In February, the $1.7 billion Time Warner Center was unveiled to a coterie of black-tie guests in Midtown Manhattan. The 80-story, mixed-use complex houses more than 1 million sq. ft. of office space, a luxury hotel, several high-end restaurants and some of the city's most expensive apartments. Demand for space in the project was evident: The retail component, for example, was 98% pre-leased months before the center even opened.

The project's success is emblematic of a real estate market that is finally emerging from a three-year slump punctuated by the 9/11 terrorist attacks. Office leasing is on the rise, hotel vacancy rates are tightening and luxury retailers are flocking to Fifth Avenue's midtown shopping corridor.

A growing local economy also is working in Manhattan's favor. The unemployment rate fell to 7.4% at midyear — its lowest level since the fourth quarter of 2001, when it bottomed out at 7%. Hiring is on the rise: Payrolls expanded 0.6% in the second quarter year-over-year — the first increase in 12 consecutive quarters.

The city is exhibiting positive trends, to be sure, but it's been an uneven performance. The city's economy grew at an annualized rate of 7.2% in the first quarter, according to the New York City Comptroller's Office, yet growth in the second quarter registered only 2.8%.

Downtown vs. Midtown

While a pickup in economic activity heralds a comeback for a city hard-hit by 9/11 and the recession that followed, some pockets are still struggling to recover. In the Downtown office market, average rental rates for Class-A space were trailing Midtown by $20.75 per sq. ft. at the end of September. The average asking rental rate in Midtown was $55.78 per sq. ft., compared with $35.03 per sq. ft. in Downtown.

In Midtown, financial service and law firms are driving the leasing market. In the first quarter, PricewaterhouseCoopers relocated to 800,000 sq. ft. at 300 Madison Avenue, a 1.2 million sq. ft. tower completed in 2003. The deal was the largest office lease signed year-to-date. And in September, a pair of international law firms leased 185,000 sq. ft. at 200 Park Avenue.

Deals like that have sliced Midtown Class-A office vacancy rates to 9.3% at the end of September, down from 11% one year earlier, according to Colliers ABR. Manhattan's overall vacancy rate registered 10.1% at the end of the third quarter — its lowest level in 20 months, and a full percentage point lower than the same period a year ago.

Lower Manhattan, on the other hand, offers a sharp contrast. Although some observers insist the submarket is poised for recovery, so far it just hasn't taken hold. Financial services firms — which lease roughly 43% of the office space in Lower Manhattan, according to Cushman & Wakefield — have been slow to hire. In fact, financial services firms in Manhattan cut 44,500 jobs between 9/11 and mid-year 2004, a 9.3% drop.

The numbers mean one thing for the lower Manhattan office market: higher vacancy. Colliers ABR reports that Lower Manhattan posted an office vacancy rate of 13.2% at the end of September compared with 12.9% one year earlier.

Adding insult to injury, two large blocks of space came to market in the third quarter. JPMorgan Chase & Co. vacated 588,200 sq. ft. at 1 Chase Manhattan Plaza, an office tower near City Hall, in a move to consolidate its office space in midtown. The banking firm also vacated 298,000 sq. ft. of sublease space at 95 Wall Street. And Larry Silverstein's 7 World Trade Center — due to open in 2006 — will introduce 1.7 million sq. ft. of office space to the market.

“Downtown just hasn't turned the corner yet, but it should continue to tighten over the next few quarters,” predicts John Powers, co-chairman of the New York region for brokerage CB Richard Ellis.

Indeed, rental rates for office space in Downtown Manhattan are a veritable bargain for tenants making the choice between Midtown and Downtown. Average asking rents for Class-A office space in the Downtown submarket fell from $35.60 per sq. ft. in September 2003 to $32.16 per sq. ft. at the end of September 2004.

“The best I can say is that we are seeing some potential demand downtown, and that's from tenants looking to save a lot of money on rent,” says Peter Sabesan, principal of Hunter Realty, a Manhattan-based leasing brokerage.

The law firm of Livingston, Wachtell, for example, took advantage of the pricing delta. Last summer, the firm moved from 1140 Sixth Avenue, a Midtown office tower, to 6,400 sq. ft. at 29 Broadway in Lower Manhattan.

Sale prices also show that investors are pricing Downtown office towers much lower than their uptown neighbors. “The Manhattan market, especially Midtown, is just so hot right now,” says Bob White, president of Manhattan-based Real Capital Analytics. “There's just so much money chasing so few deals.” As a result, office cap rates have dropped as low as 6% — and could fall as low as 5% in the fourth quarter, sources say.

In September, Midtown office tower 350 Madison Avenue sold for $225 million (or $577 per sq. ft.) to Kensico Properties. Anglo-Irish Bank spent $214 million, or roughly $575 per sq. ft., to acquire 222 East 41st Street in the same month.

But 17 Battery Place North, a 419,000 sq. ft. office tower in Lower Manhattan, snagged only $70 million, or $167 per sq. ft., from local investor Moinian Group. That's a huge pricing gap considering that the 390,000 sq. ft. 350 Madison in Midtown sold for a whopping $577 per sq. ft.

Multifamily Mecca

By any measure, the residential sector is the golden child of the Manhattan market. Data provider Reis Inc. reports that New York's metro apartment vacancy rate registered 3.2% at the end of September, down slightly from 3.5% one year earlier. Meanwhile, monthly asking rents increased from $2,124 to $2,206 during the same period.

Manhattan's apartment vacancy rate was a mere 2% at the end of September 2004 — incredibly low when compared with the current national apartment vacancy rate of 10.5%. “Manhattan has an unusual dynamic. Young people will always want to come here regardless of what's happening in the economy,” says Andrew Heiberger, president of Manhattan-based residential brokerage Citi Habitats.

Lower Manhattan's apartment vacancy rate hit 5% at the end of August, reports Reis. By comparison, the vacancy rate in outlying markets in Brooklyn, Queens and New Jersey averaged about 3.35% at the the end of the third quarter.

On the supply side, 15 new residential projects will be delivered in Manhattan in 2005 — and five of those are in Lower Manhattan, according to the Real Estate Board of New York. The single largest rental project under construction in Lower Manhattan is 2 Gold Street, a 650-unit project scheduled for completion at the end of 2005.

Offshore Retail Invades Manhattan

Manhattan's retail sector continues to thrive, thanks to strong consumer spending and an influx of luxury retailers determined to lease space in the market. The city's retail vacancy rate edged up slightly from 2.45% to 2.7% between the third quarter of 2003 and the third quarter of 2004, according to CoStar Group.

Average rents for the posh 57th Street corridor, which runs from Fifth Avenue to Park Avenue, increased 12% from $750 per sq. ft. in September 2003 to $850 per sq. ft. in September 2004, reports Manhattan-based brokerage Garrick-Aug.

“We've seen a lot of new leases this year throughout Manhattan, and this will be the best Christmas for Manhattan's retail market since 1999,” predicts broker Faith Hope Consolo, vice chairman at Garrick-Aug.

Retail space in the Downtown submarket garners an average of $200 per sq. ft., says Consolo, compared with an average of $400 per sq. ft. for similar space in Midtown. And rental rates for Downtown space grew a mere 6% between the third quarter of 2003 and the third quarter of 2004, according to Consolo, compared with an increase of 12% for similar Midtown space.

Consolo says that the weak dollar is attracting foreign luxury retailers to Manhattan. For example, South African diamond retailer DeBeers leased 10,000 sq. ft. on Fifth Avenue and 54th Street earlier this year, while Italian furrier Guiliano Teso took space at Fifth Avenue and 53rd Street. U.S.-based clothier Abercrombie & Fitch also is moving to Fifth Avenue, and will occupy 25,000 sq. ft. by the first quarter of 2005.

Outside of Manhattan, Target recently opened its first store in the Bronx. The 120,000 sq. ft. store is part of River Plaza, an $80 million mixed-use development on the East River. The discount retailer also is planning to open a 194,000 sq. ft. store in Brooklyn this year.

Meanwhile, upscale grocer Whole Foods, which leases space underneath the Time Warner Center, also is planning to open a 46,000 sq. ft. store in Brooklyn next year.

Related Retail Cos. opened the Gateway Center, a 640,000 sq. ft. power center, in the East New York section of Brooklyn. And in Queens, Atco Properties & Management opened the $120 million The Shops at Atlas Park, the borough's first lifestyle center.

No Room at the Inn

After a dismal two-year stretch that followed 9/11, city hoteliers are now finding it less difficult to fill their rooms. Occupancy rates at Manhattan hotels increased from 72% at the end of September 2003 to 79.4% at the end of September 2004. In addition, the Republican National Convention, which took place in the city this summer, helped pump up occupancy by drawing thousands of delegates to the city during a typically slow period.

Hotel sales broker Thomas McConnell believes that the Manhattan hotel market could post a strong 82% occupancy rate by the end of 2004. “This is a full-fledged recovery here. We reached the inflection point at the end of last year, and it's been very strong ever since,” says McConnell, senior managing director at Cushman & Wakefield.

Occupancy at Manhattan hotels fell to the low 70th percentile between June 2000 and the end of 2003. Now it's poised to rise 10% over a 12-month period. Business travelers are chiefly responsible for the uptick, says McConnell, and holiday travelers are expected to bolster occupancy even more over the next two months.

“We've seen 20.8% growth in RevPAR [revenue per available room] during the nine months that ended in September, and that's the highest in the nation,” says McConnell. RevPAR increased from $112.30 at the end of August 2003 to $135.69 at the end of August 2004, reports Smith Travel Research.

Not only are hotels filling up fast, but the supply of rooms is actually on the decline. “If you look at the last five major hotel sales, they are all being converted to residential by the new owners,” says McConnell.

Six Manhattan hotels are being considered for residential conversions, according to McConnell. If these hotels — which include the Hotel Delmonico on Park Avenue, the Mayflower Hotel in Midtown and the Regent Wall Street — are converted, the city will lose 1,485 hotel rooms.

“The thing that really hurts the hotel market is new supply, and we only have an added 3% [of existing supply] coming to market over the next few years,” says McConnell. “And if the Plaza Hotel gets converted into residential, there go another 800 keys. That would make the hotel market even stronger.”

NEW YORK CITY - BY THE NUMBERS

POPULATION OF FIVE-BOROUGH

METRO AREA: 8.09 million

Source: New York City Chamber of Commerce

UNEMPLOYMENT RATE:

7.25%

LARGEST EMPLOYERS:

  1. Columbia University, 15,000 employees

  2. Merrill Lynch, 15,000 employees

  3. Mount Sinai Medical Center, 13,000 employees



Source: InfoUSA

METRO AREA STATS

Office:

10.1% vacancy, September 2004

11.2% vacancy, September 2003

Rent per sq. ft.:

$47.80, September 2004

Source: Colliers ABR

Multifamily:

3.0% vacancy, 3Q 2004

3.7% vacancy, 3Q 2003

Average rent per unit: $2,252, 3Q 2004

Source: Reis Inc.

Retail:

5.1% vacancy, 3Q 2004

6.9% vacancy, 3Q 2003

Rent per sq. ft.: $52.86, 3Q 2004

Source: CoStar Group

Industrial:

4.6% vacancy, 3Q 2004

4.6% vacancy, 3Q 2003

Rent per sq. ft.: $9.87, 3Q 2004

Source: CoStar Group

Hotel:

79.4% occupancy, August 2004

72.0% occupancy, August 2003

Source: Smith Travel Research

MAJOR PROJECTS UNDER CONSTRUCTION:

7 World Trade Center, a 1.7 million sq. ft. office tower in Lower Manhattan

Cost: $540 million

Developer: Silverstein Co.

Completion: Summer 2005

731 Lexington Avenue, a 1.8 million sq. ft. mixed-use tower in Midtown Manhattan

Cost: $630 million

Developer: Vornado Realty Trust

Completion: September 2004

New York Times Tower

(620 Eighth Avenue), a 1.5 million sq. ft. office tower on Manhattan's West Side

Cost: $850 million

Developer: Forest City Ratner Cos.

Completion: 2006