Downtown waits for 7 WTC domino effect

Real Estate Weekly, Feb 9, 2005 by Elaine Misonzhnik

It has been hailed as the next business capital of the world, but it might be a while before lower Manhattan can actually claim the title.

While the overall expectations for the market remain optimistic--brokers insist that leasing numbers will go up as midtown becomes too expensive--it could take up to two years to see real improvement.

Throughout 2004, downtown's lackluster performance continued to disappoint, with vacancy rates in the 14% range, in marked contrast to the rest of Manhattan. Now, Silverstein Properties is about to add another 1.7 million s/f of space to the inventory--without a committed tenant.

"I know they've had a number of showings there, which is a good sign, but I can't disclose who they are," said Fred Trump, managing principal with Newmark & Company. He was quick to point out, though, that while "7 World Trade Center is obviously going to change the availability rate downtown, if you want to look at it positively, it will be the finest new building ever built in Manhattan."

Two other brokers, Marc Shapces, senior managing director with Studley, and Barrett Stern, senior managing director with Grubb & Ellis, have heard rumors that Verizon is considering renting several hundred square feet at 7 World Trade, but "I can't say I've heard that someone will definitely go there," Shapces noted.

"What I know about 7 World Trade is that they are gearing up their marketing program and [getting Verizon as a tenant] would make sense--every transportation avenue in the metropolitan region stops within two blocks of that building," said Stern.

"I think that buildings like 7 World Trade Center and World Financial Center will ultimately fill up because they are exceptional buildings and cater to serious sized tenants whose opportunities for affordable space at less than $60 per s/f are limited."

Another broker, however, admits that while 7 World Trade Center is a great building, his downtown clients are reluctant to spend $20 to $30 more per s/f than the market value.

Even Stern, who confesses that he is partial to downtown, says that the market is still far off from full recovery. "There was a lot of sublease space available and that has been holding the market back for a long time," he said. "But the spread between rental rates in midtown and in downtown is reaching record proportions and if the rates in midtown continue to escalate, I think it bodes well for lower Manhattan."

Stern is not the only one who hopes that midtown's tightening market will force more tenants to look downtown.

Said Trump, "There are a lot of positive reasons for folks to lease space downtown right now."

"There is still a softness in the downtown market that's going to create great opportunities for tenants within the next 12, 18, 24 months," said Shapces. "There are tenants who would probably never consider downtown who will now have to because of the lack of options in midtown and because the price differentials are so great."

According to Andrew Peretz, executive director with Cushman & Wakefield, "Midtown is really a completely different city than downtown today, prices are beginning to increase, the market is moving along very strongly. And somebody in midtown will take a look at 7 World Trade Center and say 'Over 10 or 15 years, there are millions of dollars that I could save.' And it's a really nice building. I have a feeling that this will be a successful project and won't affect the market in a negative way." In addition, the brokers point out that leasing activity in lower Manhattan has increased in the past few months. "There is quite a bit of activity at 55 Water St., Wachovia just sublet 447,000 s/f to Morgan Stanley, 32 Old Slip has signed a 137,000 s/f deal with TD Waterhouse," Trump said. "There has been a healthy amount of activity in the past month or so."

"American Express recently signed a lease at the World Financial Center, the FCC is rumored to be executing a lease and there are a number of other large users who have been considering space downtown," said Stern. "Our building, at 22 Cortlandt St., has had a tough time attracting tenants after September 11, but now we closed about six leases for a little over 40,000 s/f in the past few weeks. There is a lot to be said for being able to lease space for less than $30 per s/f. The trick is getting people to look. Once they look, they are very favorably impressed."