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Downtown is Ruled by Tourists While Offices Stay Empty
Residential market is faring better

Crain's New York Business

By Lore Croghan

March 04, 2002

Six months after the destruction of the World Trade Center, downtown's office community remains decimated.

Businesses have moved nearly 60,000 employees out of the area, or 15% of the neighborhood's employment base prior to Sept. 11, according to TenantWise.com Inc., a real estate brokerage.

A world-famous 13 million-square-foot office complex is now a grave site. And the fate of another 7 million square feet of damaged commercial buildings is unclear.

The residential market has more hopeful prospects for near-term revival, as rent cuts and government incentives start to draw apartment dwellers to the stricken neighborhood. Thousands of daily visitors to Ground Zero are swelling foot traffic on what would otherwise be sparsely populated streets. But the office market is the best barometer of whether the neighborhood can recover. It's still reeling.

Downtown's vacancy rate has more than tripled in the past year to 13.4%, according to brokerage Insignia/ESG Inc. More space is available at the World Financial Center, Ground Zero's elegant neighbor, than at any time since its mid-1980s construction.

The wholesale departure of financial services firms, the neighborhood's core tenant base, is a particularly serious problem.

"Sept. 11 was transformational," says M. Myers Mermel, TenantWise.com's chief executive. "The pillars of the financial services industry, which made the downtown market, have pulled out of the neighborhood since then."

Economy is no help

Even as the chaos has subsided and bargain-rate rents and incentives are being offered, businesses are for the most part shunning downtown. The flagging economy is much to blame, because it's slowing leasing activity throughout Manhattan. Also, companies that would be willing to move there are frustrated because no one can tell them exactly how much incentives would cut their costs, or how to get the money.

"It makes it very difficult for tenants to make a commitment," says Gus Field, a senior director at brokerage Cushman & Wakefield Inc.

Even the most optimistic real estate executives think the downtown office market won't start to revive until next year at the earliest, when the PATH station is rebuilt and the economy picks up. They say full recovery will require five to 10 years to accomplish, in tandem with the redevelopment of the trade center site and an improved transit system. So they're trying to take a long-term view.

"This is a great opportunity to do everything right, and not use the bubble gum and Band-Aid approach," says Steve Berliner, an executive director of Insignia/ESG and the head of the firm's downtown office.

The residential market, a much smaller component of downtown real estate, is starting to mend more quickly.

According to a rough estimate by the Alliance for Downtown New York, soon after the disaster, between 3,000 and 6,000 people moved out of their apartments, which was 10% to 20% of the neighborhood's residential population before Sept. 11.

At Battery Park City, where 9,000 people lived, occupancy dropped 30%. Those who left were worried about air quality and the disruption of their children's schooling.

But the tide of downtown departures is beginning to turn. Single people and childless young couples are arriving, drawn by rent cuts of 20% and more.

Developer Richard LeFrak has seen residential interest pick up just in the last month. Occupants of about 500 of the 1,700 apartments at his Gateway Plaza complex have decided to break their leases, he says. Of all the properties in 92-acre Battery Park, his suffered the most damage on Sept. 11 because of their proximity to the Twin Towers.

In recent weeks, Mr. LeFrak's leasing agent, Empire State Properties, has written 170 new leases. Empire co-founder Debbi Hildreth expects the pace to accelerate to 50 to 55 rentals per week, because of the Lower Manhattan Development Corp.'s announcement of grants of up to $12,000 for people willing to live downtown for two years.

Condos attractive

Condominium sales in Battery Park City have also started to revive recently.

"The neighborhood is in the news, and it's positioned as a bargain," says Bill Graizel of Regatta New York Realty Inc. During January and February, his two-man firm clinched 12 signed sale contracts for neighborhood apartments, its strongest early-year performance since its 1990 launch.

Sale prices are an average of 10% lower than before Sept. 11, just enough of a discount to make buyers feel they're getting a bargain while allowing sellers to reap profits.

People who move downtown find themselves rubbing shoulders with tourists.

If the flow of visitors keeps up at its current rate, about 2 million people a year will stand on the Ground Zero viewing platform-as many as used to go to the observatory at the top of 2 World Trade Center.

A full complement of 6,300 tickets per day is being handed out on weekends, and nearly that number is dispensed on weekdays other than Tuesday, says Paula Mayo, the vice president of development and programming at South Street Seaport Museum, which is handling ticket distribution.

Crowds are filling the seaport's restaurants and shops during their hours-long wait. Ten percent of the people picking up tickets are stopping into the museum as well, Mayo says.

The tourists' presence in the neighborhood distresses some residents and workers, but it shouldn't, says Brendan Sexton, a consultant to the Alliance for Downtown New York.

"They're not ghouls," he says. "They are in the presence of something bigger than all of us, and they want to be near it."

Copyright 2002 Crain Communications, Inc
 

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