Downtown Rising: Once Down, Leasing Up Again in Lower Manhattan Offices

By Stephen Kleege Commercial Observer

Downtown

Downtown Manhattan Skyline

After Hurricane Sandy wreaked havoc on lower Manhattan, owners doubled down with multimillion-dollar infrastructure investments. In the first three months of 2013, 10 major tenants have responded with renewed confidence and—even better—signed leasing agreements. The story so far.

After the storm, things are looking brighter for the lower Manhattan real estate market.

Even with construction scaffolds clogging the district’s narrow streets in a reminder of Hurricane Sandy’s devastation, Downtown office leasing activity jumped 73 percent in the first two months of the year, according to Cushman & Wakefield.

The firm’s data shows a spike in larger transactions, with leases on spaces 50,000 square feet or larger increasing to seven, from two a year earlier. That’s a sign that the market has “momentum,” just when as much as five million square feet of World Trade Center space is about to added to the inventory, said Jonathan Mazur, C&W’s director of research.Technology-oriented companies such as GFK Market Research and WeWork are moving into the area south of Canal Street as rents rise and vacancies dwindle in Midtown South, the city’s burgeoning tech center. Brokers say the newcomers, led by bigger creative companies like Condé Nast and Harper Collins, are attracted not only by cheaper rents but also by the convenience and excitement that will come with the opening of the transportation hub, restaurants and retail outlets at the new World Trade Center. Developer Larry Silverstein, president and chief executive officer of Silverstein Properties, predicted that the project will have a “far greater” impact than Rockefeller Center had on Midtown in the 1930s.

The Durst Organization, which oversees the construction, leasing and management of 1 World Trade Center, and Silverstein, which controls four other towers in the complex, report strong interest from prospective tenants touring their properties, as does Brookfield Office Properties, currently the biggest Downtown landlord. Mr. Silverstein said that 4 World Trade Center, scheduled to open this year, is about 50 percent leased and that he is negotiating deals that will be sufficient to trigger financing for the completion of towers 2 and 3 under an agreement with the Port Authority of New York and New Jersey.

“As the economy has gotten stronger, we’ve had a steady stream since [the] first of the year,” Robert Becker, Durst’s senior leasing manager, said of the groups checking out 1 World Trade Center, which is 55 percent leased and scheduled to open next year. “We’re very happy,” he said. “We’re expecting to have a busy 2013.”

Seven of the top 10 Downtown leases so far this year were either relocations from Midtown or Midtown South or expansions by tenants migrating to the market, according to Jones Lang LaSalle. Publisher HarperCollins’s lease on about 180,000 square feet at 195 Broadway and GfK’s deal on 75,000 square feet at 200 Liberty Street were the biggest relocations, while collaborative work space provider WeWork’s 120,000 square feet at 222 Broadway was the largest “new location,” JLL found.

GfK is moving from Chelsea Market, and it considered spaces in Midtown and Midtown South before choosing Brookfield’s complex west of the World Trade Center, said John Wheeler, managing director at JLL, who represented the landlord. Brookfield is in the midst of a $250 million renovation of the complex, lining up restaurants for waterfront space on the Hudson River and changing its name from World Financial Center to Brookfield Place.

Condé Nast, which spurred interest in the Downtown market in 2011 when it agreed to lease more than one million square feet in 1 World Trade Center, is in final negotiations to lease an additional 80,000 square feet at 222 Broadway.

Hurricane concerns have started to fade as prospective tenants take heart from landlords’ investments in infrastructure, such as moving vulnerable electrical systems out of basements and adding flood barriers. With Verizon now switching all of lower Manhattan to fiber from copper, the area will be the “most technically advanced of any market” in New York, said Hal Stein, managing principal of Newmark Grubb Knight Frank.

“Storms come and they go,” said Mr. Silverstein, whose building at 120 Wall Street was among those temporarily put out of service by the storm. “What you do is you learn to protect yourself, protect your building, so when the next storm comes you won’t have any outages. That’s what we expect.”

At the Trade Center, he said, millions of gallons of water flowed into the open pit at the construction site during the storm. “We were able to pump it out and get it going,” he said. Once the site is fully enclosed and construction completed, it will be 15 feet above sea level, he said. “That should be more than enough to cover any eventuality.” Still, the aftereffects of the storm linger.

Over the past few months, Durst has been re-engineering the mechanical systems and rebuilding retail spaces on Front Street, one block from the East River, which were swamped by seven feet of water. Two of the retail tenants in the 200-year-old buildings are leaving, but Durst is optimistic that the majority of the 13 businesses will return, officials said.

Meanwhile, at 1 New York Plaza, where the office space was reoccupied four weeks after the hurricane, Brookfield is negotiating with new retail tenants for its below-grade space after refurbishing the area and moving electrical systems to the second floor, out of harm’s way. The building also has Brookfield’s only sizable Downtown office vacancy, a 400,000-square-foot space on the upper floors, said David Cheikin, vice president of leasing.

While waterfront landlords’ investments in capital improvements have added to prospective tenants’ “comfort levels,” hurricane concerns are still “a factor in lease negotiations,” said Wes Rudes, senior vice president at Cresa, a real estate tenant advisory firm. The concerns are also likely to come up again when the time comes to renew the leases of companies that were forced out of their offices for as long as three months, he said.

So far, financial firms, traditionally the backbone of the New York office market, are conspicuous in their absence from the current spate of leasing deals.

Of the eight companies currently trawling the Downtown market for offices of a quarter-million square feet or more, none are financial companies, said Robert Constable, executive director of C&W.

Mr. Cheikin said that is likely to change as the financial sector regains confidence in the economy.

“They are the largest occupier of space in the city,” he said. “They’re always going to part of the fabric of New York. I have every confidence they are going to go back into growth mode.”

The leasing activity has driven average rents in the neighborhood up about 8.5 percent from their mid-2010 low, to $40.27 a square foot. That compares with $51.12 in Midtown South and $67.28 in Midtown, according to C&W data. The Downtown vacancy rate has declined to 8 percent, from more than 12 percent in September 2010. The vacancy rate is 6.8 percent in Midtown South and 10.2 percent in Midtown.

The figures don’t count the space that’s about to be added to the Downtown market, including World Trade Center space and offices at Brookfield Place, where Merrill Lynch’s lease will roll over in October. Adding that much space to the current market will bring the vacancy level to as much as 18 percent, Mr. Mazur said. As the state-of-the-art offices at the Trade Center come onto the market, Downtown may well be in the unusual position of having a rising vacancy rate coupled with an increase in average rents, he said.

Landlords are confident that the neighborhood is positioned to thrive in a way that wasn’t possible decades ago, when upwardly mobile professionals aspired to live in Westchester County or Connecticut and would enter the city by way of Grand Central Terminal. Today those workers have shifted their sights to waterfront areas in Brooklyn and New Jersey—and to Tribeca and other growing Downtown neighborhoods. With the opening of the transportation hubs linking about a dozen New York subway and New Jersey PATH trains, Downtown offices will be a short trip from where most workers want to live—and stands to be more attractive to companies seeking office space as a result.

Brokers and landlords say they expect the expanding retail and restaurant offerings at the Trade Center and Brookfield Place to enhance the appeal of the neighborhood.

“We’re changing the whole nature and use of lower Manhattan,” Mr. Cheikin said.

Mr. Silverstein’s 30 Park Place hotel and condominium development is also getting back on track, he said, thanks to rising demand for hotel rooms and rising luxury condo prices. The project is more compelling today than when it was first conceived in 2007, he said, adding that he expects financing to be completed soon and construction to begin this year.

Downtown rents have traditionally trailed those for uptown space by about 30 percent, a gap that could narrow with the opening of the Trade Center towers.

“It’s my belief, certainly at the Trade Center, [that] the Downtown discount is going to close very swiftly; it’s just a question of time,” said Mr. Silverstein, who has endured bureaucratic delays, the financial crisis—and now a hurricane—as he fought to rebuild the World Trade Center after the 9/11 terrorist attack in 2001. “When I look back, I realize where we were, what we had to do to get the process going, and where we are today, [and] I am nothing short of amazed.”

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