Despite mixed projections about longterm job growth and the city's overall economic health, the Big Apple has a slightly sweeter taste than it has in recent years. Tourism is up, and crime is down. New retailers are moving in at a brisk pace, and small apartments are renting again. Even the sluggish office market has seen slight rises in demand.
Keeping the optimism in check are some persistent recession-like factors. Office space vacancies are still plentiful, with midtown posting a vacancy rate of more than 14% at the beginning of the year, and downtown is even more glutted. Bank consolidations, have resulted in substantial layoffs, and a major new study warns of the crucial need for long-term infrastructure improvement in order for New York to hold its own in a global economy.
While all of New York's economic problems may not be solved by the end of the 1990s, the decade may prove to mark the end of Times Square's tarnish and downtown's doldrums. These two, bruised but integral, parts of the city are both in the early stages of a turnaround that could spur activity in nearly all commercial real estate sectors.
After a 15-year stall, the Times Square redevelopment is becoming a reality. New restaurants, refurbished theaters and entertainment-oriented retailers are replacing prostitutes and drug dealers on 42nd Street. A new office building will be constructed there as well. In mid-February, The Prudential Insurance Co. approved the sale of a site on Broadway to the Durst Organization, which plans to begin construction early next year on a $200 million, 47-story tower, according to Douglas Durst, president of the family-owned business that owns several midtown office buildings. The project marks one of the first office buildings to go up in the 1990s.
Durst says negotiations are under way with possible lead tenants, including Young & Rubicam, a major advertising agency. He says the building is to contain 1.5 million sq. ft., with 50,000 sq. ft. base floors, and completion is expected by the third quarter of 1998 with tenants moving in by 1999.
Times Square may also be seeing a new hotel by the millennium. Tishman Urban Development Co. has proposed a $303 million, 871,000 sq. ft. entertainment complex, which would contain a 680-room convention-style hotel to be located on Eighth Avenue. The project is expected to begin this year and may open by 2000.
A tax incentive package known as the Lower Manhattan Revitalization Program has prompted the start of significant conversion activity in the downtown financial district. Many of downtown's pre-1975 office buildings may see new life as apartment buildings.
"Downtown will change forever," says Ron Cohen, a managing director in investment sales at Edward S. Gordon Co. Inc. (ESG), New York. "It's the first time in history that it will be a mixed-use neighborhood."
All of the conversion activity "is good news as it hastens activity and redefines the downtown market," says Helen R. Arnold, managing director at Jones Lang Wootton USA, New York.
"It's a rolling machine at this point. There is a huge momentum that increases daily, ever since the law changed," Cohen says, referring to the new revitalization plan, which is a package of several laws designed to improve the state of existing buildings and encourage growth in the downtown market, in part, by providing incentives for existing tenants to expand and others to relocate, according to New York-based Cushman & Wakefield.
Ironically, many of the downtown buildings, which over the last two decades have become the least well-suited for office tenants, make for ideal apartments, says Woody Heller, senior director in investment sales and finance at Jones Lang Wootton USA. He mentions that characteristics found in older downtown buildings can amount to an unleasable nightmare as office space but can be desirable amenities for apartments.
Conversion will also have a positive spillover effect for all of downtown, Heller says. The office vacancy rate will decrease as buildings are removed from inventory, even in the absence of space absorption, and the newer remaining office buildings in the neighborhood will eventually have a better chance of leasing up.
The 540,000 sq. ft. 25 Broad St. will be converted to residential use by Crescent Heights and is expected to be the first conversion project to come online downtown. Rockrose Development Corp. also is planning to convert the entire 500,000 sq. ft. at 127 John St. to apartments, says John West, director of planning at Rockrose. Construction activity is expected to begin later this year with completion in 1997.
Not all of the near-empty office buildings are becoming apartments, however. Rudin Management Co. has already seen great success with its $15 million transformation of the former 400,000 sq. ft. Drexel Burnham Lambert headquarters at 55 Broad St. into the New York Information Technology Center.
In the first six months of renovation, approximately one-third of the building was already leased or under negotiation, despite industry skeptics. Tenants are a mix of both domestic and international technology and multimedia companies.
"Downtown offers many office locations where tenants can significantly save occupancy costs and be in a long-term position of stability," says Bob Alexander, executive managing director at ESG. "Any major corporation, especially those that are publicly held, are wise to look at the downtown market," he says.
That may hold true for quite awhile if total downtown office space availability remains at the January 1996 rate of slightly over 20%, reports Cushman Wakefield. Negative absorption in 1995 totaled 2 million sq. ft., the worst showing since the downturn of 1989, according to ESG.
Midtown expected to tighten
The midtown office market may not be undergoing anything as dramatic as the conversions going on downtown, yet it is expected to tighten, says Durst. He says he foresees further decreases in tenant inducements, steady rental pricing and continued growth from smaller technology firms.
Nevertheless, 1995 did not meet expectations. Availabilities increased, especially on Park Avenue and the West Side, and leasing slowed by more than 17% from its 1994 level and fell short of reaching 14 million sq. ft. for the first time since 1991, according to ESG.
Arnold of Jones Lang Wootton says both the midtown and downtown were in a state of "significant vacancy rate stagnation" throughout 1995. "The market is in a pause to contemplate," she says. "New York City seems to be in its own economic orbit, and Corporate America cannot afford rent spikes even on a deflated basis," Arnold says.
ESG's Alexander says he does not expect to see rents jump in midtown, but "there should be some improvement in net effective rent - some hidden gains - as pricing improves incrementally from last year but with no dramatic upticks."
A focal point of midtown leasing is the Avenue of the Americas (Sixth Avenue)/Rockefeller Center submarket. "It's been the primary area of activity, representing approximately one-third of all space leased in midtown in January," Alexander says. The tenant quality and large floorplate sizes in buildings there make the neighborhood attractive to a wide variety of tenants, and most of the high-end A-quality space there "is being eaten up in rapid fashion," Alexander says.
The continual absorption of Class-A space in a weak market combined with a virtual lack of new construction has prompted the New York Life Insurance Co., who has taken title of 1180 Avenue of the Americas, to begin a multimillion dollar, three-year renovation of the 343,000 sq. ft. office building at 46th Street, according to Andrew G. Simon, senior managing director at Columbus, Ohio-based The Galbreath Cos., leasing agent for the building. Simon says the work will create "a boutique-like building along corporate row." Simon says the project "gives a chance for smaller firms to be part of the Sixth Avenue corridor."
No improvement in sales prices
The general flatness of rental rates carries over to the office building investment market as well. "Underlying in fundamentals have not improved that dramatically to otherwise support improvement in pricing Heller of Jones Lang Wootton says.
The beginnings of a rebound in the office market in mid-1993 did not hold long enough to produce any major upswing. "The situation has ebbed back somewhat again, with gross leasing down 2 million sq. ft. in 1995 in midtown. Rental rates are flattening," Heller says, adding that prices are still a fraction of replacement costs.
While prospects are strong for longterm rental increases, "it distills down to job creation as the single most important issue driving the market," Heller says, mentioning that New York has lost approximately 280,000 jobs from 1988 to 1993. But, as the economy rebounds, Heller says base rents and space absorption will go up.
Hotel market booming
While the city's office market sees little signs of any dramatic change in occupancy levels, New York hotels achieved their highest occupancy in 15 years, reports Coopers & Lybrand, New York. Overall hotel occupancy in 1995 was 80.6%, up 2.5% from 1994. All types of hotels reported occupancy increases, with tourist-class properties leading the way with an increase of 4.6%.
Average daily rates increased 7.2% to $167.24. The improvement in both occupancy and average daily rates resulted in a 10% increase in rooms revenue per available room (RevPAR), reports Coopers & Lybrand. Hoteliers benefited greatly from a weak dollar that brought visitors from abroad. In 1995, an estimate 24.8 million people visited the city, according to the New York Convention and Visitors Bureau.
Considering all of these positive factors, it is no surprise that a survey of the 120-plus members of the Hotel Association of New York City at year-end 1995 shows an overwhelmingly upbeat attitude on the part of hotel owners. A wide majority responded that they felt that the repeal of the city's hotel occupancy tax (down from 19% to 14%) served as the key to increased tourism.
"The hotel market is seeing a big resurgence and much of the credit can be given to the Giuliani administration, which has helped to change the perception of the city. New York is perceived as safer, and the perception is the reality," says Bernard Goldberg, president of the Gotham Hospitality Group, owner of a chain of five small boutique hotels in Manhattan.
Goldberg's group is currently refurbishing the Roger Williams Hotel at 31st Street and Madison Avenue, an area that not long ago was "a kind of no man's land," Goldberg says. But like many other areas of the city, it is experiencing revitalization.
Besides the Tishman plan for a Times Square hotel, a number of other proposals for new hotels or major rehabilitation projects are either under way or planned throughout Manhattan.
For example, the 1,070-room Hotel Roosevelt is undergoing a $55 million complete restoration that is scheduled for completion in January 1997, when it will reopen under the Radisson flag, according to Hospitality Valuation Services.
Also, construction is under way on Lincoln West, a mixed-use project on Broadway. The project will include a hotel on the lower floors, rental units, luxury condominiums and retail space. Completion is scheduled by the end of the year.
A 168-room hotel is part of the $300 million Trump International Hotel and Tower, which is under construction at what is now known as 1 Central Park West. A joint venture of the Trump Organization, The Galbreath Cos. and GE Pension Trust, which owns and finances the building, the hotel is part of a mixed-use facility scheduled for a January 1997 completion.
The limited-service, 369-room SoHo Grand Hotel at 310 W. Broadway, which was developed by the Hartz Mountain Corp., is expected to open midyear. Also in Soho, the 78-room Mercer Hotel is slated for rehabilitation with a scheduled opening this year.
Two other hotels have already seen upgrades: the Omni Berkshire Place reopened in late 1995 after a $50 million renovation, and the 151-room Kitano New York Hotel reopened in September 1995. Several New York City hotels sold over the last two years at prices significantly below replacement cost, reports Hospitality Valuation Services (HVS). Goldberg reported receiving numerous inquiries from hungry buyers, and he says he is finding it practically impossible to buy a property that works for rehabilitation.
The Dorset Hotel and two adjoining brownstones on 53rd Street were sold in February to the Museum of Modem Art for a reported $50 million. Coopers & Lybrand also reports that the Battery Park City Authority has requested proposals to develop a hotel in Battery Park City. HVS reports of other hotel proposals for a site near the Javits Convention Center, the redevelopment of the Matinique Hotel at Herald Square and a mixed-use project with a hotel component at the New York Coliseum site.
Retail market active
An intensely competitive retail market is seeing tremendous interest from a variety of retailers. Expanding regional chains, major national conglomerates, international retailers and competitors are all searching for space, according to Faith H. Consolo, senior managing director at Garrick-Aug Associates Store Leasing Inc., New York. "Whoever is not here is looking to enter the market," she says. "Every category killer will want to be here by the end of 1996."
But space availabilities are tight all over the city, she reports. Any remaining retail space on Madison Avenue is filling up, with rents ranging from $250 to $350 per sq. ft.
But activity is not confined to midtown. Garrick-Aug reports new shops and restaurants opening in the World Trade Center, World Financial Center and at the South Street Seaport. Heightened retail interest in the downtown area is expected as it moves from a strictly daytime office environment to more of a round-the-clock neighborhood. Average rental rates are from $45 to $75 per sq. ft. in most downtown locations, Consolo reported.
Similarly, Soho is enjoying "a renaissance of new construction and leasing activity," Garrick-Aug reports. Big national chains have opened mall-like stores along Third Avenue on the Upper East Side.Consolo says, "based on the tight rental market, she expects "rents to inch up a little bit for the first quarter" of the year. What happens beyond this period is dependent on how much space banks put on the market from vacated branches. Approximately 500,000 sq. ft. of such bank space is expected to come on the market in the tri-state area, Consolo says.
Apartments regain strength
Co-operative and condominium apartments are selling better than last year and at better prices, according to Robert A. Cohen, president of Robert A. Cohen & Associates Inc., a residential management and investment firm. "It is certainly not the inflationary, frenzied 1980s with 10% rises in price in each year but, unlike three. to five years ago, there is activity and interest," he says.
Prices also have risen in the multifamily investment market as the number of distressed sales and foreclosures has decreased significantly, Cohen says. "People are feeling better about New York City, and money is available," he says.
In the rental market, David J. Wine, president of Related Management Co., an affiliate of New York-based The Related Cos., reports a robust apartment rental market that has continually grown in strength over the past several years. Specific signs of the market's health show up in the complete elimination of owner paid broker fees and concessions, increasing rental rates and decreasing vacancy and turnover rates, according to Wine, whose firm currently has a new apartment building under construction on the Upper East Side and anticipates starting construction on two or three other projects this year.
Other developers have plans for new rental projects, Wine says, but securing construction financing remains difficult. "Any lending requires a large equity investment, which is regulating the amount of new product coming online," he says.