Office workers in lower Manhattan smile when they see Isamu Noguchi’s Red Cube. The 24-foot-high steel sculpture, which dominates the sweeping plaza in front of 140 Broadway, evokes the playful spirit of the late 1960s, when it was built. But last month the 1.2 million-square-foot office tower that stands behind Noguchi’s work inspired a different kind of cheer -- the kind Wall Streeters can appreciate: It was in contract to be sold for $450 million, or some $375 per square foot, considerably above the prevailing downtown average of $176 per square foot.
The buyer, Deutsche Immobilien Fonds, a Hamburg, Germanybased real estate investment fund, beat out some 30 rivals to acquire the skyscraper -- just a few hundred feet from Ground Zero -- from Morgan Stanley Real Estate Funds and Larry Silverstein, the developer who owns the leasehold interest on the World Trade Center. “The sale of 140 Broadway is one of the first big institutional buys downtown since 9/11,” says William Shanahan, an executive vice president in the New York office of CB Richard Ellis, a Los Angelesbased real estate services firm.
This and a number of other recent transactions signal the beginning -- modest and tentative, to be sure -- of a real estate revival in downtown Manhattan. After the terrorist attacks, real estate values in the area plummeted and vacancy rates rose, even as some 15 million square feet of commercial space was destroyed or irreparably damaged. A faltering economy and the departure of several major financial services companies depressed downtown real estate values even more than their midtown counterparts.
Another vote of confidence in the downtown market came from two New York investors, Swig Burris Equities and Zamir Equities, which together bought 44 Wall Street, a 340,000-square-foot office building, for $68 million. Overall, downtown office vacancy rates are running at 15.4 percent, far higher than the 6.2 percent that prevailed in August 2001 but slightly better than the post-9/11 high of 15.6 percent. “The fear factor has subsided, and the market downtown has definitely bottomed out,” says Shanahan. “In some respects it’s recovering.”
But it’s a different downtown today, and not just because of the still-jarring absence of the twin towers. The area is evolving into another upscale New York neighborhood, full of high-priced rentals and swanky condos. Five years ago it was dominated by banks and investment firms; although there were a few restaurants and bars, it was not much of a residential neighborhood.
The recent shift reflects the giddiness of the Manhattan residential real estate market, fueled by low interest rates, limited supply and, in the case of lower Manhattan, the tax-exempt Liberty Bond financing that the government made available to developers after 9/11.
As Wall Street office buildings are converted to residential use, lower Manhattan is losing commercial space. As a result, what is currently an 82.4 million-square-foot downtown office market is expected to shrink to 80.6 million square feet in the next few years, helping to firm up prices. Meanwhile, the area is attracting a new crop of tenants that are further changing its character: among them nonprofits like the HIP Health Plan of New York, the Legal Aid Society of New York and the Teachers’ Retirement System of the City of New York; and the City University of New York.
Real estate investors welcome the changes. The more diverse the office space tenancy, the less dependent the market is on Wall Street. And as more residential amenities become available in the area, it becomes a more desirable place to live and work.
According to the Alliance for Downtown New York, a business group, new downtown residential buildings under construction, on the drawing board or in the process of being converted from office space will add at least 4,567 units to the neighborhood between 2003 and 2005. That’s an almost 30 percent increase over the number of units available at the beginning of this year.
As apartment and condo dwellers arrive in the Wall Street area, financial services firms continue to withdraw. Bank of New York, which employed more than 8,000 people within 400 yards of the World Trade Center, will soon move 1,500 workers to a new building in Brooklyn; Bank of America’s new headquarters will be in midtown. Lehman Brothers has moved to Times Square from One World Financial Center. And Wachovia Corp., which recently acquired Prudential Financial, is shifting 1,000 jobs to Richmond, Virginia, leaving an estimated 1.5 million square feet of empty office space at 199 Water Street and 1 New York Plaza.
Lower Manhattan, of course, will henceforth be defined by its spiritual center, Ground Zero. At the moment, no one knows precisely what will be built on the site, or when. Laymen and experts have debated the various designs proposed for the Freedom Tower, the major new building at Ground Zero, and the memorial to the victims of 9/11 and the 1993 bombing of the World Trade Center. Developer Silverstein is suing his insurers to receive $7 billion, instead of $3.5 billion; he argues that the terrorist attacks constituted two events, while the insurers claim that they should be treated as one.
In late December architects David Childs and Daniel Libeskind agreed on a design for the 1,776-foot-high Freedom Tower, although it’s probably not final. Their skyscraper spirals for 70 stories before giving way to an open-air pinnacle composed of cables, windmills and antennas. The building will likely be the world’s tallest when it is completed in 2009. In Libeskind’s site plan for Ground Zero, left partially exposed is the slurry wall that holds off the force of the Hudson River and survived the terrorist attacks.
For the memorial the LMDC in January selected Michael Arad and Peter Walker’s “Reflecting Absence,” twin pools of water 30 feet below street level where the towers once stood, surrounded by a plaza planted with sycamore, locust and linden trees.
Some architecture critics assert that the aesthetic triumph of the new Ground Zero site will be the PATH train terminal, designed by renowned Spanish architect and engineer Santiago Calatrava. The 150-foot-tall, glass-and-steel-winged pavilion will boast cathedral-like arches and a glass roof that will be opened each year on September 11. Financed with $2 billion in federal funds, the new terminal is expected to be operational at the end of 2006 and completed in 2009.
With an additional $3 billion in federal funds earmarked for improvements to lower Manhattan’s transportation system, the city plans to expand the Fulton Street subway station -- New York’s largest -- from nine to 11 subway lines.
Although it’s unclear whether all of these projects will be completed, progress at Ground Zero has been faster than expected, helping to fuel the optimism about lower Manhattan’s future. Says Silverstein, who is in the process of rebuilding Seven World Trade Center, the last building to collapse after the terrorist attack: “When people begin to understand the impact of the billions being expended in this very small space -- 16 or 17 acres at Ground Zero -- the impact of this on lower Manhattan will be phenomenal. I think values downtown will increase, and much more swiftly than anybody could possibly comprehend.”
Planned improvements to the area’s transportation also contribute to that optimism."What we’re seeing now is not only a rebuilding of the World Trade Center site and probably the most modern office buildings that will exist anywhere in the world but also a transformation of lower Manhattan’s transportation system,” says Carl Weisbrod, president of the Alliance for Downtown New York.
Of course, tax breaks help, too. In addition to Liberty Bond financing, leasehold improvements in lower Manhattan qualify for accelerated depreciation over five years instead of 39 years.
Already this year three major deals have been struck: the 140 Broadway sale, the 44 Wall Street deal and the purchase of 990,000-square-foot 60 Broad Street, former home to Drexel Burnham Lambert, by Wells Real Estate Investment Trust for more than $213 million, or $215 per square foot. The seller: New Yorkbased Cogswell Realty Group and two funds managed by Lend Lease Real Estate Investments. That continues the swift pace set in 2003, when another 12 downtown office buildings were either sold or under contract, according to New Yorkbased real estate research firm Real Capital Analytics. By contrast, in the fourth quarter of 2001, only two downtown office assets traded hands; in 2002 just four buildings sold.
Eight of the 12 buildings sold or in contract in 2003 are slated for conversion to residential use. Says Shanahan, “The residential market downtown is absolutely red-hot.” Among the buildings being converted to at least partial residential use: 100 Maiden Lane, 20 Exchange Place and 63 Wall Street.
Before September 11 the New York Stock Exchange had proposed constructing a new building at 23 Wall Street, across from its current headquarters. In spring 2002 New York Mayor Michael Bloomberg announced that the city could not afford the subsidy for the project. Now a partnership of Tel Avivbased Africa Israel Investments and Brooklyn-based Boymelgreen Developers, the new owners of 23 Wall Street and connecting building 15 Broad Street, plans to transform half of the space into condos; the other half might be rented by a hotel or educational institution.
At the moment, businesses looking for office space can find relative bargains in lower Manhattan, which has always been less desirable than midtown. At the end of 2003, downtown office rentals averaged $32.88 per square foot, compared with $50.22 for midtown. In addition, companies that are relocating to downtown or renewing or expanding their existing commitments there for at least five years qualify for city and state subsidies that can add up to $5,500 per employee.
Leasing activity is picking up. Last spring HIP and the New York City teachers’ retirement system both signed leases at 55 Water Street, for 550,000 square feet and 157,700 square feet, respectively. Law firm Cadwalader, Wickersham & Taft announced in September that it will move to a new, 450,000-square-foot location at One World Financial Center; in January another law firm, Morgan & Finnegan, revealed plans to move from its current midtown offices to a 100,000-square-foot space at the World Financial Center.
“Lease renewal activity was extremely strong over the past year,” says Richard Clark, CEO of Brookfield Properties Corp., the owner of much of the World Financial Center and the biggest office landlord in lower Manhattan. “That’s usually an indication that tenants feel the market is about to rebound -- that they’d better get their deals done in a hurry before the train pulls out of the station.”
Despite the increasing demand for downtown office space, many institutional investors remain leery of buying there. Pension funds generally prefer to buy buildings where no major leases are set to expire. But in lower Manhattan, says Clark, “a lot of the buildings present some leasing risk. That’s why we haven’t seen a lot of institutional investor interest.”
Developers face another potential hazard: It will be at least ten years before all of the planned transportation improvements are completed, and by that time Ground Zero’s impressive new office buildings will be ready to welcome new tenants. Because those buildings will likely have unusually high safety standards and will be built with the benefit of less expensive, tax-exempt financing, they could prove stiff competition for the older buildings being bought and sold today.
It’s the classic conundrum for a would-be buyer: You don’t want to be too early or too late. Says Shanahan: “I think that a lot of investors say, ‘I can make a lot of money downtown.’ But they don’t know what’s the right timing. ‘When do I get in, and what’s the right pricing level?’ Until they can get comfortable with the answers to those two questions, they won’t make a move.”
