NY Times
February 28, 2007
Square Feet
Lower Manhattan: A Relative Bargain but Filling Up Fast
By TERRY PRISTIN
It was not long ago that prospects for Lower Manhattan seemed so dire that many people predicted it would not survive as a financial center. Within days — even hours — of the destruction of the World Trade Center, a number of companies with offices in Lower Manhattan were searching for space in Midtown or outside the city.
Today, however, space is so tight in Lower Manhattan that the vacancy rate for prime buildings is only 5.1 percent, lower than in any other market but the Seattle suburb of Bellevue, said Steven E. Coutts, a senior vice president at Studley, a company that specializes in tenant representation.
Of course, the 89.5-million-square-foot office market below Chambers Street is 20.3 million square feet smaller than it was before the terrorist attacks — both because of the destruction of the World Trade Center and the conversion of 59 older office buildings into condominiums since 2002.
But the conversion trend appears to have run its course, one of many signs that the downtown office market has bounced back. A total of 5.6 million square feet were leased last year, a 64 percent increase from 2005, according to Cushman & Wakefield. The decline in the overall vacancy rate — from 10.6 percent to 8.4 percent — was more pronounced than it was in Midtown, where the vacancy rate fell to 6.4 percent from 7.8 percent during the period.
Yesterday, another new lease was signed downtown, as Legg Mason, a financial company, agreed to occupy 97,000 square feet at 55 Water St., according to a spokesman for CB Richard Ellis, which represented the building and the tenant.
In the largest lease signed during the last year, Moody’s Investors Service took 589,000 square feet at 7 World Trade Center, the first new office tower in Lower Manhattan in 20 years. The company is about to take two more floors, said John M. Cefaly, the Cushman vice chairman who represents Moody’s. “Their business has grown,” he said. “They went back and reassessed their head counts.”
JPMorgan Chase is negotiating with the Port Authority of New York and New Jersey to build a 1.6-million-square-foot tower on the site on Liberty Street where the long-awaited demolition of the heavily damaged Deutsche Bank is finally under way. The site had been intended for a residential building.
Average annual rents in Lower Manhattan have been climbing steadily but are still cheaper than in 2000 — $41.36 a square foot compared with $43.24, Mr. Coutts said. At 7 World Trade Center, Larry A. Silverstein, the developer, is asking $70 a square foot for the top floors.
Mr. Silverstein had leased those floors to Beijing Vantone, a Chinese real estate company, but the agreement collapsed after the tenant could not produce a letter of credit.
Last month, Beijing Vantone agreed to lease the top three floors of 195 Broadway, a 28-story landmark in Lower Manhattan that once served as the headquarters of the American Telephone and Telegraph Company. But again, the deal fell apart over a missing letter of credit.
“Although we’re disappointed, we’re not concerned because the market is very robust, as robust as I’ve seen in 25 years,” said David W. Levinson, the chief executive of L&L Holding Company, the owner of 195 Broadway.
Several factors have combined to enhance downtown’s appeal. Office rents are a bargain compared with the red-hot Midtown market, where the average annual rent is about $57 a square foot. The political wrangling over the rebuilding of the World Trade Center site is over, and work on the site is under way. The World Trade Center transit hub and the new Fulton Street Transit Center are closer to completion. The residential population has grown by 16,000 since the terrorist attacks, to 39,000, according to the Downtown Alliance, a business group, making the neighborhood more inviting after dark.
“A lot of critical factors have fallen into place,” said Sheldon L. Cohen, a senior managing director of CB Richard Ellis. “The political will has coalesced.” Though some companies like Lehman Brothers and Bank of America that lost or gave up space downtown because of the attacks have found permanent homes in Midtown, many tenants have returned. Aon, for example, was able to sublease the space it took at 55 East 52nd Street at a profit, and it signed a new lease for more than 221,000 square feet at 199 Water St.
But most of the downtown space is being leased to companies like Moody’s that never left the neighborhood, with only about 15 percent going to tenants that are moving from Midtown, Mr. Coutts said.
Among those is ABN Amro, a Dutch financial services company, which was able to find another tenant for its costly offices at Park Avenue Plaza on East 52nd Street. The company took nearly 139,000 square feet at 7 World Trade Center for about $59 a square foot.
At the World Financial Center, where occupancy fell to 65 percent after the attacks, the four buildings are almost fully leased, said Richard B. Clark, chief executive of Brookfield Properties, which owns the eight-million-square-foot complex.
That could change if Merrill Lynch relocates when its lease expires in 2013. The company has been looking at other sites, including the complex Brookfield is building on Ninth Avenue between 31st and 33rd Streets and the buildings being developed by Mr. Silverstein on the World Trade Center site. The company wants to create trading floors and is angling for subsidies. A rival, Goldman Sachs, got $1.65 billion in tax-free bonds and more than $115 million in other incentives for the new tower it is building on West Street.
“Merrill will take into account all economic factors in making a decision,” said the company’s broker, Peter Riguardi, president of the New York region for Jones Lang LaSalle. “If benefits are available, that would be part of their decision-making process.” He said a decision was likely this summer.
Lower Manhattan has a more diverse roster of tenants than it used to, including architects, engineering firms and law firms, said Eric Deutsch, president of the Downtown Alliance. Still, “whatever the city and state can do to keep anchor tenants downtown would be enormously helpful,” he said. “Companies like Merrill Lynch represent a huge part of the fabric of downtown.”
But city and state officials say that the Goldman Sachs deal would not serve as a model for other corporate tenants. “This is not the time to ask for huge subsidies,” said Avi Schick, the president of the Empire State Development Corporation, the state’s development arm.
Then, too, there is the question of what will happen to the market when Mr. Silverstein’s new buildings are completed in 2011 and 2012, adding 6.2 million square feet.
“If we continue at the pace we’re going, the market will absolutely need it,” said Mr. Clark of Brookfield.
At the same time, many real estate specialists say the 2.6-million-square-foot Freedom Tower, also on the World Trade Center site is a mistake, though most are not willing to say so publicly. Among the few willing to speak out are the developers Douglas Durst and Anthony E. Malkin. They recently ran ads in New York newspapers calling the tower “the legacy of poor planning and decision-making by the Pataki administration” with a design that is “too expensive to build and cumbersome for tenants.”
“We respectfully propose rethinking these plans,” they said.
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