It would be understandable if lower Manhattan simply up and quit. Its status as the center of the financial world and corporate America itself has been on the wane for half a century. Then it was hit with 9/11, a credit crisis that laid Wall Street flat, and a long, brutal recession.
Finally, the real estate market at the southern tip of the island is showing signs of exhaustion. The office vacancy rate has increased to 8.1 percent from 7.7 percent at the end of last year, according to CBRE-Econometic Advisors. As 4.4 million square feet of new office space associated with the rebuilding of the World Trade Center site come on line in 2013, the vacancy rate in the city's oldest neighborhood could hit 14 percent, according to Robert McGrath of CBRE.
The surprising thing is, the experts view the coming dip as just one more cycle in the up-and-down history of the area. They are continuing to plan and to build, so that they can be ready for the next leg up, which they expect to occur in a few years. Kenneth McCarthy, head of Cushman & Wakefield’s New York research unit, stresses that the “important thing to remember is that downtown is still a vital market that will once again become, one of the best markets in the United States.”
Why the optimism? Part of it is timing. When examining the downtown market, McCarthy says it is important to understand that it almost always lags Midtown. Downtown doesn’t begin to see significant pressure on vacancy, which in turn puts downward pressure on rents, until after the same turn has occurred in Midtown. Right now, he says that that there’s an emerging consensus among real estate players that Midtown has probably reached its bottom.
Downtown still has a ways to go before beginning any semblance of a climb back up.
“I think we’re going to come off (rents) a bit more, “said McCarthy. He noted that as of February 2010, asking rents downtown averaged around $39.43 per square foot. That’s down 22 percent from a peak of $50.89 in Sept 2008.
Commanding much of the attention downtown: the years-long dispute between World Trade Center developers Silverstein Properties and the land owners at Ground Zero, the Port Authority of New York and New Jersey. But, with the latest arbitration agreement, much appears to have changed. In 2013, the Port Authority’s One World Trade Center will add 2.6 million square feet of new space to the downtown market, while Silverstein’s second tower will add 1.8 million. As part of the agreement, a third building could be built if Silverstein raises $300 million in capital and rents around 20 percent of the available space.
Silverstein president Janno Lieber adds that there are a number of other reasons why developers are bullish on Downtown. For one, he points out that despite a soured economy, Downtown has the lowest vacancy of any commercial business district in the nation. The national average is 16.3 percent. The vacancy rate in Midtown is currently 10.5 percent.
The neighborhood also benefits from a wide variety of stock. Over 65 percent of Manhattan’s office stock is 50 years old or more. And, since downtown was the principal business district in Manhattan until the years of the Great Depression, its stock of older buildings is disproportionately higher.
And as a result of 9/11, the area lost 14 million square feet of class A office space. The new office space that is being built and the vintage buildings in the area serve different markets. loss of 14 million SF of new class A office space downtown. As Leiber says, “Companies that are willing to relocate into a 60 or 70 year old building, are not the same firms that will sign a lease at the new World Trade Center site.”
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