts—from Fulton Mall in Brooklyn to downtown Jamaica in Queens and the Hub in the Bronx. Because upper floors won’t fetch hefty rents and building owners are already bringing in lucrative profits with their ground-floor retail tenants, there has been little incentive for building owners to rent out these spaces or put in the upfront investment needed to make them usable. While many retailers aren’t interested in leasing upper-floor space, these spaces might be ideal for some creative businesses, tech firms or nonprofit arts groups. 

 

Jonathan Bowles is executive director at the Center for an Urban Future.

Jonathan Bowles
is executive director of the Center for an Urban Future.
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