Lower Manhattan Vacancy Rate Could Breach 20 Percent by 2012; Rents Expected to Plummet

limonadaviaflickr Lower Manhattan Vacancy Rate Could Breach 20 Percent by 2012; Rents Expected to PlummetBy 2012, 20.6 percent of lower Manhattan’s top-tier office space, or 5.7 million square feet, could stand vacant, according to research by commercial real estate brokerage Jones Lang LaSalle.

Mind you, that’s not the worst-case scenario. In the worst-case scenario, one that would include still unforeseen developments, 25.5 percent of the top-tier office space downtown could sit idle, according to Jim Delmonte, a vice president and research director at the firm. The best-case scenario: 15.7 percent. Elementary principles of supply and demand indicate that such vacancy rates would send office rents plummeting. Mr. Delmonte expects rents per square foot to drop to $33.81 on average in 2012. In a worst-case scenario, they could go as low as $32.26. In a best case: $35.40.

These numbers may sound extreme. After all, downtown has proven one of the healthier sectors of the Manhattan office market in recent months. In rival brokerage Cushman & Wakefield‘s recent first-quarter report, the top-tier, or “Class A,” vacancy rate was a mere 7.3 percent. And the average asking rent per square foot was $49.08.

But that is, in part, because so many corporations, like AIG, Merrill Lynch, Goldman Sachs and Deloitte, are still sorting out their office-space predicaments. (Important note: These forecasts include only One World Trade Center, a.k.a. the Freedom Tower.)

Because so much in downtown remains up in the air, notions of how to value office space remain murky. This week, The Observer wrote about the ongoing bidding process for AIG’s two skyscrapers at 70 Pine Street and 72 Wall Street, which, when the bidding process is complete, will provide the first real benchmark of how far property values downtown have fallen. At this point, it looks like you will be able to buy a nice square foot of office real estate for just $100.

But back to JLL. Wait till you get a load of their predictions for 2014! By then, JLL anticipates that 9.5 million square feet of top-notch downtown space will be vacant, or 22.7 percent. In a worst case scenario, that could hit 14.3 million square feet, or 30.6 percent. In a best case scenario, that number would only reach 4.7 million square feet, or 14.8 percent.

But some good news! Yes, there is some “good” news. By 2014, Mr. Delmonte expects rents to start rising again, to $36.99 a square foot. In a worst-case scenario, they would only reach $33.76 a square foot. Best-case: $40.45.

“Employment is forecast to grow minimally at the end of 2010 and in 2011,” Mr. Delmonte said. “But we don’t expect rental growth until 2012.”

For the purposes of this research, “downtown” is defined as south of Canal Street, from the Hudson to the East River.

Click here for the 2012 numbers, and here for the 2014.

drubinstein@observer.com