In Manhattan office rentals, you can always go… downtown – Commercial Observer

Is Lower Manhattan on the Brink of an Office Renaissance?

Short answer: yes. Long answer…

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Think of it this way, said Adam Foster, an executive vice president at CBRE (CBRE), who has leases totaling 14 million square feet: Residential conversions are taking a lot of unused — and unusable — office space off the market, leaving behind a tidy collection of addresses in Lower Manhattan that will benefit from the demand.

“You’re going to see a lot of rental growth over the next few quarters,” Foster said. “That’s not surprising. Post-COVID, everyone wanted to stay on top of transportation. To that end, the World Trade Center and the buildings along Broadway were the recipients of most of the demand.”

That would be seen as a reversal in a market that had been struggling. Traditionally, when Manhattan caught a cold, Lower Manhattan caught pneumonia. Vacancy rates have been rising and rents have been falling in the city’s downtown, known for its narrow, winding streets and older buildings. Typically, any post-crisis recovery comes first to Midtown, which boasts wide boulevards, a grid of streets and some of the most sophisticated office space in the world.

Post-COVID-19, it was no different. According to research firm CompStak, the gap in average office rents between Midtown and Downtown has widened. The firm found that the weighted average effective rent — the rent that’s actually agreed upon between a landlord and tenant, not the commonly quoted asking rent — was $79.84 per square foot in Midtown, compared with $45.80 in Lower Manhattan in mid-2024. That’s a 43 percent difference post-pandemic.

While that gap narrowed in the early months after lockdowns in 2020 to an extremely narrow 17 percent ($67.81 in Midtown versus $56.22 in Downtown), it has widened since then as both markets have grappled with a surplus of office space and workers have explored opportunities to work from or near home.

As a result, city authorities and many private sector entities are seeking to transform permanently empty office buildings into residential buildings, which is a time-consuming and often expensive process.

While for many years the driving force in office design was to place as many workstations as possible on the same floor, which created a need for wide, column-free floorplates, apartments require natural light. In some cases, developers went so far as to create skylights—courtyards in the center of towers—to bring light into units that had to be carved out of previously open offices. An example is 25 Water Street, formerly 4 New York Plaza, a 1.1 million-square-foot tower that once housed JP Morgan Chase and New York Daily Newscurrently divided into 1,300 apartments.

Such projects remain the exception, however, which could mean more unused office space in the downtown market. In its September research report, CoStar (CSGP) found that New York City is seeing a nearly 80% decline in housing starts so far this year compared with 2023, forecasting about 5,000 units for the year compared with more than 23,000 last year.

“While steps have been taken to encourage new housing construction, the rising cost of doing business in New York City has significantly slowed the construction process,” Victor Rodriguez, senior director of analytics at CoStar, said in an email. “Whether it’s the required use of union labor, affordability requirements for new construction, the increased cost of purchase or construction loans, or the lengthy process of getting a project approved, some developers have decided to hit the pause button.”

According to CBRE data from August, Midtown’s vacancy rate (i.e., vacant space plus any space that becomes vacant in the next 12 months) was 17.9 percent. Downtown’s vacancy rate was 22.5 percent—roughly the same as it has been for the past few years.

Real estate services firm Cushman & Wakefield (CWK) said nine downtown buildings containing about 6.6 million square feet of office space have been converted to apartments or are in talks to do so.

Rob Holbrook, executive director of Mayor Eric Adams’ Get Stuff Built program, which oversees office-to-residential conversions within the Mayor’s Office of Planning and Policy, said there were 74 properties in the conversion accelerator program that the city launched in mid-2023 to cut red tape and make these conversions possible. Of those 74, 14 are south of Canal Street in Manhattan. Holbrook said there could be more because not all property owners seeking conversions have been in touch with the city.

“We’re here to help,” he said. “We’ve set a goal of 20,000 (conversions) over the next 10 years. We’re on track for the next few years, producing about 2,000 units a year through conversion. We need zoning changes to continue to meet that production goal.”

Holbrook said CoStar’s findings don’t reflect the urgent need for more housing in New York City. Citing the city’s own study, he said the apartment vacancy rate in 2023 was 1.4 percent — “virtually zero vacancies” — and that a number of factors could have made it difficult to start construction this year, including high interest rates.

As Holbrook noted, the city’s Department of Housing Preservation and Development operates a separate tax credit program to help property owners cover both the financing and construction costs associated with the conversion.

And the fact that many offices are in financial trouble doesn’t help the city center either. Trepp, a research firm that tracks commercial real estate tied to commercial mortgage-backed securities, provided a list of 54 Manhattan properties below 14th Street whose loans have experienced some level of distress, ranging from special servicing to default. The list includes 65 Broadway, 17 State Street and several hotels, such as the Holiday Inn and the Nolitan Hotel in the Financial District. Many of them are smaller buildings.

At 80 Pine Street, the 1.2 million-square-foot office tower was left half empty after the departure of insurance giant AIG in 2021. was acquired earlier in September by Brooklyn’s Bushburg. He paid $160 million to Rudin Management for the building and secured $100 million in financing from Carlo Bellini’s 99c. The tower is reportedly set to be converted to residential.

In August, a specialty real estate servicer, often a pre-foreclosure agent, took over a $180 million commercial mortgage-backed loan tied to the RFR Holding Building at 17 State Street, a cylindrical downtown office tower.

Commercial real estate powerhouse RXR almost lost its 33-story office tower at 61 Broadway after failure to fulfill an obligation for a $240 million loan. A 49 percent stake in the building was sold in 2016, allowing RXR to recoup nearly all of its equity, according to a person familiar with the situation. Although the company has defaulted on the loan, talks with the lender are ongoing, and part of the building could be converted to residential use.

Robert Tunis, a vice president at Colliers (CIGI) and a broker who specializes in tenant representation, said he doesn’t think Lower Manhattan is in any bigger financial trouble than any other part of the city, given its size. Midtown is a market of about 240 million square feet, the largest in the country.

Lower Manhattan has seen a “flight to quality” office leasing pattern similar to that seen in Midtown, with the more chic and modern World Trade Center and Brookfield Place the most desirable. The same is true of Sixth Avenue in Midtown near Rockefeller Center and Park Avenue just north of Grand Central Terminal, as well as the relatively new One Vanderbilt compared with older buildings in the submarket. Post-pandemic, corporations appear to be emphasizing newer, well-appointed spaces to attract and retain talent.

“Almost every corner of downtown has accessibility rates that are higher than what you would consider market equilibrium, which is typically 10 percent,” said Frank Wallach, executive director of research and business development at Colliers. “But there are areas of downtown that are not as oversupplied as others, and with the flight to quality, those are the areas that are experiencing lower accessibility. At the end of the second quarter, downtown had an accessibility rate of over 20 percent. But if you look at the product of downtown since 2000, which is almost exclusively Trade Center, the accessibility rate is much lower, about 14 percent.”

The overall vacancy rate in Midtown was 24.2 percent in August, according to Cushman & Wakefield. The so-called Insurance District and Financial West submarkets in Lower Manhattan were on par with 32.6 percent and 33.2 percent vacancies, respectively. The World Trade Center area, which includes Brookfield Place, had a vacancy rate of 19.8 percent, lower than the overall average, and the lowest vacancy rate was in the City Hall area, at 12.6 percent. The other submarkets were Financial East and Tribeca.

Colliers data suggests that sublease availability in the city centre also remains worryingly high. At the end of August, sublease availability in the city centre stood at around 5.6 million square feet, or around 26 per cent of the total in the city centre. That percentage was actually better than it has been on record, the lowest since April 2022. However, overall sublease supply was significantly higher than it was in March 2020, the last month before pandemic-related lockdowns rocked the market.

At that point, Wallach said, the total availability in the center was just under 11 million square feet, of which subleases accounted for about 2.5 million square feet, or about 22 percent of the total availability in the center. The 25 percent mark is where brokers start to worry, because subleases, which are typically cheaper than space offered directly by landlords, drive down prices.

Tunis described the sublease share in the downtown office market as “recessionary.” “The fact that we’re still at 26 percent is a little bit problematic,” he said. “Downtown has always been the weaker sister in the Manhattan market.”

Jessica Lappin, director of the Alliance for Downtown New York and a former City Council member, said the conversion of offices in the market into residential buildings is nothing new. More than 22 million square feet have been converted there since 1995, she said.

“During the pandemic, it helped us weather the storm,” she said. “We created a neighborhood where people work. It grew at a rapid pace and it was very beneficial. When it first started in the ’90s, there were critics who thought it was stupid and no one wanted to live downtown. It’s clear that wasn’t the case. People love living in Lower Manhattan.”

She mentioned 85 Broad Street, the tower that once housed global investment bank Goldman Sachs, as one of the buildings now slated for conversion into apartments. Asked whether she foresees Lower Manhattan’s rebirth as an office market once the current wave of conversions ends, Lappin took a “positive long-term view,” she said.

“The thing about Manhattan is that it’s a finite piece of land and they’re not building on any more land,” she said. “I can’t tell you when, but I’m sure we’ll always come back.”