For a true gauge of the ongoing success of the Manhattan office market, cast a gaze on downtown’s recent performance.
The vacancy rate downtown continues to dwindle deeper into the single digits as rents for office space there rise; these trends mirror the market as a whole, a market that’s defied expectations in the last few years—yet one that seems to be merely following historical patterns.
The total downtown vacancy rate was 7.2 percent in the first quarter of 2007, down from 8.4 percent in the fourth quarter of 2006 and 11.6 percent from the same time one year ago, according to a report out last week from brokerage Cushman & Wakefield. The vacancy rate for Manhattan was 5.7 percent, down from 6.7 percent in the fourth quarter and 8.4 percent in the first quarter of 2006.
That overall rate is also down from more than 11 percent in early 2002, shortly after the terrorist attacks of Sept. 11, 2001, which became a sort of demarcation: Everything office market-wise in Manhattan for now falls into the pre–Sept. 11 and post–Sept. 11 categories.
And pre–Sept. 11, things were very strong, as strong—if not more so—than they are now; and after Sept. 11, especially immediately after, things were weak, with predictions of further weakness to come. The current Manhattan vacancy rate is the lowest since the 5 percent rate of the first quarter of 2001, which ended less than six months before Sept. 11. The rate would quickly rise into double-digit percentages, and stay there into 2005.
Nowhere were such predictions of meandering weakness stronger than downtown. Analysts, even the proverbial man on the street, saw little to buoy any optimism about that area’s renewal, and the gaping, undeveloped hole known as Ground Zero one year, two years, three years, four years, five years after the attacks did little to assuage such pessimism. Downtown’s dismalness commercially became shorthand for worries about the office market in general.
Now, though, a few years on, few would worry about downtown’s success—and, therefore, by extension, about the office-market success (from a landlord’s perspective) of Manhattan entirely. No longer the shorthand for failure, downtown’s vibrancy should be seen as a barometer of ongoing vibrancy overall.
In the first quarter of 2007, companies leased 1.3 million square feet of downtown office space—nearly one-quarter of all Manhattan leasing during the quarter and up from 750,000 feet leased in the same quarter last year, accounting then for 13 percent of all Manhattan leasing.
And asking rents downtown continued a now years-long upturn in the first quarter, swinging to an average of $40.55 a square foot from $38.62 in the fourth quarter—and up nearly 16 percent from the first-quarter 2006 average of around $35. This $40.55 pales, of course, to midtown’s first-quarter average of $62.89 (and Manhattan’s overall of $53.43), but it’s a difference in scope and not necessarily pace; and the scope springs from tradition: Midtown’s always been more expensive for leasing than downtown.
It’s this pace of improvement downtown that augurs well for the Manhattan office market in midtown and throughout the borough. The same forces that have driven the downtown vacancy rate to single-digit percentages and its asking rents steadily upward have boosted the entire market: a strong local economy that produces office-based jobs that, in turn, spurs demand for office space—which leads to leases and subleases.
Just after the first quarter ending March 31, Silverstein Properties, owner of what’s probably downtown’s most lucrative office tower, 7 World Trade Center, announced 88,568 square feet in fresh leasing; that brings the 1.6-million-square-foot tower to two-thirds leased. This feat’s all the more striking as 7 World Trade looms on Ground Zero’s edge, and has commanded asking rents of more than $70 a foot, reportedly, a very high amount for downtown.
Such an example of downtown’s commercial strength bodes well for a Manhattan that’s now years removed from the pessimism of the post–Sept. 11 market.
But such strength will be tested by history. In the later part of 2000, the Manhattan vacancy rate tumbled below 4 percent, creating the tightest office market in more than a decade. Even before the terrorist attacks, before the pessimism, the rate was inching upward, to over 7 percent in the summer of 2001.
So the success now, attributable as it is to forces like the economy, may merely be the signal of rockier times to come, as valleys usually follow peaks in the office market. Keep an eye, then, on downtown. If things there get any better, the Manhattan market overall could soon get worse.