12/01/08

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Hopes for Downtown revival perk up as vacancy rate falls

Reports of Downtown's death as a commercial center may be greatly exaggerated.

Despite several recent blows an apparent pullout by the investment bank Goldman Sachs, the absence of an anchor tenant at 7 World Trade Center as Larry Silverstein tries to rebuild around Ground Zero, and a spate of office buildings converting to residential things are not all bad for the nation's third leading commercial center, say experts.

The Class A vacancy rate Downtown fell to 12.7 percent in March from 13.2 percent in February, though the Class A asking rent remained essentially flat, according to a report from Colliers ABR.

"You have 7 World Trade Center coming on," said Robert Neborak, a director at PBS Realty Advisors. "When it's hard to find that big space in other parts of the city, coupled with the incentives going on Downtown, there will be an increase in rents."

Downtown saw a brief wave of optimism after landlords clinched three large deals early in the year: the Securities and Exchange Commission's move into 235,000 square feet of space at 3 World Financial Center, Fried Frank Harris Shriver & Jacobson's renewal and expansion for 380,000 square feet at One New York Plaza, and Bowne & Co.'s 200,000-square-foot lease at 55 Water Street.

The current vacancy rates don't yet take into account the 1.7 million square feet of space that will become available at 7 World Trade Center later this year. But Robert Sammons, director of research at Colliers, said there's no reason the big deals won't continue and improve occupancy levels. In mid- April, it appeared there was substance to rumors that Newsweek magazine would move Downtown. The firm has been looking at moving into 250,000 square feet at 55 Water Street, Sammons said.

Not all analysts were as sanguine about Downtown's future. Richard Persichetti, senior research analyst at Grubb & Ellis, said he hadn't heard of any major companies looking Downtown.

"Downtown is still going to remain a secondary market until Midtown's vacancy rate drops below 7 percent," he said.

Commercial brokers also are contending with a wave of conversions of commercial buildings into residential. Some contend the move may be a canny strategy on the part of developers to force a rise in prices in the long run.

"You're seeing ownerships making a big bet on the fact that because the commercial market is shrinking relative to the residential market that that is going to increase the value of commercial real estate Downtown," said Gus Field, executive director at Cushman & Wakefield.

Still, Field said he also sees the conversions as a turning point in Downtown's evolution into a vibrant and youthful community with a changing retail face. A process of converting Downtown into a 24-hour neighborhood that began in the early 1990s and took off after Sept. 11, 2001, with the assistance of Liberty Bonds is finally coming into its own.

Midtown South

The conversions Downtown and in other parts of the city are keeping commercial brokers busy relocating tenants, and may be benefiting Midtown South, with its preponderance of smaller Class B and C spaces.

According to a Grubb & Ellis report, Midtown South asking rents rose to $33.69 in the first quarter while pricing Downtown declined to $33.49, with overall average asking rents in Midtown South surpassing Downtown's for the first time in recent history.

Neborak said he believes many of the conversions to residential are taking place in buildings with smaller floorplates.

"Generally what you see coming off the market in terms of conversions to residential are buildings that really don't make sense for commercial anymore," he said. Some of those displaced tenants may be filtering into Chelsea in Midtown South, according to brokers.

"Probably the section of Midtown South that has come back the strongest has been the Chelsea market, where you've got a lot of these buildings with very large floorplates, like 111 Eighth Avenue, 450 West 33rd Street and the Starrett-Lehigh Building. These buildings have decreased their vacancy rates meaningfully over the past 18 to 24 months."

The Flatiron area also has appeal to some of these tenants who can function in "B-plus" space, Sammons said, despite factors like SL Green Realty's purchase of the 1.4 million-square-foot One Madison Avenue, the current offices of Credit Suisse First Boston, which it plans to convert partially to residential. Owners of the International Toy Center, a building with huge floorplates in the Flatiron, also have plans to convert it to residential.

"We're directly involved in working with three different owners who are purchasing properties and converting to residential," said John Brod, principal of PBS Realty Advisors. "We are working to relocate buildings full of tenants."

Midtown

Midtown remained a healthy market in March, favoring neither tenants nor landlords, Field said.

"It's just driving deals," he said.

However, there was a small leap in vacancy when JP Morgan Chase put 712,000 square feet of space at 245 Park Avenue on the sublease market, Sammons said. That pushed the Class A vacancy rate up to 8.6 percent in March from 8.3 percent in February.

"That all had to do with that one big block of space, actually," he said. "Without the addition of the block, the vacancy rate would have dropped to 8.1 percent."

However, JP Morgan Chase's asking rent of $72 a square foot raised the average Class A asking rents in Midtown, which went to $59.14 per square foot, up 3.5 percent from $57.15 in February, according to Colliers.

The numbers look good, Sammons said, but lingering doubts remain about the lack of job growth to support high rates of leasing. Revised 2004 job growth figures showed the creation of about 10,000 office-related jobs in Manhattan, a drop from estimated figures released previously, he said.

At an average of 250 square feet of space per additional employee, that means the absorption should have been 2.5 million square feet. But it was actually almost 7.5 million square feet, Sammons said.

"We last saw numbers similar to that in 1994, but it wasn't as dramatic," he said.