Value still to be found in recovering Downtown market

Real Estate Weekly, June 25, 1997 by George M. Stone

Despite a common perception, even in its darkest days, Downtown was a force to be reckoned with. In 1995, 4.7 million square feet of space was leased, and 5.7 million in 1996, making Downtown the second most active market in the country.

Within the past six months, many large blocks of Class A space have been leased up and asking rents have grown to a healthy $25.79 per square foot. However, the market has not reached its peak and there are still plenty of bargains to be had for educated tenants, as well as savvy owners.

The recent expansion of Wall Street's financial institutions has definitely had a positive impact on the market. However, while Wall Street is still the engine that drives Downtown's economy, other types of businesses have recently moved into the area, adding stability to the market and creating a much more diverse neighborhood. These new companies, which in the past would have been unable to afford Downtown rents, have been lured in by cost savings on Class B and C space, as well as the divergence of rents between Downtown and Midtown. We will continue to see migration of these businesses, which include high-tech companies, health organizations and non-profits, to Downtown as long as Class B and C rents stay in the teens.

Large corporations are once again considering Downtown as a viable option to Midtown, and are taking advantage of the cost differential between Midtown and Downtown, tax abatements under the Revitalization plan as well as reduced energy costs. Although Midtown will remain serious competition for Downtown in attracting these tenants, Downtown should be able to capture its fair share of big-name companies. Recently, Chubb, Penguin Putnam, Inc. and Standard & Peers Corporation signed letters of intent for Downtown properties.

Downtown's major attribute - it has the single greatest transportation infrastructure (12 subway lines converge at the tip of Manhattan), which means a huge employment base is accessible to Downtown within minutes - will undoubtedly be a big decision-maker for these tenants. The creation of a residential segment and increased quality of life due to the proximity of Tribeca and attributes created by the Downtown Alliance, such as street cleaning and shuttle buses to the Ferry, will only increase the area's allure.

Owners who are looking to take advantage of this revitalized market take note: there are still plenty of opportunities to be had in Downtown, especially with Class B and C product. The Witkoff Group has been one of a small handful of owners who have been successful in the Downtown market and have acquired several buildings within the last year and a half, including 100 Wall Street, One Broadway, 33 Maiden Lane, 10 Hanover Square and 156 William Street. Success stories such as that at 156 William Street illustrate the opportunity for landlords in Downtown.

When The Witkoff Group acquired the Class B property in late 95 (still a lagging market in Downtown), it was only 50 percent occupied. The company began an aggressive plan to upgrade the building with a new roof, common corridor upgrades, a new cooling tower and complete elevator modernization. By offering aggressive rental packages and new installations for tenants, and by seeking the cooperation of the real estate community (brokers were a key component in marketing and leasing the building), 156 William Street is now 95 percent occupied.

From a financing point of view, the market is also showing considerable improvement. When The Witkoff Group bought 33 Maiden Lane, there were only two lenders Credit Suisse First Boston and East New York Savings/M&T Bank - willing to finance properties Downtown. Today, the situation has vastly improved and dozens of financial institutions are financing deals in the Downtown market. This added liquidity has made it easier to acquire property, finance improvements and thus has had a positive impact on leasing and overall values.

Downtown has something today that it lacked for the past seven years: momentum. The current trend of residential conversions, coupled with enthusiastic leasing activity, has helped the Downtown market reclaim its significance in the Manhattan real estate scene. If it continues on this rapid pace, Downtown should continue to excel in the coming year.