Downtown Manhattan’s Office Market Can’t Catch a Break

Analysts forecast persistently high vacancy through 2024 and beyond — and conversions to residential aren't going to help that much

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When Manhattan sneezes, its downtown catches a cold.

It’s almost always been this way. Its original 17th century design — if you could call it that, with its haphazardly narrow, curving streets best suited to horse carts and two-story buildings — reflects what makes it such a problematic business district in 2024. When the city’s leaders in the 19th century literally mapped out Manhattan’s future, they proposed a grid with wide avenues, where you almost always know where you are and how to get where you want to be. In other words, a design exactly unlike Lower Manhattan.

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Yet, downtown survives. It survived the Great Depression; the departure of many of the financial institutions that made it a global superpower, such as JP Morgan & Co., Lehman Brothers and Morgan Stanley (no major banks have Wall Street offices anymore); the terrorist attacks of 9/11; and the Great Recession. Now downtown is recovering from a pandemic that is making its large stock of Class B and C office buildings seem even more of an anachronism than they long have been. Different brokerage houses —  including CBRE (CBRE), JLL (JLL), Newmark (NMRK), Colliers (CIGI) and Savills — have different numbers for downtown’s vacancy rate, but just about all show office vacancy above 20 percent. 

And the brokerages expect it to stay that way.

A diverse number of downtown watchers project that its future should be a lot like its recent past, that of a district evolving from offices to residences. It’s become almost a cliché to note the rising number of baby carriages and dog walkers on Wall Street or Broad Street or Maiden Lane. To hear so many talk, you can expect even more of that over the next 10 to 20 years, though the pace of office-to-residential conversions might not be as vigorous as in eras past.

“The numbers don’t really tell the whole story,” said Andrew Peretz, an executive managing director at Newmark and a veteran broker specializing in Lower Manhattan. “In reality, phones are ringing, there are tours, there are inquiries, paper is being traded. Better-quality assets are seeing activity.”

Yet, Peretz predicts another wave of residential conversions — that is, if the first wave that began in the 1990s ever receded. From 2001 to 2005, office-to-residential conversions created around 6,000 units, according to figures from the Alliance for Downtown New York, a business improvement district. In the next five years, the number of units jumped to nearly 8,000; and, from 2011 to 2015, some 1,600 units were born of conversions. The pace picked up again in the following five years, nearly doubling; and since 2021, around 1,500 units have come about in downtown from conversions. 

“There’s going to be a good amount of conversion,” Peretz said. “It’s not like it’s a new concept. If you remember right around 2000, the entire south side of Wall Street went residential. What drove that really was they were becoming obsolete for the people that were looking to rent office space. It was driven by financial services, if you remember. They didn’t have the slab heights, they didn’t have the column spacing.”

Peretz said he would not be surprised if downtown’s office market, now 86 million square feet per Cushman & Wakefield numbers, fell to somewhere around 70 million square feet within the next two decades. He said he was “getting phone calls” from developers looking at these buildings “and the question always is, Can we convert the top, maybe we can convert the whole thing?”

Lower Manhattan availability was 25 percent at the end of 2023, according to a fourth-quarter report by Savills, despite the lowest commercial rents of the three major Manhattan submarkets — $58.28 a square foot to Midtown’s $81.17 and Midtown South’s $84.48. The neighborhoods with the three lowest rents were all downtown: the World Trade Center/Brookfield Place area at $62.14 a square foot, the Financial District at $56.26, and the City Hall area at $48.75 — the last the lowest in Manhattan.

Meanwhile, downtown has a stubbornly high volume of empty office space. Its availability rate — a measure of vacant and soon-to-be-vacant office space — has been above 19 percent the last nine quarters, according to brokerage Colliers. Comparatively, Midtown’s availability was 17.2 percent, and Midtown South’s 21.5 percent, per Savills’ latest figures.

Rival CBRE pegged downtown’s availability at 22.3 percent in January 2024, barely budging from January 2023’s 22.5 percent.

“It’s been around that level for the past nearly three years,” said CBRE’s Michael Slattery, research manager in the company’s Manhattan research department. “The age of the stock in the downtown market is significantly older than other areas of Manhattan.”

Needless to say, any newer office development to go along with this aged existing stock — including plans for some office space at the largely residential 5 World Trade Center — would only elevate the availability rates. 

According to Cushman & Wakefield, downtown’s vacancy rate — that is, actual empty space — varied from a low of 11 percent in the fourth quarter of 2023 in the City Hall area to 35.4 percent in the area just to its south once known as the Insurance District. The eastern Financial District, which includes the New York Stock Exchange, was at 24.1 percent; the western Financial District was at 34.6 percent; the World Trade Center/Brookfield Place area was at 19.5 percent; and the Tribeca neighborhood was at 17.7 percent. The overall figure for Lower Manhattan was 23.7 percent.

Brookfield Properties, which owns Brookfield Place, reported the Hudson waterfront office park’s vacancy rate was just 7 percent. And, the company noted that downtown leasing volume overall in 2023 was its highest since the pandemic hit in early 2020.

“Quality office assets continue to dramatically outpace the rest of the market,” said Callie Haines, Northeast region head of Brookfield’s office business, in a statement emailed to the Commercial Observer. “Lower Manhattan is no exception. Tenants are looking for dynamic, modern, highly amenitized workplaces, and Brookfield’s office properties are well positioned to meet those needs.”

The February news that Barings, the real estate arm of MassMutual Insurance, was looking to sell 100 Wall Street, a tower near the East River end of the famous downtown street, for $125 million, or about $150 million less than it paid for the asset in 2015, didn’t help matters. And it was reported that RXR, an owner with 30 million square feet mostly in and around the New York area, defaulted on a $240 million loan last spring tied to 61 Broadway. (An RXR spokesman said the company remains “in discussion with the lender.”) 

Meanwhile, downtown’s residential side has been going great guns. The neighborhood’s population reached 67,000 in 2023, nearly five times what it was in 1990, according to the Alliance for Downtown New York, . About 15.1 million square feet of offices total have been converted to residential since 2001, the Alliance said.

“We have some large blocks of space available,” said Jessica Lappin, the alliance’s president and a former City Council memeber. “I don’t think we’re a huge outlier. In terms of conversions, that has been an ongoing narrative for 20-plus years. When you see talk across New York and the country about conversions, people tend to point to Lower Manhattan as a pioneer. [But] the low-hanging fruit has long since been picked.”

She ticked off the downtown buildings that are going through conversion right now: 55 Broad Street (571 units); 25 Water Street, formerly 4 New York Plaza (1,300-plus units, maybe the largest office-to-residential conversion in the country); and 90 John Street. The former Goldman Sachs headquarters at 85 Broad Street, which the bank vacated in 2009, could also be converted.

At 25 Water, the developers went through the trouble and the expense of putting in a “light well,” a shaft designed to bring natural light inside apartments, to comply with residential standards, Peretz noted.

While other business districts talk about mixing commercial and residential, allowing people to walk to work or have short commutes, in Lower Manhattan it’s actually happening, Lappin said. “That’s all been very beneficial for us,” she said.

The administration of Mayor Eric Adams has identified 46 office buildings citywide as prime conversion candidates under the mayor’s “office conversion accelerator” program. Among the buildings are 25 Water, 90 John, 160 Water Street and 17 Battery Place, which are all downtown. Together they could comprise about 2,100 units. 

“We are reimagining our central business districts by helping to convert empty offices into affordable homes,” Adams said in a statement last month. In a statement last August, the mayor said he had committed “a record” $24 billion in general toward affordable housing.

A veteran downtown broker, who asked not to be identified because their firm had not authorized them to speak, said a good share of the problem is concentrated on Water Street on the east side of Lower Manhattan, where the office buildings tend to be large and relatively unadorned. They were built in an era when companies could compel workers to appear. There was no technology allowing them to do their jobs from anywhere.

“What 2024 is going to bring to us will be very interesting,” the broker said. “In some segments of the market, at the high end, choices are limited. In commodity space, particularly along the Water Street corridor, there are large blocks of vacancy and available space.”

All might not be lost, though, the broker added. Companies in different fields, looking for a comeback, might look downtown. 

“That marketplace has shown the ability to attract talent from almost every market segment.”

For more on Downtown Manhattan’s office market, see this article on the conversion of 160 Water Street from offices to apartments.