I’m often asked by investors, “How is downtown Manhattan faring in these uncertain markets?” My answer is that it’s well-positioned to weather the storm. With so much new construction downtown is vibrant, modern and has upgraded infrastructure. Downtown also borders culturally diverse and unique neighborhoods like TriBeCa and Chinatown, which makes it an even more exciting place for investors.
According to the Downtown Alliance, which manages the Downtown-Lower Manhattan Business Improvement District (BID), downtown Manhattan is the fourth largest business district in the U.S. with more than 90 million square feet of office space. In the last seven years a tremendous effort by government, local advocates and residents have remade the district into a 24/7 community. Federal and state officials, in addition to the Bloomberg administration, implemented an array of measures to get business and residents back to downtown. The Liberty bond program has helped with billions in tax-exempt financing for downtown; The Industrial and Commercial Abatement Program (the former ICIP) is an ambitious public works redevelopment program; and a new Fulton Street Transit
Station and Fulton Street beautification program is in the works. In May 2008 at a Real Share conference, City Council member Alan Gerson also expressed support for business and stated that government can learn from and work with the business community to bring more retail and supermarkets to downtown. More recently, the Department of City Planning approved a rezoning initiated by a developer and changed the manufacturing M1-5 zoning to a commercial/residential C6-2A zoning in an area close to Chinatown. The rezoning is another sign that city officials in charge of downtown understand the needs of the business community and are flexible in their approach to zoning issues.
The results of all the efforts to attract businesses and residents are visible – of the 312,000 employees who work downtown, about 55,000 also live there (as compared with about 20,000 in 2001). According to the Downtown Alliance statistics, the average downtown salary in 2007 was $127,619 - almost twice the average for Manhattan. Not surprisingly, a high-end retail corridor has come to life on Wall Street and Broad Street. Tiffany’s recently opened its first new location in Manhattan there, and Hermes. Canali and Thomas Pink have set foot nearby. Additionally, the highest grossing BMW dealership in the U.S. is also on Wall Street.
With the relatively inexpensive dollar and the eternal Manhattan mystique, tourism is also booming. More than six million people are projected to have visited lower Manhattan by the end of 2008. Occupancy rates in 2007 for downtown hotels was at a phenomenal 88%, about 10% higher than the average for Manhattan and about 30-40% higher than the industry average. Because downtown attracts a large number of business visitors, its average daily rate was at $340 -over 25% higher than the average rate in the city. A number of owners have decided to cash in on the great revival of downtown – a building at 6-12 Water Street sold for $450 per buildable SF in early 2008. Massey Knakal is currently marketing a development site at 90 Water Street, off of Wall Street, a great location for a hotel.
Exciting new projects
A number of large investors and real estate owners consider downtown their base and in the past few years have engaged in many exciting new projects. Joseph Moinian is currently building a luxury W Hotel south of the World Trade Center site at 123 Washington Street and has finished a renovation at 95 Wall Street, a luxury rental designed by Philippe Starck. William Rudin is focusing on improving his buildings and making them the “most wired and technologically advanced in the country,” while Kent Swig of Swig Equities continues to buy office and residential building. In May 2008, Swig Equities announced it will convert 45 Broad Street to a luxury hotel and residential project with a Nobu restaurant, spa and retail on the ground floor.
As Mr. Swig famously said when asked why he likes downtown: “With rents of class A office buildings downtown relatively inexpensive to Midtown you can hire limousines for all your senior executives and have them at your disposal 24/7 and still save a great deal of money on rent.” While parking is difficult downtown and the constant construction slows you down, Mr. Swig’s argument makes very good sense. Rents for class A office space are $55 downtown vs. $75 in Midtown. When incentives and tax abatements kick in, average rents downtown tend to be closer to $40 per square foot.
Challenges and predictions
While the economy has recently slowed and Wall Street seems more somber, downtown still holds its own with other areas of Manhattan. Analysts mostly fear that developers or converters will not be able to finance their projects and that an increase in the vacancy rate of office buildings will put downward pressure on rents, which may lead to foreclosures. The Wall Street slowdown may also put pressure on retail purchases and thus, on retail rents.
While all of these arguments have some validity, we do not expect the slowdown to lead to a major unraveling of the building sales markets or rental prices in the next 12 months. Yes, projects with low cash flow (developments/conversions or rent stabilized multifamily properties) will probably experience a very challenging environment if they need to finance or refinance now, but the bigger projects will probably survive. Financial institutions have started giving discounts on commercial mortgages in an effort to reduce their risks to defaults. Debt funds are for now waiting on the sidelines but have large cash piles. Real Estate Alert, a trade publication, estimates that in 2008 there are at least 55 active or planned funds, which have raised $33.8 billion for commercial real estate debt.
The average vacancy rate for office buildings in downtown Manhattan is about 7.7%, according to Cushman & Wakefield. The number, while up from the last quarter, is still quite low by historical standards. The WTC and the Fulton terminal have experienced delays, yet gone are the naysayers who only about a year ago thought that developer Larry Silverstein would find it challenging to rent the World Trade Center.. Since 2005 more than 20 % of the new commercial tenants downtown have been from counter cyclical industries like education, health care and non profit organizations, which should cushion a potential blow to rents. While buying power of the downtown population has been affected, it is still strong– e.g. Battery Park residents have an average salary of $315,000.
Yes, the promise and excitement of downtown is well and alive, we just need to dance a cautious dance for the time being.
Neighborhoods: Financial District