Four years after the 9-11 attacks, lower Manhattan’s office market is on the mend. But 7 World Trade Center, one of the first towers to rise along Ground Zero, is lagging behind the recovery with just 40,000 sq. ft. of its entire 1.7 million sq. ft. leased as of late December. The problem, say brokerage sources, are the above-market rents at 7 World Trade Center, which is being developed by Silverstein Properties and is slated for occupancy in March.
Yet the 7 World Trade Center's plight 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 leasing agent from CBRE 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. "But there's plenty of good office space in the downtown market that is leasing for much less than [Silverstein] is asking for."
CBRE data pegged the average asking price for Class-A downtown office space at around $30 per sq. ft. at the end of November. Leasing broker Nottingham says that asking rents at 7 World Trade Center are as high as $55 per sq. ft., though rent subsidies knock that price into the high $40 to $45 per sq. ft. range.
Above-market asking rents aren't the only challenge that Silverstein faces at 7 World Trade Center, 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. "That's not so easy for many tenants to do, especially when they'll be overlooking the pit," says Nottingham, referring to the scooped-out Ground Zero site to the south of 7 World Trade Center.
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 eleven months of 2005. This activity suggests that large tenants are leasing space in lower Manhattan, which has helped bring vacancy down to 14.5% from 15.8% from November 2004 through November 2005.
Nottingham believes that there's no guarantee that five new office towers will ultimately be built on the World Trade Center site, even though Silverstein owns those development rights. Indeed, 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 will arrive between 2012 and 2013. And, if all six towers are ultimately developed on the site, there will an extra 10 million sq. ft. of office space on the market within seven years.
That may be a lot of time, but it's also a lot of space. And if filling 7 World Trade Center is any indication, 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. He says: "Over the long term, I'm very optimistic about the lower Manhattan office market."