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Downtown Thinks Small

Deals inked with incentives, cheap rents; 14% vacancy

Crain's New York Business

By Lore Croghan

August 19, 2002

Patrick Curtin remembers the horror of Sept. 11 and always will. But he just rented a new office six blocks from Ground Zero, committing his law firm to a 10-year stint in disaster-scarred downtown.

Rents are cheap at newly renovated 48 Wall St. The landlord is handling the construction of the 18,000-square-foot space, which will spare Conway Farrell Curtin & Kelly a huge capital expenditure.

The city and state incentives Mr. Curtin is applying for will cut costs even further. He finds these compelling reasons to make a deal downtown-and so do scores of other small business owners.

"What drives it is the numbers," he says.

Nearly a year after the destruction of the World Trade Center, big companies are shying away from signing leases downtown. But small tenants have become surprisingly active dealmakers since the city and state pulled together a generous package of grants, tax credits and tax abatements. They've signed 239 office leases since the beginning of the year, which was all but eight of the deals done in the neighborhood, says real estate brokerage Insignia/ESG Inc. Most were the size of Mr. Curtin's transaction or smaller, yet added up to 2 million square feet, enough to nearly fill the Empire State Building.

Busy as they were, the small firms haven't made much of a dent in the area's inventory of empty space, which currently totals 11.6 million square feet, creating a 14% vacancy rate. They haven't achieved the critical mass needed to restore lower Manhattan's office market to full health. Nor are they expected to.

Keeping area alive

"They aren't the panacea, but they are a way to keep the patient alive," says Kevin Richards, director of leasing at Capital Real Estate.

The small fry do provide a significant boost to the economic vitality of the area, though. They add to the employment base, buy goods and services, and swell the pedestrian traffic that retailers depend on. Downtown's energy level is on the rise, thanks in part to them. Restaurants that were empty a couple of months ago are busy. At lunchtime, it's impossible to get a seat on Pier 11.

"We liked the feel of downtown," says Mike Jefvert, director of business development at The Johnsson Group Inc., a Chicago-based financial consulting firm that chose a 4,000-square-foot office at 55 Broad St. rather than a midtown site for its Manhattan debut.

Besides attorneys and consultants, the small-office renters are professional firms such as accountants, architects and engineers, plus tech companies and nonprofits. Some are downtown businesses securing new and bigger offices. Some are from other neighborhoods or are new to the city. Most are privately held, and real estate spending directly affects paycheck size.

The prospect of saving substantial sums is the single most important factor in their decision-making.

The spread between midtown and downtown rents is wider than ever, says Kent Swig, an owner of 48 Wall. Rents for some downtown buildings are half those of comparable midtown properties.

And incentives, which vary according to a company's head count and the proximity of its office to Ground Zero, can cut costs for small firms by as much as $15 per square foot over five years, real estate brokers calculate.

At 2 Rector St., three blocks south of Ground Zero, incentives combined with landlord's concessions add up to savings that are equivalent to two and a half years of free rent during a 10-year lease, says Capital Real Estate's Mr. Richards, the building's leasing agent. The rents themselves are low, in the high $20s per square foot. This combination has drawn small law firms to space that won't even be available until January.

Big tenants also stand to benefit from incentives that are not dependent on lease signings. The city and state have dished out $131 million in retention grants to 40 large downtown companies with 34,000 employees in the area. These deals entail pledges to stay put for seven years rather than signing new office leases. Indeed, some of the recipients are hotels, hospitals, universities or department stores-not office tenants.

"The (leasing) incentives have been ineffective for big tenants," says M. Myers Mermel, chief executive of brokerage TenantWise.com Inc. "They work for small tenants."

Because large companies are shunning the neighborhood, some small tenants feel they have to go. Caplin Systems Inc. moved to a 2,700-square-foot office at 111 Fifth Ave. The company, which makes software that delivers real-time financial data over the Internet, was located at 80 Broad St.

The death of colleague Ari Jacobs, who was at Windows on the World on Sept. 11, wasn't the reason Caplin left the neighborhood. "We lived with the emotional issues for so long that they weren't the problem," says Nigel Glen, the company's chief executive.

Following clients

It was that so many of Caplin's clients and potential clients had left downtown. Mr. Glen drew a map of their current locations, and Union Square fell right in the middle.

But other small tenants are betting on a downtown comeback-even some that had offices in the trade center.

One of them, Wall Street Planning Associates, was located in the North Tower and lost two employees in the terrorist attack. Managing Director Rob Sibarium promised his staff three things before seeking a new office downtown: He wouldn't move them to a building that's a likely terrorist target. He wouldn't take space above the 10th floor. And he would get them a world-class facility. The firm, which is part of MetLife Financial Services, wound up in a 13,600-square-foot office on the fifth floor of 48 Wall.

Another is Financial Technologies International Inc., which just returned to a 34,300-square-foot office at 22 Cortlandt St. rather than turn its temporary digs in Iselin, N.J., into its permanent home.

Early this month, the staff of the financial software manufacturer gathered for a town meeting. Chief Executive Mike Meriton asked them to look out the window at the panoramic view of Ground Zero. "This can be the remembrance of tragedy," he told them. "Or this can be where you will see the rebirth of the financial district."

He's now negotiating with his landlord for a new, cheaper lease, so he, too, can apply for incentives.

Copyright 2002 Crain Communications, Inc

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