Empty Offices Abound.
Crain's New York Business
By Lore Croghan
November 12, 2001
Downtown renter’s revolt
Government incentives to resuscitate downtown will not be enough. Businesses
are demanding hefty rent cuts as well.
First indications show prospective office tenants seeking rent reductions of
That is exactly what has happened at 1 Liberty Plaza. There, a prospective
tenant has offered to pay $40 per square foot for sublet space, sources say.
Asking rents are $52 to $55 per square foot at the Class A skyscraper, which
recently reopened after sustaining damages in the Sept. 11 attack on the
World Trade Center.
“All the buildings downtown are going to have to be very responsive on the
price side to conclude transactions,” says Barrett Stern, an executive
managing director at Murray Hill Properties/TCN.
Traditionally, tenants have looked to downtown as a lower-rent alternative
to midtown. Now they want even steeper discounts versus midtown prices to
compensate for the distress and inconvenience of working near a disaster
site where reconstruction won’t be completed for years.
Those rent cuts would come on top of city, sate and federal incentives that
are expected to lower occupancy costs by $10 to $20 per square foot. The
combination of rent cuts plus incentives would knock the cost of an office
that had been $40 per square foot before the disaster to $20 per square foot
Mr. Stern predicts that buildings surrounding the trade center site as well
as Class B properties on downtown’s east side will be compelled to accept
rents that are 10% to 20% lower than pre-Sept. 11 asking rents.
At 22 Cortlandt St., a disaster-zone building that’s a scheduled to re-open
between Dec. 15 and Jan. 1, a prospective tenant slashed its offering rent
to the mid-$20’s per square foot after the terrorist attack. The asking rent
is $33 per square foot. Mr. Stern is trying to negotiate the price back up
to $29, which would be 12% below the asking rent.
On the other side of downtown at 83 Maiden Lane, he thinks, he’ll have to
drop starting rents to the mid-$20’s per square foot to get deals
done-reductions of 25% to 35%. He had anticipated rents in the mid- to high
$30’s per square foot.
The outlook is not helped by the fact that downtown is now awash in empty
space. Five million square feet of sublets have surged onto the downtown
market since Sept. 11. Even though 13 million square feet of offices were
destroyed in the trade center’s collapse, 25 blocks of 100,000 square feet
or more are available through sublets or direct leases, according to
brokerage TenantWise.com Inc. Before the disaster, tenants were
complaining about a dearth of big spaces throughout Manhattan.
Initially, companies offering sublets are expected to resist rent slashing.
Many secured space in recent years and owe high rents to the landlords they
are leaving behind. Building owners, however, have more leeway to cut prices
on direct leases, unless their loan covenants restrict how low they can drop
A handful of big companies are seeking space downtown, including Morgan
Stanley, Aon Corp., Sidley Austin Brown & Wood and Oppenheimer Funds.
Oppenheimer came close to clinching a lease in Jersey City, then changed
Meanwhile, five to seven prospects per week have visited Gruntal & Co’s
180,000-square-foot sublet at 1 Liberty Plaza for the last three weeks, says
John Wheeler, a senior director at Cushman & Wakefield Inc. Several have
toured Merrill Lynch’s 472,000-square-foot sublet at 2 World Financial
Center, which could go for less than its asking price of $55 per square
foot. “For the right tenants, we will figure out the right flexibility,”
says Bob Flippin, an executive managing director at brokerage Colliers ABR
Inc., who is marketing Merrill’s space.
At this point, though, there is a lot more looking than signing. Without
finalized incentive packages, most companies are reluctant to commit to the
neighborhood. “It worries me,” says Peter Sabesan, chief executive of The
Hunter Realty Organization. “Every week that passes, we are going to lose
In a single day recently, he met with three midsized companies that all
wanted to rent offices downtown, after telling him just a few weeks before
that they’d never return. But none was willing to go forward without knowing
exactly how much money it would save through incentives.
At this point, only government agencies are moving swiftly to rent space
downtown. “How could the city say to the federal government, ‘Help us,’ if
they aren’t keeping their own offices downtown?” asks Brian Waterman, a
principal at Newmark & Co. Real Estate Inc. and the building agent for 59
Maiden Lane, where the city just leased nearly 300,000 square feet.
One government tenant, the U.S. Attorney’s Office, was so eager to secure
space that it exercised its power of eminent domain to take over three
floors of 33 Whitehall Street.
Another factor slowing the flow of tenants to downtown is the slumping
economy, which is driving companies to lay off personnel and reduce rather
than expand their space needs. Citigroup’s situation is an extreme example
of that effect.
The company not only lost more than 1 million square feet in the trade
center, it also shed space at 399 Park Ave. and recently put Salomon Smith
Barney’s office at 125 Broad St. up for rent as well. All told, the
financial services firm has slashed its Manhattan space by 1.9 million
Tenants that are in the market for space also have plenty of options in
midtown, which many prefer, though it’s pricier. In the next three months,
real estate executives say, more than 1 million square feet of additional
sublets will open up as fresh rounds of layoffs begin.
With all those factors stacked against them, downtown buildings that don’t
offer aggressive rent cuts to combine with incentives are in danger of
having their spaces sit empty for years. That is precisely what happened
during the recession of the early 1990s. Back then, the area’s vacancy rate
rose to 25%.
It’s hard to postulate that tenants need all this space,” says M. Myers
Mermel, the chief executive of TenantWise.com.
Copyright 2001 Crain Communications, Inc