Lower Manhattan's commercial real estate market is thriving nearly six years after the 9/11 attacks. What's fueling this rebound are a growing number of businesses and residents who see the allure of an area that's undergoing a $20 billion upgrade.
Office tenants are fleeing average Midtown rents of $75 per sq. ft. for cheaper rents of $45 per sq. ft. downtown. The migration helped drive down the Class-A vacancy rate to a tight 6.3% in the first quarter, reports Cushman & Wakefield.
Effective rents for Class-A space rose by 33% to $45.02 per sq. ft. in 2006, reports the Alliance for Downtown New York, a Business Improvement District. Downtown office buildings also recorded 4.3 million sq. ft. of absorption during the year — nearly four times the 1.1 million sq. ft. of absorption in 2005.
The residential and retail markets also are flourishing despite an apartment inventory that has grown by 8% since the end of 2004. Apartment vacancy has remained tight — 3% through the end of March, reports Manhattan-based real estate research firm Reis. Low vacancy coupled with a growing inventory of units strongly suggests that apartment demand is healthy.
Office workers, residents and tourists need places to shop. A flurry of luxury retailers such as Tiffany and Hermes are opening stores in the area. Based on rental rates, landlords expect more high-end stores to follow: Lower Manhattan retail rents climbed from $85 to $92 per sq. ft. in 2006, an increase of 8%.
Perhaps no single project exemplifies this comeback better than 7 World Trade Center. As the first new downtown office tower completed since 9/11, thewas panned by critics until recently. Many of them feared that the lower Manhattan office market would be inundated with 1.7 million sq. ft. of speculative space.
“There are always cynics out there who say it can't be done,” says developer Larry Silverstein, 76, president of Silverstein Properties, who built the gleaming 52-story tower. Silverstein's roots in the area date back more than a quarter century. In 1980, he developed the original 7 World Trade Center only to have anchor tenant Salomon Brothers renege on its lease just two months after the 1.2 million sq. ft. building was opened.
Approximately six weeks before terrorists slammed two planes into the twin towers of the World Trade Center on Sept. 11, 2001, killing 2,973 people, Silverstein had agreed to lease the complex for $3.2 billion.
Silverstein and leasing agent CB Richard Ellis have filled more than 70% of the tower with tenants since the building officially opened in May 2006. Ranging from the magazine publisher Mansueto Ventures to non-profit organization New York Hall of Sciences, the building houses quite a diverse tenant base.
“When you look out at this area and remember that $20 billion is being invested in such a small district, it really makes sense that lower Manhattan will be even stronger than it was before,” says Silverstein.
That $20 billion sum includes insurance proceeds and government funds allocated for rebuilding the Ground Zero site. An ambitious new transit hub will account for $5 billion, and Silverstein plans to spend roughly $7 billion of insurance proceeds on three more office towers on the site that will total roughly 6.2 million sq. ft.
One risk is that thewave could drive away some potential tenants from the area, which will be crowded with earth-moving equipment and cranes for years. But one downtown leasing broker says that major construction activity is the norm in Manhattan. He points to one of the city's strongest office markets as a case in point.
“Times Square has undergone major construction in the past several years, and that dust and construction didn't stop the area from operating on a day-to-day basis,” says Andrew Peretz, executive director at Manhattan-based Cushman & Wakefield.
Downtown Alliance president Eric Deutsch agrees. He's also pleased to see economic growth rippling through lower Manhattan businesses. “Downtown New York is a thriving, expanding market that has witnessed a surge in activity in virtually every industry sector.”