Eight Years Post 9/11: Lower Manhattan Diversifies in Face of Office Glut

Sep 22, 2009 4:48 PM, By Sibley Fleming

Q&A with Robert Goodman, FirstService Williams

For the past 26 years, Robert Goodman has worked in Lower Manhattan, where he started his career. Goodman prides himself on his encyclopedic knowledge of the market, and maintains a mental database of tenants and their locations, past and present.


He has seen multiple cycles and watched the market rebuild over the past eight years as he also watched it collapse before his very eyes. On Sept. 11, 2001, he left his office on the 86th floor of One World Trade Center at 8:47 a.m. One minute later, he was at the base of the building, getting ready to jump onto the subway, when the first plane crashed.


Recently, Goodman left his position of senior managing director for tenant rep firm Studley and joined FirstService Williams, where he now serves as senior managing director of brokerage in the firm’s Manhattan office. NREI recently talked with Goodman about the Lower Manhattan office market, the current challenges of oversupply and the future of the home of Wall Street.


NREI: It’s been eight years since the attacks of 9/11. What are the broad strokes that characterize how the market has changed?


Goodman: The real estate market before 9/11 occurred was weakening as a result of the dotcom implosion. As we turn the clock ahead eight years later, it’s been a little bit of déjà vu in that we now have a weakening market that we’re once again addressing. The good news is that over the span of these eight years there’s been a change in the tenant mix, which makes up the business sector for Lower Manhattan, a change which is actually for the better for Lower Manhattan’s survival and ultimate rebirth.


NREI: How has the tenant mix changed?


Goodman: Up until 9/11, it was essentially a typical solid business community where you had traditional, old-line investment banking firms, all of the major Wall Street companies. We have a higher proportion now of technology firms, information technology firms, public relations firms, not-for-profit organizations, architectural firms and engineering firms, so the marketplace is no longer dependent on one particular business for its growth. It helps mitigate some of the risk that has been going on in the business world over the past 18 months.


NREI: What happens if the 11 million sq. ft. of office space lost when the World Trade Center was destroyed is replaced before the economy rebounds?


Goodman: It would be a significant risk to the marketplace simply because there are not enough existing tenants. There are not enough new companies, which are going to be created, which could possibly fill up a majority of that space. It will actually work to Lower Manhattan’s benefit that the development of those properties will take longer than anticipated because at that point businesses will have stabilized.


NREI: What are the opportunities for tenants seeking space in Lower Manhattan?


Goodman: There are significant opportunities both for existing product and product that will become available as key decisions get made about organizations such as Merrill Lynch and AIG. AIG has a significant presence in Lower Manhattan. Including the two buildings they have sold but not yet vacated, they have in excess of 2.5 million sq. ft.


NREI: What are some of the concessions that landlords are granting these days?


Goodman: Concessions continue to increase. The level of tenant improvement dollars continues to escalate. The number of months of free rent continues to increase. Probably the biggest difference that’s taken place is that tenants are significantly cash flow sensitive and they want to preserve as much of their capital as they can. Landlords now are aggressively promoting the construction of new premises at little to no cost to the tenant, so it’s stimulated tenants’ interest in certain buildings because they can move in at nominal costs to themselves to preserve a lot of their internal cash flow.

NREI: How have lease terms changed?


Goodman: Right now tenants are looking for long-term deals, anywhere from 10 to 15 years in order to lock in, in many cases historically low rent levels, particularly for Class-A properties.

NREI: Have Lower Manhattan asking rents stopped falling?


Goodman: Rent levels peaked during the second quarter of 2008 with average asking rents for all space at $51.00 per sq. ft. Average asking rents started to decline to $50.93 at the end of the third quarter of 2008 and to $49.72 by the end of the fourth quarter. Rent levels then collapsed at the beginning of 2009 as the downturn in the economy, exacerbated by Lehman Brothers’ demise, brought rent levels down to $44.37, a 10.8 % drop from the prior quarter. Average rent levels continue to weaken. Lower Manhattan is still weak as the bleeding continues but the rent levels are no longer hemorrhaging, as was the case in early 2009.


NREI: Have you seen much movement in tenants moving from Class-B space to Class-A space as a result of greater affordability?


Goodman: There has been a keen interest from tenants who have been located downtown for their entire careers to upgrade the quality of their premises. A lot of the small and mid-size tenants who could not afford Class-A properties are now able to move to buildings with better infrastructure, which will better help support their business moving forward.


NREI: What’s going on with sublease space?


Goodman: The overall sublease market right now has a handful of high-quality alternatives. What the sublease market has done is to put tremendous pressure on landlords to lower prices and there has been continued pressure on tenants who are offering sublease space to offer significant concessions as well. The sublease market has been somewhat of a magnate for drawing tenants outside of Lower Manhattan, and that’s a good thing.


NREI: When do you see a balance of supply and demand occurring in Lower Manhattan?


Goodman: The balance for supply and demand is going to occur faster in Lower Manhattan than it will in other parts of the city for a number of reasons. The first is that a number of older buildings are continuing to be transformed from commercial into residential properties. The number of housing units have more than doubled in the last eight years. The population, which was about 22,000 to 23,000 people around 9/11, is in excess of 55,000 people now. The growth of residential has taken inventory away from Lower Manhattan for some of the old buildings that go back to the early 1900s and now allows the marketplace to essentially be comprised of newer, upgraded office buildings. That’s going to help stimulate the balance sooner rather than later, probably within the next three years