State Sen. Daniel Squadron has criticized the FDIC’s decision to leave its home at 20 Exchange Place for the Empire State Building.Resilient. That’s the word for Lower Manhattan’s commercial real estate market for the past 12 months. In the aftermath of the greatest financial meltdown in recent history, Lower Manhattan boasts the lowest vacancy rate of any market in the city at 7.3 percent, according to CB Richard Ellis data for November. Midtown and Midtown South had rates of 10.2 percent and 9.8 percent, respectively, in the same month.
Sounds like good news, right?
Not so fast. There’s a looming cloud.
“In many instances it is always calm before the storm,” said Hal Stein, who heads up Newmark Knight Frank’s Downtown office. “Here is the issue: [In 2010] there is going to be substantial space hitting the market from some of the financial firms and that is going to be a telltale sign.”
While Stein remains optimistic that the Downtown market can hold the line, “substantial” may be an understatement.
When Goldman Sachs fully transitions into its new 43-story tower at West and Vesey streets this year, the financial giant will be unloading an estimated 2 million square feet of space at 85 Broad Street and a few other Downtown satellite offices. Merrill Lynch occupies over 2.6 million square feet of space at 4 World Financial Center and, according to news reports, the firm is considering abandoning Lower Manhattan for a new 3 million-square-foot tower on Seventh Avenue. There is, however, speculation that its plans may have changed because of the recession, according to a number of brokers. Calls and e-mails to Merrill Lynch seeking comment were not returned. In addition, the Freedom Tower will ultimately add 2.6 million square feet of office space to the Lower Manhattan market when it comes online in 2013.
“I think it is going to get worse rather than better,” said William Montana, managing director at Studley. “But that being said, it is a market that is divided into big blocks and smaller spaces and so if you are a large user, it is your playground down there. There will be many opportunities to get space affordably.”
According to a recent report by CBRE, for the 12-month period ending on Oct. 1, the price per square foot for Lower Manhattan office space dropped 30 percent, to $43.
There are other challenges for Lower Manhattan, too: stalled development projects, continued uncertainty in the financial sector, seemingly endless construction at the World Trade Center site and discounted deals being offered in Midtown.
Barbara Byrne Denham, chief economist for Eastern Consolidated, outlined a number of these challenges in a recent report.
“The gap between average Midtown and Downtown [rents] is now less than $10 and there are a lot of forces moving in the wrong direction,” she said in an interview. “There is just still the sense that we haven’t hit the bottom in the office market yet, and there are so many opportunities in Midtown.”
The next slap in the face will occur in the first quarter of this year, when government insurer FDIC leaves its home at 20 Exchange Place and heads uptown to the Empire State Building. The FDIC’s decision angered politicians, who accused the agency of betraying Lower Manhattan, which has been rebuilding itself since 2001.
State Senator Daniel Squadron said the FDIC didn’t read the market correctly: “If they had been responsive to the market they would have stayed because there is better value here.” But Squadron said there are bigger, overarching concerns for Lower Manhattan. “My concern is that we have all of this space and the economy isn’t ready to grow into it,” he said.
Still, brokers were quick to highlight a number of renewed leases in recent weeks. Depository Trust & Clearing Corp. renewed its 750,000-square-foot lease at 55 Water Street even after an aggressive courtship by New Jersey officials. The law firm Herzfeld Rubin opted to stay Downtown, moving from 40 Wall Street to 125 Broad, and the law firm Stroock & Stroock & Lavan is said to be close to renewing its lease on Maiden Lane. Also, in September, Country-Wide Insurance Company signed a long-term renewal for 109,000 square feet at 40 Wall Street.
Andrew Peretz, the Downtown executive director for Cushman & Wakefield, sees a tremendous amount of activity on the tenant representative side.
“People are staying and re-upping, and that is a vote of confidence even though all signs are pointing to bad times ahead. Are we in the go-go years? No. Am I trying to put a good spin on it? Possibly. But it could be a lot worse.”
