One of the first towers to rise above Ground Zero since the 9-11 attacks is lagging behind the lower-Manhattan office recovery. As of late December, just 40,000 sq. ft. was leased at 7 World Trade Center, a 1.7 million sq. ft. skyscraper.
Sources say that above-market asking rents and political bickering over Ground Zero's future are foiling developer Larry Silverstein in his quest to fill the $700 million building. What's even more daunting is that Silverstein also has the right to build 10 million sq. ft. of additional office space on the site in years to come.
Yet the plight of this signature building hardly mirrors the health of the submarket as a whole. CB Richard Ellis reports that downtown leasing absorption over the first 11 months of 2005 increased by roughly 500,000 sq. ft. versus all of 2004. Last year, Silverstein hired CB Richard Ellis to market 7 World Trade Center's office space. Neither Silverstein nor a CB Richard Ellis leasing agent could be reached for comment.
“This is a very impressive building, possibly the most advanced office building in Manhattan,” says Howard Nottingham, executive managing director at Manhattan-based brokerage Studley. Several prospective tenants are eyeing space, he says. One is Chinese firm Vantone Real Estate, which is interested in the top five floors.
In spite of 7 World Trade Center's reputation, it's not the only game in town. “There's plenty of good office space in the downtown market that is leasing for much less than [Silverstein] is asking,” says Nottingham.
CB Richard Ellis data pegged the average asking price for Class-A downtown office space at around $30 per sq. ft. at the end of November. At 7 World Trade Center, asking prices are as high as $55 per sq. ft., though rent subsidies knock that price into the high $40 to $45 per sq. ft. range. The New York Academy of Sciences, which leased the 40,000 sq. ft. at 7 World Trade Center in December, is reportedly paying close to $55 per sq. ft.
Still, above-market asking rents aren't the only challenge that Silverstein faces, says Nottingham. Many prospective tenants may shy away from working in a building located at the center of what will be a busy construction site for the next several years.
Meanwhile, CoStar Group reports that downtown office towers 3 World Financial Center and 55 Water Street were the second and third most active Manhattan properties, based on leasing volume, in the first 11 months of 2005. This activity suggests that large tenants are leasing space in lower Manhattan, which helped lower the vacancy rate to 14.5% in November 2005 compared with 15.8% a year earlier.
Nottingham says that there's no guarantee that several other planned office towers will be built on the World Trade Center site. Along with the 99-year ground lease to the original World Trade Center, Silverstein has rights to build as many as five towers on the Ground Zero site, including the 2.6 million sq. ft. Freedom Tower.
Even so, the Freedom Tower isn't expected to be finished until 2011, and the other towers are slated for sometime between 2012 and 2013. And, if all six towers are ultimately developed, 10 million sq. ft. of office space will be dumped onto the market within seven years.
Using 7 World Trade Center as a gauge, leasing some 10 million sq. ft. of added space down the road might not be so simple. To Nottingham of Studley, however, demand should follow the rebuilding of lower Manhattan. “Over the long term, I'm very optimistic about the lower Manhattan office market.”