Downtown real estate activity is building up an encouraging head of steam as companies lease office space and people buy into condo conversions, but a handful of buildings remain on the sidelines as their owners try to figure out which way the market will go.
In a reversal of the trend in which office buildings convert to condos, the owners of 75 Wall Street, 95 Wall Street and Financial Square at 32 Old Slip are considering offers for commercial usage after announcing plans to turn their buildings into condos. Thank the improving pace of the commercial market for the change of heart.
Brad Gerla, senior vice president at CB Richard Ellis, said 75 Wall Street was “basically bought over two years ago with the intention to convert to residential or possibly a hotel.” Hakimian Management Corp. and Peykar Brothers Realty, which bought the building jointly, are now considering other options. “Because of the strong market commercially over the past six months, there has been a change in terms of the owners’ mentalities,” Gerla said.
As residential real estate boomed while investors fled stocks and buyers enjoyed low interest rates, residential buildings sold for double the price of an office building, and Downtown lost a significant amount of space to residential conversions.
Approximately 25 buildings were slated for conversions post-September 11 — about 24 percent of Downtown office space inventory. The conversions helped to reduce commercial vacancy rates in Downtown, which peaked at 13.7 percent in 2004, after a sharp rise following the terror attacks of 2001.
“Back then, the market made sense for apartments, but apartment growth has slowed down and commercial rents have increased,” said Andy Peretz, executive director at Cushman & Wakefield. “Building owners have to consider returns and risks to make their decision.”
A flurry of office leasing dominates the Downtown market. According to Cushman & Wakefield, over 2.7 million square feet of office space was leased during the third quarter of 2006, the largest single quarter of activity since 1998. Overall third-quarter vacancy in Downtown dropped to 9.1 percent, an improvement from 11.2 percent during the second quarter. It’s projected to soon meet or surpass the 6.4 percent vacancy rate before the terrorist attacks. Corporate demand also fueled a steady increase in average Downtown asking rents, now at $36.18 per square foot.
Some Downtown buildings, in fact, are getting record lease rates per square foot — an incentive that will keep owners leaning toward the office market for now.
“When you have an office building, you keep it and collect rents and make cash flow,” Gerla said. “When you vacate your building and sell it as a conversion, you make one big profitable hit. It’s a different mentality.”
At 75 Wall Street, Gerla says the building is being shown for commercial usage.
“They haven’t made a decision yet; they had plans to make one-third hotel and two-thirds residential,” Gerla said. “They are putting feelers out in the commercial market, but it would have to be a lease for 200,000 to 300,000 square feet in terms of size for the owners to be convinced to stay commercial.”
95 Wall Street, the building owned by the Moinian Group, is in the same position. Moinian is rumored to be working on a single-tenant deal for 500,000 square feet. Representatives for Moinian said no commercial deals have been signed.
“If they capture a big tenant, then it’s a no-brainer,” said Eric Anton, principal at Eastern Consolidated. “But if they go residential, it’s a big risk, it’s a two- or three-year project, and who knows where the market will be then.”
At Financial Square, the owners considered a residential conversion as a higher and better use of the building, says Peretz. “But from the pricing standpoint, it was better to keep it as an office building financially,” he said.
Financial Square is managed by the Paramount Group, which tried to include five-year termination clauses in recent commercial contracts to keep the option open for conversions, but tenants refused to sign, brokers said.
Financial Square, completed in 1987, more recently than 75 Wall Street and 95 Wall Street, attracts commercial tenants because it’s better suited to current information technology needs, and can thus command higher asking rents than the other buildings.
The Downtown market is reaching a point of equilibrium, says Peretz. “But it may be leaning toward a landlord’s market in the Downtown area soon. Every single landlord has raised rents — some even twice a month.” Downtown office owners have had a bullish attitude this year toward the market, with asking rents going up as much as 20 percent since the beginning of the year.
Whether 75 Wall Street, 95 Wall Street or Financial Square decide to enter the office market, Peretz says it won’t add much to the Downtown office space inventory.
These buildings would enter the commercial market only with a massive anchor tenant, which would, of course, take a large portion of the space.
“The only way these buildings will go commercial is if the demand supports it and prices make sense,” Peretz said.