12/03/08

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Downtown rounds a corner

The hand-wringing over the state of the Downtown commercial market has been constant since the end of 2001, as spiraling vacancy rates underpinned the area's sense of loss.

But it's always been a matter of when not if Downtown would reclaim its status as one of the globe's premier commercial hubs.

This summer may have been that when.

At the end July, American Express Financial Services signed a 15-year lease for 20,000 square feet at 7 World Trade Center. Though details of the deal remain scarce, the effects of even a small lease involving a financial services anchor tenant could ripple through Downtown and beyond.

The Downtown commercial market entered the summer in May with vacancy rates north of 13 percent. It ended July, according to Colliers ABR, with a vacancy rate for Class A space of 11.3 percent a decline over not only June, but over the beginning of the summer.

Although Downtown's recovery is not complete and questions remain about the overall strength of its resurgence, signs point to the area's having turned a corner toward a sustained commercial recovery.

"It's kind of in a holding pattern in a way," said Robert Sammons, research director at Colliers ABR. "It appears obviously that the vacancy rate has been dropping, which is a good thing. The one caveat, again, is 7 World Trade Center."

The 52-story 7 World Trade Center, scheduled to be finished in the first quarter of 2006, has become shorthand for Downtown's commercial woes despite the reported American Express deal.

"That's the one major, major problem that will be coming down the line toward the end of the year, the beginning of 2006," Sammons said. "But, minus that, Lower Manhattan, generally, is doing relatively well considering where people probably thought it would be."

Vacancy rates for Class B and Class C space in Downtown also continued to decline in July to 15.9 percent and 11 percent, respectively. Both, however, were higher than they were in July 2004, while the vacancy rate for Class A was lower than it was a year ago. Average asking rents increased in Class A and Class B space Downtown, while the average asking rent for Class C space declined about 20 cents.

Midtown and Midtown South continued the summer trend of besting Downtown in average asking rents and vacancy rates. But, as Downtown's vacancy rate declined to its lowest in a year, Midtown's jumped.

The vacancy rate for Class A space in Midtown for July was 9.3 percent, up from 8.8 percent in June. The vacancy rate for Class B space declined slightly to 11.7 percent and Class C vacancy stayed even at 7.9 percent, according to Colliers ABR. In Midtown South, the Class A vacancy rate for July was 5.7 percent, a slight decline from June.

Sammons called the Midtown vacancy rate increase an "anomaly," one likely due to the addition of two large blocks of space in the Grand Central submarket 800,000 square feet at 485 Lexington Avenue and 91,000 square feet at 750 Third Avenue. This addition brought the Class A vacancy rate in Grand Central to 11.8 percent, its highest since 11.9 percent in December 2003.

Downtown's biggest recent commercial deal of the summer may have actually arrived in the second week of August. Reversing a decision it made earlier this year, Goldman Sachs announced plans to build a 2-million-square-foot office tower in the Financial District for about 9,000 employees.

Some are crediting such fresh commercial interest in Downtown to the incentives package passed by the state Legislature in late June. It was shepherded through the Legislature by Sheldon Silver, the state Assembly leader who represents parts of Lower Manhattan.

"Ever since the Silver bill was passed, we've really seen a change in momentum and attitude toward Downtown," said Adam Foster, of CB Richard Ellis, the firm leasing 7 World Trade.

In the end, Downtown's rounding the bend toward sustained recovery may, in fact, be tied to what happens in pricier Midtown. The difference in average commercial asking rents between the two areas, especially for Class A space, is as high as more than $30 per square foot. Downtown, then, may become a commercial offer companies can't refuse.

"As far as the incentives playing out," said Michael Liss, a senior associate with Trammell Crow, "you'll see, I think, things coming to fruition in the fall. But I don't know if you're going to see, per se, a direct correlation in the uptick of leasing activity [Downtown], at least for another 60 to 90 days."

So, hold the champagne.

The corner Downtown is turning toward commercial recovery should be a long one. Still, that recovery appears as a definite point in the future rather than a mirage in the distance.