World Trade Center landlord Larry Silverstein has been a thorn in the city’s side in the years since the landmark towers were destroyed in the 2001 terrorist attacks.
For commercial real estate brokers, however, his role in Lower Manhattan has been more practical than political, redefined most recently by the massive addition of office space at 7 World Trade Center.
Silverstein’s space came on the market in January after years of anticipation, and its 1.7 million square feet of office space are rich in symbolic and pragmatic hopes for a Downtown revival, despite skepticism toward his asking rents, which are about 40 percent above the area average. In a Downtown office market of 90 million square feet of space, the 1.7 million-square-foot building — which had approximately 1.6 million square feet of space still unoccupied in January — is a drop in the bucket, brokers say.
“Adding 1.7 million feet of space is not that dramatic of an increase in overall inventory,” said Andy Peretz, the Downtown executive director for commercial brokerage Cushman & Wakefield who has worked in the submarket for almost two decades. “That being said, this space is spectacular. It is probably the finest or one of the finest buildings right now on the island of Manhattan.”
Silverstein is charging accordingly, asking anywhere from $50 to $60 a square foot to lease the space, according to brokerage Colliers ABR. That price may seem outlandish in a Downtown market where the best space typically rents in the high $30s or low $40s a foot, but it is not, Peretz said.
Though most analysts might expect average rents to fall in a market where a large chunk of space has been introduced, Silverstein may get his lofty asking rents, brokers say, especially if the Midtown market continues to thrive. Rent for class A space Downtown averaged $35.02 a square foot in the fourth quarter of 2005, according to Cushman & Wakefield, nearly $20 a square foot less than the $54.41 average in Midtown.
“I don’t see 7 World Trade Center dropping its rents particularly,” said Marcus Rayner, principal at Cresa Partners, a commercial brokerage that specializes in tenant representation. “I’m not sure there’s any need. They offer a product that’s very difficult to match in the market.”
Joseph Jerome of JEMB Realty Corporation, which owns two buildings with high-quality class B space at 150 Broadway and 75 Broad Street, agreed that Silverstein’s property is unique. Jerome, who has been in the Downtown market more than two decades, said he has seen the submarket swing from availability rates in the single digits before the terrorist attacks of 2001 to being largely abandoned by business interests afterward. Then there’s the current state of the market, which he calls a partial rejuvenation with a fairly stable availability rate.
“I think Silverstein’s going to lease that space,” Jerome said. “The scarcity of space in Midtown will cause the bigger tenants to come Downtown.”
The numbers would seem to indicate that Silverstein’s space is already being absorbed into a reviving Downtown market. Despite the entry of the 52-story tower into the market in January, the vacancy rate for class A space at the end of February was 11.1 percent, which was still lower than the 13.2 percent figure of one year ago, said Robert Sammons, director of research at Colliers ABR.
“Considering this huge block of space hitting the market in Lower Manhattan, having an 11.1 percent vacancy rate for class A space isn’t so bad,” Sammons said. “We need some space available, because we don’t want the price to go through the roof too fast, or we’ll start running people out of town.”
The Downtown market is waiting expectantly for a high-profile corporate tenant — or maybe more than one — to arrive on the scene. Silverstein’s asking rents, at an average of $54 a foot, are high, but work out to be quite reasonable when government incentives and developer concessions are factored in, whittling them down by $7 to $10 a foot, brokers say.
“Granted, he’s the highest Downtown,” Sammons said. “I can’t read his mind, but I’m sure that part of what he’s banking on is there’s very little space in Midtown available.”
There are no new office development projects slated for anywhere in Manhattan to become available within the next two years, Sammons said. New office buildings being done by the New York Times Company and Equity Office Properties will not be completed before late 2007, he said.
“As far as any big block of space ready to go, [Silverstein] is really just about the only game in town right now,” Sammons said. “Along with that, there are quite a number of tenants in the market — law firms and financial service firms. I’m sure he’s thinking he’s going to land one of those guys as an anchor tenant, which is not that far-fetched, because, really, we are running quickly out of big blocks of space.”
A report issued by commercial brokerage CB Richard Ellis in March predicted Manhattan vacancy rates will fall below 5 percent by 2008 and below 3 percent in 2009, while asking rents could soar to $90 a square foot by the end of the decade.
“If that’s the case, if rents double in Midtown, then those firms looking for some value will really think that Downtown and Mr. Silverstein’s rents are a bargain,” Rayner said.
While commercial real estate brokers were generally optimistic about 7 World Trade Center’s prospects, several pointed out that Midtown South has become a particularly vibrant market in Manhattan — and a serious competitor to Downtown. “Midtown South is the healthiest of our three submarkets right now,” Peretz said. “People go to Midtown South because it’s cool; people go to the Financial District because it’s cheap. You don’t have people moving Downtown because it’s cool.”
Rayner said Google’s move to Chelsea instead of Lower Manhattan was a blow. “The law firms have resisted moving Downtown, and we haven’t yet seen a technology company that’s big enough willing to make that move,” he said. “Google would have been a great potential tenant for 7 World Trade Center, but they chose to go to Chelsea. So that represented an opportunity for the technology industry to establish itself Downtown, and they didn’t do it.”
Most experts agree that development of a Downtown transportation hub will be key to the submarket’s future development. Jerome said that there may be upward pressure on asking rents Downtown since the class A spaces that were being subleased at highly competitive rates by various companies that shrunk after September 11, 2001, are largely gone.
“Really, the bulk of that space was in the World Financial Center, and that’s pretty much leased,” Jerome said.
But as to how the grand opening of 7 World Trade Center, now scheduled for May, will affect further development of office projects Downtown, such as the Freedom Tower, the jury is still out, experts say.
“That seems to be a protracted process,” Jerome said. “I don’t think anybody’s going into the ground until we see a substantial lease-up of 7 World Trade Center. I don’t think you could finance it.”