Downtown Still Struggles
A Year After the Attacks
NEW YORK (Sept. 9, 2002) -- Downtown New York's real-estate market may be in better shape than it was immediately after the Sept. 11 attacks, but its long-term prognosis remains in doubt.
At least 13 million square feet of office space was lost in the attacks, and another 20 million square feet was damaged. Despite this huge loss of real-estate space, vacancies actually escalated, rents dropped off and a boatload of sublease space hit the market. Many firms, grappling to deal with the tragedy in addition to the deepening economic recession, began slashing jobs and downsizing their real-estate needs.
Some thought the market was beyond help, and indeed, from a commercial perspective it is still ugly. The office vacancy rate in downtown New York shot up to 13% in May, up from 8.1% last August and its low of 4.3% in September 2000, according to Justin Stein, regional director of client services at Grubb & Ellis New York.
Still, this is far better than then "high-teen" vacancy rate that many had predicted earlier, said Mr. Stein. And since May, vacancies have continued to hover around 13%.
"It's a signal that things are not dive bombing, but they're not getting better either," he said. However, there have been small signs of improvement in that asking rents have increased slightly over the past three months, he added.
In the immediate aftermath, horror-stricken tenants, displaced in the catastrophe, talked loudly about moving offices out of Manhattan altogether, and a flurry of firms began scouting for space in areas as far-flung as New Jersey; Westchester County, N.Y.; Stamford, Conn.; and Brooklyn. When the smoke cleared though and cooler heads prevailed, some took space only temporarily outside New York while other opted to return to Manhattan, although not necessarily downtown.
Downtown Diaspora?
Indeed, the mass exodus some analysts predicted hasn't happened. Cynthia Wasserberger, director at Colliers ABR Inc., a commercial real-estate brokerage firm, estimates 71% of the displaced tenants from the Twin Towers have remained in Manhattan. Of those, 56% relocated to midtown, 34% to midtown South and only 10% stayed downtown. Of the 29% that left New York, Ms. Wasserberger estimates Jersey City, N.J., with its attractive tax incentive package and close proximity to Manhattan, likely benefited most. New York City was a bit slow at the switch, only unveiling its tax break programs in January and March in the hopes of encouraging both residential and commercial tenants to stay downtown.
Those companies that have stayed in lower Manhattan have spread their roots a bit wider. Many firms, such as Goldman Sachs Group Inc. and Morgan Stanley, saw Sept. 11 as a wake-up call to diversify their operations geographically. They didn't want to be caught flat-footed with all of their operations sharing the same transportation and power grids should another unexpected attack occur. Goldman announced its intention to move its New York equities businesses to a new office complex in Jersey City, while Morgan Stanley purchased a 725,000 square foot office building in Westchester County. Both the Bank of New York and Empire Blue Cross Blue Shield are constructing new buildings in Brooklyn.
There are signs of improvement on the residential side, as well. Sales in downtown New York simply disappeared for about six to eight weeks following Sept. 11, said Scott Durkin, chief operating officer at the Corcoran Group. "It was as if no one was home. No one was looking, and no one was putting their apartment up for sale," he said.
Since November though, sales have slowly been returning. Citywide, they peaked in June and prices are up 6% on the East side and 15% on the West side from year-ago prices. Downtown though, prices are off 9%, Mr. Durkin said.
On the rental side, "people just left, just walked away from their leases in the Battery Park area and the financial district" in the months immediately following Sept. 11, he said. As a result, "landlords were left holding a huge inventory of apartments in an area that needed a massive cleanup," he said.
City incentives, which offer tenants rent rebates of up to $6,000 a year for two years, and other landlord perks -- ranging from free cable to two months free rent -- are helping to lure tenants back, Mr. Durkin said. Still, he estimates rents are as much as 25% lower than they were prior to Sept. 11.
Downtown residential is "the best deal in town," he said, "The most negotiable and the most eager."
The government's economic stimulus package (unveiled in January and March), which included grants, tax credits and other incentives, went a long way toward enticing tenants to stay downtown -- especially residential tenants, said Steven Spinola, president of the Real Estate Board of New York. He said the residential vacancy rate, which skyrocketed to more than 30% following Sept. 11, has now dropped to under 10%.
"The incentives really worked," said Steven Ross, chief executive of the Related Cos., a residential developer. "Downtown now has the highest [residential] occupancy of any part of the city."
Yet, most observers admit that, despite some of these positive signs, it may not take much for it to recede again. The situation could get worse if the economy experiences a double-dip recession or financial services firms do another round of layoffs.
Silverstein Saga
And, commercially, there still needs to be a decision on what will be rebuilt at the World Trade Center site and when. This has seemed like a soap opera, with endless twists and turns that show no signs of resolution in the near-term.
First, there's World Trade Center leaseholder, Larry Silverstein, who is battling his insurers in court over how much he's entitled to receive in insurance payments to rebuild. He argues the plane attacks were two separate incidents, and therefore entitle him to two separate payments of $3.55 billion for a total of about $7.1 billion.
A consortium of insurers, led by Swiss Reinsurance Co., are balking at this. They accuse Mr. Silverstein of underinsuring the complex, and they argue the attacks were a single coordinated event organized by terrorists, which therefore limits the payout to a single payment of $3.55 billion at the max. Some have suggested that Silverstein will be unable to rebuild if the payout is this small.
The two sides have been working with another judge to reach an out-of-court settlement, but at last word, the two sides remained "billions of dollars apart." If no deal is inked, a trial date has been set for Nov. 12, with jury selection beginning Nov. 4.
As for the redevelopment plans themselves, Mr. Silverstein has often stated that he wished to restore all 12-million square feet of office space that was lost at the site. However, a long-awaited list of six redevelopment proposals, which conformed to this vision, were recently panned by the public, and Mr. Silverstein has since started to soften his stance.
As a result, another consultation period and more plans are now being drawn up. Mr. Spinola downplays the delays.
"Progress is being made despite the criticism and cheap shots," said Mr. Spinola. "Some people claim there was no public process, but there was. [But] whenever people don't get their wishes granted, they claim there was no input."
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