Dan Marcec
On September 11, 2001, the confidence inherent in the American spirit was shaken considerably, which without a doubt extended to the economy and the real estate industry. With two of the country’s — and indeed the world’s — iconic office buildings directly destroyed, the Lower Manhattan commercial market not only took a physical hit, but also a psychological one. REBusinessOnline takes a look at Lower Manhattan today and the steps it took to reinvent — and at the same time reestablish — itself as a destination market for growth and development.
In The Aftermath
As a result of the 9/11 attack and its subsequent fallout, Lower Manhattan lost more than 12 million square feet of space — nearly 26 million square feet was either destroyed or damaged, says Tara Stacom, vice chairman with Cushman & Wakefield, who is also responsible for leasing One World Trade. Because of the immediate flux in space, there was an obvious impact on vacancy and rental rates in the aftermath.
Interestingly enough, in mid-2001, the Lower Manhattan market had an unusually low vacancy, hovering around 6.5 percent. According to Stacom, 7 to 9 percent is considered equilibrium, where there is balance on both sides of the negotiating table. Once vacancy drops below that, the landlords gain the advantage, which was the state of the market before 9/11. However, one year later in mid-2002, the vacancy rate downtown was approaching 13.5 percent.
While the destruction of and damage to office space in Lower Manhattan certainly contributed to the vacancy climb, Stacom notes that the numbers for Manhattan overall were nearly identical — vacancies in the mid-6’s in 2001 ballooning to the mid-13’s in 2002, displaying the event’s impact on the overall market. While those numbers are not nearly as staggering as some of what we see around the country today, for perhaps the most desirable real estate market in the United States, doubling its vacancy year-over-year is an extremely uncommon occurrence.
Market Evolution
As the years went on, the landscape in the downtown market began to change. While the World Trade Center site was being cleared, re-imagined and then planned, the tenant mix that began refilling vacant space around it was showing a distinct shift.
“Downtown, as you know, has always been traditionally dominated by financial firms, and 10 years ago they occupied just under 50 percent of the downtown market,” says Stacom. “Today, financial firms occupy less than 40 percent of the space, closer to 36 or 38 percent.”
According to a report from Alliance for Downtown New York, Inc. entitled The State of Lower Manhattan, 10 Years Later, over the past 10 years, Lower Manhattan has seen both a net increase in the number of companies as well as a diversification of businesses, the latter supporting Stacom’s point. The report explains that while the area saw a decrease of 754 companies in the first two years after 9/11, 2004 saw the arrival of 200 companies. Following that, the count has increased each subsequent year, even during the recession, and 307 companies have moved to Lower Manhattan since 2005. All told, the submarket boasts 8,428 companies, 130 more than resided there on September 11, 2001.
Of course, finance is still Lower Manhattan’s signature industry, and there likely will not be a sea change in that respect. Major institutions such as American Express, Goldman Sachs, Bank of New York Mellon and Deutsche Bank remain mainstays. Yet, from 2002 to 2010, the proportion of people employed in the FIRE sector (finance, insurance and real estate) dropped 19 percent, while professional services increased 21 percent, hotel and retail increased 10 percent, and education and social services increased 37 percent (see the pie graph for more details).
In addition, media is one of the area’s growing industries. In the past two years, Broadcast Music, Inc., American Media, Inc., and the New York Daily News with its sister company U.S. News & World Report joined the growing roster of media companies in Lower Manhattan, where more than 60 media firms currently occupy 1.3 million square feet. And of course, these companies will soon be joined by Condé Nast, which signed a 1 million square-foot lease at One World Trade Center for occupation in 2014, a deal arranged by Stacom and her colleague Alan Stein, executive director with Cushman & Wakefield, along with The Durst Organization.
“Though quite a few media firms had already migrated downtown, the flag of Condé Nast at One World Trade Center has truly changed the dynamic of the marketplace and how other media companies are now looking at Lower Manhattan,” says Stacom.
One World Trade, aside from its obvious visibility as the revival of an American icon, embodies this sensibility that’s meeting market demand. Not only is it well located near transportation, but the building itself offers other attributes these companies are looking for, whether it be LEED certification or new construction, or even office layout. The interior structure is being built out column-free and allows a much greater density, in addition to allowing light on all sides.
Aside from One World Trade, much of the submarket is embracing new trends on a larger scale. Creative industries and digital firms are looking for a modern work environment that allows for less than 200 feet per person, Stacom says. “Much like what Bloomberg did a decade ago uptown is now mushrooming throughout the industry,” she notes.
“A lot of private sector companies, whether law firms, management consulting firms, or technology firms, now feel that they can attract and maintain the best talent in downtown Manhattan,” Stacom adds. “The city has pockets of neighborhoods, and these neighborhoods are where young people want to live and work. Downtown has already become a focal point, and with transportation access only becoming better with the completion of the Calatrava [Transportation Hub], these companies want to locate downtown.”
The Future Is Here
As Lower Manhattan looks forward, the momentum is only rising. When asked about challenges the market has faced recently, Stacom acknowledged she knows to expect them, but to this point the growth has occurred ahead of what they foresaw.
“We’ve had such a wonderful several years worth of progress, whether it was the joint venture partnership initiated by the Port Authority of New York and New Jersey that brought in the Durst Organization, which has added validity both finishing the project as well as managing and leasing it as a first class office tower going forward, and then of course the Condé Nast transaction and opening of the memorial of course this month,” she says.
“We all sort of sit here looking back, and while I was always optimistic that downtown would absolutely have this resurgence, I didn’t see this,” Stacom adds. “We all keep scratching our heads, and it’s been an extraordinary thing bringing this all to fruition. One World Trade is 40 percent committed three-and-a-half years before it opens, and we’re actually ahead of schedule for what we can deliver on tenant construction.”
Complemented by the monumental accomplishment of getting One World Trade well off the ground, the entire submarket is standing on its own. With 5,000 new hotel rooms coming online, and destination locations like the WTC memorial, Frank Gehry’s new building and the Calatrava Transportation Hub, the area is already seeing an influx of tourism, and it’s the fastest growing residential neighborhood in New York City.
As a result, downtown growth has been a bonus for Manhattan in general. Because there had been so little new supply over the past decade, and even the past two decades, the market for new construction is bringing more life to the city as a whole. Stacom notes that a lot of firms today, particularly internationally based firms, want high-functioning, newer office space. While One World Trade will be the only new product delivered in the 2013/14 timeline, Related Cos., Boston Properties and Brookfield all have other buildings slated.
“Equilibrium rates are 7 to 9 percent; we expect vacancy to be at 9 percent by the end of this year, and that’s beginning to feel like a tight market,” Stacom says. “Rents will begin to climb even quicker than they have right now. So this new construction has been sorely needed and will help retain these tenants in Manhattan that want to be here for the labor pool.”
Now that One World Trade has risen above the construction barricades, it’s become a visual beacon of the market’s resurgence. While 9/11 was a tragic event still in recent memory, its impetus as the rebirth of Lower Manhattan will leave a larger legacy for generations to come.