It’s looking good these days for downtown Manhattan to become one of the great commercial real-estate success stories of the next several years.
Right now, the downtown office-vacancy rate is about 10.7 percent, according to brokerage Jones Lang LaSalle. That rate’s lower than it was a year ago, at 10.8 percent—and much lower than the dangerous highs of nearly 13 percent in the months immediately following the terrorist attacks.
Since then, a lot of business, big and small, has returned. Half of the top 10 Manhattan office leases in 2006 were inked downtown, including the two biggest: 600,000 square feet in the Freedom Tower for the U.S. Customs and Border Protection service, and 589,978 feet in 7 World Trade Center for Moody’s Investors Service.
Governors Eliot Spitzer and Jon Corzine both endorsed the Freedom Tower last week, and the board of the Port Authority O.K.’d $500 million in construction contracts for the 2.6-million-square-foot skyscraper. Along with the Freedom Tower, new office buildings will spill at least 10.8 million square feet of space onto the downtown market by the end of 2012, according to Jones Lang LaSalle.
But whether the tenants will still be there then depends on a few factors.
Today, downtown presents a cheaper alternative to midtown. So, for one thing, rents in lower Manhattan will have to continue to undercut those in midtown, the present-day prince of the office submarkets. By the end of 2006, the average rent downtown was $38.62 a square foot, according to the brokerage Cushman & Wakefield; in midtown, it was $58.92 a square foot, and $100-per-foot leases weren’t unusual; the bulk of the 41 such leases signed last year were in midtown.
Downtown is an even bigger discount for larger companies looking for blocks of higher-quality space, which is harder to find in midtown and midtown south.
The midtown vacancy rate was 6.4 percent by the end of 2006, according to Cushman & Wakefield, and the midtown south rate even lower, at 5.6 percent. Larger blocks of space—those of at least 100,000 contiguous feet—are also harder to come by in midtown and midtown south: Only 10 remain. And, with the New York Times headquarters and One Bryant Park as the only higher-quality office buildings slated to open in both submarkets in the next two years, such blocks should only dwindle in number.
So, a tighter, more expensive midtown and midtown south could drive companies downtown, into the gaping arms of brand-new skyscrapers like the Freedom Tower.
Once there, the companies would find the Fulton Street Transit Center, linking 12 downtown subway lines to the new World Trade Center transit hub. And a growing amount of rentals and condos—gems like the Cipriani Club Residences at 55 Wall Street and 20 Pine Street, where Giorgio Armani’s interior-design firm sculpted the insides—are sprouting around the sites of these hubs, helping turn downtown into a 24/7 enclave.
In other words, meet the new and improved downtown Manhattan!
But suppose that the economy doesn’t hold? Or that 2006 turns out to be the peak year for Wall Street bonuses for many years to come? Suppose that the city’s unemployment rate, now around 4 percent, starts to inch back upward?
The success of Manhattan’s office market has always been closely tied to the ability of the local economy to create and maintain jobs. A lot of office-based jobs means a lot of demand for offices. Take a healthy economy away—one spurred locally by the financial-services sector—and the office-leasing market tends to turn very ill.
In the summer of 2001, downtown’s vacancy rate was barely 6 percent. A healthy local economy buoyed the submarket, and the original World Trade Center, which was filled with tenants by the late 1990’s, gleamed as a symbol of its health. Will the Freedom Tower do the same a few years from now? It’s likely, but ….
LAST WEEK, THE LAB CONTENDED THAT too few homes are being built to keep pace with New York City’s population growth. The city added, between 2000 and 2005, more than 205,000 residents, according to census estimates; and, from 2000 through 2006, about 159,000 permits were approved for privately owned housing units.
That leaves a difference of about 40,000 people without homes to rent or to buy, assuming a one-to-one ratio between homes and residents. As readers pointed out, however, the average New York City household has more than one person; it has 2.59 persons, according to 2000 census data.
Still, the city faces a housing deficit, despite the Bloomberg administration’s efforts to erase it by encouraging new development through subsidies and rezoning.
That’s because, when measuring New York’s housing supply, you start with a negative number—a deficit—left by previous administrations and by a private sector that, until fairly recently, wasn’t too keen on building homes in much of the city.
The Furman Center for Real Estate and Urban Policy at New York University estimated in 2005 that the difference between the demand for housing and the supply was about 100,000 units. (The Manhattan Institute put the deficit at 111,000 in 2002.)
So, subtract 100,000 from the 159,000 home-building permits. Multiply the resulting number—59,000—by 2.59 residents, and you get 152,810 residents that could be housed in these roughly 59,000 new units, assuming that all get built (though at least 10 percent won’t).
The city added over 205,000 residents from 2000 to 2005. Subtract from this 152,810, and you have about 52,190 new residents more than there are new homes available. (These calculations don’t account for variables that could drive the deficit even wider, such as existing units becoming obsolete or the 2006 growth population.) While this deficit leads to a low apartment-vacancy rate and to vicious competition for condos and co-ops, it’s still a relatively low one.
An official in the city’s Department of Housing and Preservation pointed out to The Lab that “between 1990 and 2000, only 78,607 housing units were created … Between 2002 and 2005, the city’s population grew by nearly 14,000 households, but 42,372 new units have been added, thereby shrinking the housing gap.”
That gap, though, remains.