How Naval Shipyards Are Charting a New Commercial Course

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Waterfront property is among the most valuable real estate in the United States —many of us desire marine views or beach access. But for much of our nation’s history, large chunks of such land, often near or within major cities, have been controlled by the U.S. Navy, used to house the shipyards that turned America into a naval superpower. But as needs change, and as some of those naval shipyards come to the end of their lifespans, the question becomes: What should be done with these high-potential industrial properties next? 

For answers, we can look to two shipyards that have made the transition from pubic shipbuilding to private industry: the Brooklyn and Philadelphia Navy Yards. In a recent interview on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111, John Grady, president of the Philadelphia Industrial Development Corporation, and David Ehrenberg, president and CEO of the Brooklyn Navy Yard Development Corporation, spoke about the secrets to their success.

You can listen to the interview using the player above. An edited transcript of the conversation appears below.

Knowledge@Wharton: David, I’ll start with you. Tell us a bit about the history of the Brooklyn Navy Yard, and the timeline of its transformation.

David Ehrenberg: The Navy Yard here in Brooklyn was established in 1801, the same year the Philadelphia Navy Yard was established as one of the first original five naval facilities in our country. By the time it closed in 1966, it had been one of the longest-serving and largest industrial assets on the Eastern Seaboard. The history of the yard is one of mass production, and research and development, comingled and side-by-side. We were the site of some of the great naval innovations: The first iron-side warship was clad in iron here, the first modern warship in the world. The first steam engine on a boat was made here. The technology for the first trans-Atlantic cable was developed here.

But we are also a mass production facility. And at its height, during World War II, 70,000 people worked at the Brooklyn Navy Yard, in 24/7 shifts — about 0.2% of the American workforce at the time — and obviously, they played a huge role in the war effort.

By the time the 1960s rolled around, the yard was, frankly, coming to the end of its useful life for the Navy. The Brooklyn and Manhattan bridges were too low for modern ships to get under, and larger facilities around the country were coming into their own. In 1966, the Navy sold the facility to the city of New York, and about 10,000 people lost their jobs overnight.

We don’t think of New York City as being hit by the classic military base closure, but that did happen to the city in the 1960s and really precipitated, and it led the way for the extraordinary disinvestment that really dominated the Brooklyn Waterfront in the 1970s and 1980s, when I was growing up in Brooklyn. In just a generation, you went from the Navy Yard and the Brooklyn Waterfront being the home to high quality, middle-class manufacturing jobs, to it really being a place where you would never think of to go to find your next opportunity or the next opportunity for your family. At its low in the 1970s and 1980s, there were about 100 people working here at the yard. So down from 70,000 to 100. That was obviously an extraordinary body blow for the borough, for the surrounding communities and for the city as a whole.

“I think it’s that kind of mix of activity and people and diversity that the current workforce really thrives on. It’s not sterile; it’s not isolated. It’s very engaged.”–John Grady

Over the last 15 years or so, the city and the Brooklyn Navy Yard Development Corporation, which is a 501(c)3 nonprofit that manages the Yard on behalf of the city, had been going through and making very significant reinvestments in the Yard and the basic infrastructure in the buildings.

We are now at about 7,000 people working here every day in 330 companies, and that number is set to more than double in the next five years. So we’ve really seen, over the last 50 years, the need to stabilize the facilities, just get the basic infrastructure right, get it to a place where businesses would even consider moving here.

And then, we started a process of growth, and that growth is now increasing quite dramatically.

Knowledge@Wharton: John, I’m guessing the story in Philadelphia was somewhat similar?

John Grady: It was similar, and I think the legacy is certainly similar. Philadelphia, like, Brooklyn, was a place of production and innovation; it was a place of work. It was a place, quite frankly, that many Philadelphians didn’t know much about — because there was an armed Marine Corps guard at the front gate to keep folks out of there.

Where our paths diverge a little was, when the Brooklyn Navy Yard was closed in the 1960s — the government just closed it. They just shut it down and left it there, and the folks in Brooklyn and New York had to figure out what to do with it.

The Philadelphia Naval Shipyard started a closure process during that time, in the 1960s. After the Vietnam era, work started to slow. We went from a peak of probably 50,000 or 60,000 employees during World War II down to probably 30,000 during the Vietnam era. And then, rapid disinvestment. The Navy stopped its operations in Philadelphia in the mid-1990s, and at that point, the federal government had established a more structured transition process for base closure. So we were very fortunate, in that the federal government supported our acquisition of property with environmental investigation, with planning money, with transition funds, with some infrastructure capital, so that the transition could begin to occur a little more quickly.

Interestingly, further up the Delaware River, we have the old Frankford Arsenal,

which was very much closed the way Brooklyn was. They just locked the gates one day, and 10 years later, they sold it to somebody, and it was left for that owner to figure it out.

But at the Navy Yard in Philadelphia, we acquired about 1,000 acres from the Navy in the years 2000 and 2001. Over the last 10 or 15 years, we’ve been able to see a little over $1 billion of investment. We have 165 companies that employ over 12,000 people. And the Navy continues to be a key element of what we do there. They have a little over 2,000 employees — civilian employees, particularly focused in engineering and ship systems and cybersecurity. And that reserve of employees really gave us a base to start to build from. So, when you see the Navy Yard in Philadelphia today, because of the large scale of land, because of the infrastructure we’ve been able to build, I think I agree with David: Infrastructure and preparing the site for the marketplace is the real challenge with these kinds of sites.

Knowledge@Wharton: So Dave — in terms of getting Brooklyn to where it is now, what was the thought process in terms of turning it into what could be a very important piece of the business community?

Ehrenberg: That, I think, evolved over time. Initially, in the 1960s, right after the city acquired the property, they went out and tried to find another shipbuilder who would operate the yard as a shipbuilding facility. And in fact, they secured somebody to do that, but that operation failed extremely quickly. They then went out and sought large-scale automobile manufacturers to locate in Brooklyn, really trying to recreate as closely as possible the kinds of manufacturing and industrial jobs that had been here for 150 or so years under the Navy.

When they were unable to find a car manufacturer to locate here, they took a step back, and then over the course of quite a long time pivoted to where we are now, where we have embraced much smaller-scale manufacturers and industrial companies that are tech-enabled and design-enabled, but still create the kinds of high-quality middle-class jobs that the classic manufacturing facilities like naval shipyards or car factories would have created in the past. So that’s a process that really evolved over time, and was driven by the fact that we have dedicated management on site, and a dedicated, independent board who are thinking day in and day out about these issues. There was no master plan for the Brooklyn Navy Yard; when people come to us and asked, “What’s your secret? How did you become so successful?” It’s not, “Here is our playbook, just do this and you’ll be successful.”

It’s really around having the right system, the right personnel in place who can react to the market and see opportunities when they arise and grab them.

Knowledge@Wharton: Living here in Philadelphia, my son and I have been to the Navy Yard a few times; my son’s mom used to work down at the Navy Yard. My son used to love to go down to his mom’s office and see the ships. That’s part of the allure, I think, for the people who work there now — that there still are a variety of old naval ships still there.

Grady: Yes, in Philadelphia one of the things we really focused on early was preserving a working waterfront. We have 1,000 acres of land, whereas Brooklyn is much more land-constrained. So we were able to take 400 or 500 acres of land to commit to a working waterfront.

We are still building commercial ships at the Navy Yard. The Navy still has some of its vessels in a reserve base, including big aircraft carriers. I think for a lot of people — particularly, the current generation that’s coming into the workforce — it’s a positive that the place that gets created has an appreciation for history. You’re surrounded by all this great history — we feature that history.

It’s in buildings, it’s in places. We really try to tell the story of the history. But it’s also very much in the activity. So the people who work [there] love to go down and see a giant section of ship getting wheeled down the street and put into position as part of a larger ship construction.

I think it’s that kind of mix of activity and people and diversity that the current workforce really thrives on. It’s not sterile; it’s not isolated. It’s very engaged.

Knowledge@Wharon: David, tell me if I’m wrong, but Brooklyn right now in general has been going through quite a re-development over the last few years. So part of that is also the allure of Brooklyn as a whole — and probably part of the reason why the Brooklyn Navy Yard has been successful as a business operation the last few years.

Ehrenberg: Yes, I certainly think that that’s true. We’d like to think that we also helped lead the way back for Brooklyn. But I think what you’re seeing is a lot of the same things that you’re seeing in Philadelphia, where people want to feel a connection to the place where they live and work.

“The definition of manufacturing has changed quite dramatically over the last number of years, and we believe it will change even more dramatically in the coming years.”–David Ehrenberg

And there’s a lot that goes into that: It’s the quality of the buildings on the interior, where the classic Midtown Manhattan skyscraper is still speaking to companies — and obviously it’s an extraordinarily strong office market — but there are whole classes of companies now for whom Brooklyn is not just the low-cost alternative, but in fact, the primary alternative, because they want that quality of the space, they want the bike to work opportunities. Here in the Yard, we don’t have a ship construction facility, but we have ship repair and maintenance. So we’ve got huge cranes lumbering around on rails repairing ships here.

We have the Fire Department’s Maritime Operations here, and they test the water canons every couple of days. People who have views of those absolutely love it, and it’s a feel and an aesthetic that you just can’t get in many other places in New York. I think it’s part of the real draw for the resurgent talent base that’s taking root here in Brooklyn. And on a residential basis, people are also pivoting to saying, “You know, I don’t want to work in a sterile environment where I can go to get my lunch at a chain store. I want something that feels much more authentic to Brooklyn, and that I feel a deeper connection to.”

Grady: Yes, and in Philadelphia … [the] issue is about low cost. You can’t be the low-cost provider and be successful in this business. It’s too expensive to renovate old buildings; it’s too expensive to invest in infrastructure.

I think David and his team have been a real model for us in trying to understand how you can attract market-driven solutions. The government can’t come in and subsidize all of this. One of the ways you do this is, when we first started renting space at the Navy Yard, you could get into an old officer’s house for $10 a square foot, but we would ask you to do some renovation work.

Today, you rent that same space for $25 a square foot, and it’s fully improved. And the more you increase value, the more people attribute value to that location. So the Navy Yard is driving as high a rent as any place in Philadelphia right now, because it’s bearing the cost of the construction.

If it costs $450 a square foot to build a building, you have pay $40 a square foot in rent to make it work. And I think that, in a broader sense, as cities become attractors again for talent, it’s for all the reasons that David mentioned. The ability to create that environment and to extract the value is really important.

Knowledge@Wharon: You alluded to this before: It’s just as simple as the process of taking something old and tweaking it a bit, and it becomes new. And obviously, the other part about it is, it’s not like only one sector of the business community is coming to rent space in Philadelphia or up in Brooklyn. There’s a wide range of companies that are saying, “We want to be part of that particular area.” David, you have to see that quite freely in Brooklyn.

Ehrenberg: Absolutely. We are a mission-driven not-for-profit that remains focused on industrial and manufacturing businesses in order to create the quality jobs and the accessible jobs that are synonymous with manufacturing. That said, you know, the definition of manufacturing has changed quite dramatically over the last number of years, and we believe it will change even more dramatically in the coming years. The vast majority of our companies — and certainly our fastest-growing companies — are nearly indistinguishable from design firms or technology firms, but they are also manufacturing firms. But to categorize them as simple manufacturers really ignores the reality of what is a sustainable manufacturing firm in the United States now — even with a mission-driven landlord like us, where we charge rents affordable to manufacturers, not necessarily what we could get in the open market if we were marketing the space for the “highest and best use,” in real estate parlance.

New York is still a high-cost place to do business, and that’s never going to change. So what we look for in a tenant base are companies that have a real reason to need and want to be in Brooklyn, because we think that will create a stable tenant base and — most importantly — a stable employer base here at the Yard. Companies like Crye Precision, which is one of our largest companies here — it started 15 years ago or so, very small, just two engineers from a local, very high-quality engineering school, tinkering around with engineering projects. Now, it has become one of the largest providers of high-tech body armor to the Department of Defense and the country, and produces the only print of camouflage used in Iraq and Afghanistan. If you go into their space, they have technologists, they have designers, they have a whole suite of folks doing things that, given the sensitive nature of what they are doing, they can’t even describe to us.

Then, you turn the corner, and they are bending the metal for the body armor, and they’re sewing the camouflage. That, in one company, encapsulates the ecosystem that we have here at the Yard, and that we think is critically important.

I say all the time: Nobody lives and works in Brooklyn or in Philadelphia to be surrounded by companies just like them. You can find much cheaper, much more sterile environments elsewhere that will check that box. What makes New York and Philadelphia the economic drivers that they are is that diversity, is the bumping into companies who you didn’t know what they did — and five years later, you’ve got the next great thing in whatever industry you’re in.

We’re trying to re-create that by curating an interesting, compelling group of tenants here. And just given the talent base in Brooklyn and the resurgence of Brooklyn, we’ve been able to do that in spades. We have robotics companies with systems on every Mars rover since 2003, and large-scale manufacturers that want to be part of that ecosystem because they want to be able to partner with those high-tech companies, as well.

“Our model, because we have the scale of real estate to do it, is to create a mini vibrant city, and to create an option that Philadelphia didn’t have before.”–John Grady

Grady: I do think talent is the driver. The Navy Yards of our fathers and grandfathers that were based on high-volume, low-cost labor — that model has left. It left a long time ago. What remains are companies that really value the contributions of talent. Talent is not a low-cost input; it’s now a high-cost input. It’s combined with technology so that it’s more productive. And in Philadelphia, we’ve tried to create a place that has diversity, and that allows a diversity of uses to access talent from the broadest possible range. So when we initiated redevelopment back in the late 1990s, our first major task was repurposing the shipbuilding component. And the city and the state and the federal government got behind that. The Aker Shipyards there have produced a billion dollars’ worth of ships; they’re a technology operation. They are thinking about ship design. They’re thinking about material science; they’re thinking about the efficiency of production. And as a result, they can be 10 times as productive as the Navy was at building ships. They are building ships — two ships a year on average at this point.

Across our shipyard, we’ve made a commitment that it would remain a place of work. In the early days, there was a lot of anxiety. The economy was terrible. The city was on the edge of bankruptcy. There was not a lot of clarity about, “What are we going to do with this 1,000 acres that sits at the edge of the city?”

Our focus was always [this]: Let’s focus on work; let’s think about market-based investment. How do we attract investment to this property? And we now have this campus that has heavy manufacturing, light industrial technology, it has universities and medical centers, hotels and parks and open spaces. Our model, because we have the scale of real estate to do it, is to create a mini vibrant city, and to create an option that Philadelphia didn’t have before. If you want to be in a high-rise-dense environment, we have one of the best downtowns in the country.

If you want to be in a campus-like environment with more flexible building forms and a different kind of environment in terms of collaboration, the Navy Yard has emerged as that alternative to the more traditional suburban industrial park that has become a bit passé.

Knowledge@Wharon: David, I’m sure you have a lot of great companies up there in Brooklyn, but John has you one-upped — at least in my mind — with one specific company that he has in his Navy Yard, and it’s Tastykake. People love Tastykake.

Ehrenberg: Yes, sure…. We’re launching a food manufacturing facility here at the yard, which we’ll deliver in the next year and a half, so maybe we can have this conversation again later, and we’ll see who wins.

Grady: But you know, the reference to Tastykake is important. Because again, for people in this regional market, that’s a brand name that people know…. We saved that company by building a modern facility that had technology and consolidation and efficiency to it. You know, I’m a very popular man when I take somebody on the tour of the Tasty Baking factory and they get a box of freshly made Krimpets or a pie on the way out.

Knowledge@Wharon: I was going to say: Do you get a supply every month coming over to your office from them?

Grady: [Laughs] I don’t want to disclose anything that might be viewed as, you know, unethical.

Knowledge@Wharon: All right, all right. Let me ask you this, David: You’re talking about facilities that are obviously older and have been revamped. But one of the big areas that a lot of people talk about is sustainability and conservation and just being aware of the atmosphere that you’re around. How does Brooklyn address those factors?

Ehrenberg: We are very focused on that, partially in order to be as good a neighbor as we possibly can to our local community, but also because our tenants are very focused themselves on being sustainable businesses…. They want to be able to tell a story about their operations and their landlords’ operations that their customers will value.

[To address that], we have the largest soil-based rooftop farm in the country on one of our buildings, which diverts about a million gallons of rainwater a year. New York has a combined sewer system, which means when there are heavy rains, the rainwater flows through the sewers and sometimes leads to bad things happening in the rivers around the city. We’re able to divert a huge amount of rainwater from that.

We are exploring solar installations on many of our buildings. Our fleet of buses and shuttles exceed all of the required standards. More importantly, we think that repurposing existing buildings is the biggest thing we can do to be sustainable — taking the wider definition of sustainability, both in terms of environmental sustainability and historic sustainability.

Grady: Yes, I agree with that. And I think in Philadelphia and in other places, sustainability has moved from an advocacy or a buzzword to something that the marketplace has really adopted as a core value. The workforce definitely associates with it; companies want to be in an environment that’s respectful of natural resources and the natural environment around them. We see that as an attractor to the Navy Yard, because we’ve made a really strong statement around how we operate, because we control the site, and we manage the operations. Every building since we’ve been building down there has been LEED certified, most of the buildings are platinum; some of them are double platinum. People are trying to outdo each other with technology now.

“Nobody lives and works in Brooklyn or in Philadelphia to be surrounded by companies just like them. You can find much cheaper, much more sterile environments elsewhere that will check that box.”–David Ehrenberg

We’ve used energy efficiency as a way to attract business. We’re partners with Penn State University and a group of other institutions and private companies, and something called the Consortium for Building Energy Innovation. It’s basically the federal government’s national research lab around innovation and building energy. We operate a really sustainable set of infrastructure around our roads and our storm water. We are kind of the R&D arm for our city’s water department now — they come down and they try out new technologies on our streets.

It’s a way for them to test things to scale. And our biggest commitment has been that we own and operate the electric distribution grid at the Navy Yard. So back when the Navy was the sole tenant across this property, it bought power and distributed it to their in-house uses.

When we took over the site, we were faced with this issue: How do we provide power? Because there was infrastructure set up for this central system. So we actually got into the power business. We’re an unregulated public utility, and we purchase power for all of our tenants. We probably purchase about 25 megawatts of power now — we’re a large consumer. We’ve really committed to making the purchase and distribution of power onsite smart and sustainable, so we’re investing in smart meters, we’re investing in technology, we’re investing in demand-reduction opportunities for our businesses. We’re partnering with companies like PECO, which has been a huge supporter of new technology, and the Philadelphia Electric Company. Exelon’s parent company, [DTE Energy Electric Company], is a partner of ours. Alstom, which is a big international company, just moved their North American grid research center to Philadelphia. We’re finalizing a solar grid development onsite [and] we’re doing battery storage onsite, so we’re really trying to create and infrastructure that works smartly and sustainably. That infrastructure acts as part of the value that attracts clients to the site. People really want to know, “Where’s my power coming from? Can I promote to my employees that we are doing everything we can to be part of a sustainable solution?” So it works at a lot of levels.

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