In Manhattan Office Leasing, You Can Always Go … Downtown

Is Lower Manhattan on the verge of an office revival?

Short answer: Yes. Long answer …

Think of it this way, said Adam Foster, a CBRE (CBRE) executive vice president with 14 million square feet in leasing deals to his credit: Conversions to residential are taking a lot of unused — and unusable — office space off the market, leaving behind a streamlined collection of addresses in Lower Manhattan that will benefit from demand. 

“The next couple of quarters, you will see a big uptick in leasing,” Foster said. “It comes as no surprise. Following COVID, everyone wanted to be right on top of transportation. To that end, the World Trade Center and the buildings along Broadway have been the recipient of most of the demand.”

This would count as a turnaround for a market that has been struggling. Traditionally, whenever Manhattan has caught a cold, Lower Manhattan has gotten pneumonia. Vacancy rates have tended to rise, and rents have tended to dip in a downtown known mostly for its narrow, winding streets and older buildings. Typically, any recovery from a slump takes place first in Midtown, which boasts wide avenues, a street grid and some of the most sophisticated office space in the world.

Post-COVID, it has been no different. The spread in average office rents between downtown and Midtown has widened, according to the research firm CompStak. The firm found that the average overall weighted effective rent — meaning the rent actually struck between landlord and tenant, not the widely quoted asking rent — was $79.84 a square foot in Midtown versus $45.80 in Lower Manhattan at mid-year 2024. That’s a post-pandemic spread of 43 percent. 

While the gap narrowed in the immediate months following the lockdown in 2020 to an unusually tight 17 percent ($67.81 Midtown versus $56.22 downtown), it has since widened, as both markets dealt with a surplus of office space as workers discovered the wonders of working in or near their homes.

Hence the city and many in the private sector have been pushing office buildings with chronic emptiness to be converted to residential use, a time-consuming and often expensive process. 

Whereas the driver for many years in office design has been to put as many workstations on the same floor as possible, creating demand for wide and column-free floorplates, apartments demand natural light. There have been cases where developers have gone as far as sinking light wells — courtyards in the center of towers — to bring light into units that need to be carved out of heretofore open offices. An example is at 25 Water Street, formerly 4 New York Plaza, a 1.1 million-square-foot tower once home to J.P. Morgan Chase and the New York Daily News, now being carved into 1,300 apartments.

Such projects remain an outlier, though, which may mean more underutilized office space on the downtown market. In its September research report, CoStar (CSGP) said that New York is so far experiencing an almost 80 percent decline in housing construction starts compared to 2023, projecting roughly 5,000 units for the year compared to more than 23,000 last year. 

“While steps have been taken to incentivize the construction of new apartments, the increasing costs of doing business in New York City have slowed the construction pipeline considerably,” said Victor Rodriguez, CoStar’s senior director of analytics, in an email. “Whether it be the required use of union labor, affordability requirements for new construction, elevated borrowing costs for acquisition or construction loans, or the lengthy process to get a project simply approved, some developers have decided to hit the pause button.”

According to CBRE figures for August, Midtown availability (that’s vacancy plus any space that will become vacant in the next 12 months) was 17.9 percent. Downtown’s was 22.5 percent — pretty much where it has been the past couple of years.

Cushman & Wakefield (CWK) reported that nine downtown buildings containing about 6.6 million square feet of offices have either been converted to housing, or there is talk of doing so.

Rob Holbrook, executive director of Mayor Eric Adams’s “Get Stuff Built” program, who oversees office-to-residential conversions for the city under the mayor’s Office of Planning and Policy, said there were 74 properties in its conversion accelerator program, which the city launched in mid-2023 to cut through red tape to get these conversions to happen. Of those 74, 14 are south of Canal Street in Manhattan. Holbrook said there might be more, because not all landlords seeking conversions have been in contact with the city.

“We are here to help,” he said. “We set a goal of 20,000 [conversions] over the next 10 years. We are on track for the next couple of years, producing about 2,000 units a year through conversion. We need zoning changes to continue that production goal.”

Holbrook said CoStar’s findings did not reflect the pressing need for more housing in New York City. Citing the city’s own survey, he said the vacancy rate for apartments in 2023 was 1.4 percent — “effectively no vacancy” — and that many things could have stymied construction starts this year, including high interest rates.

The city’s Department of Housing Preservation and Development runs a separate tax abatement program to help landlords with both the financial and construction costs of conversion, Holbrook noted.

And having its share of offices in financial distress doesn’t help downtown, either. Trepp, a research firm which tracks commercial properties tied to commercial mortgage-backed securities, supplied a list of 54 properties in Manhattan below 14th Street whose loans have experienced some level of distress, starting with special servicing up to default. The list included 65 Broadway, 17 State Street, and a few hotels such as the Financial District’s Holiday Inn and the Nolitan Hotel. Many of them are smaller buildings.

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

In August, a special servicer, often a precursor to foreclosure, took over a $180 million commercial mortgage-backed securities loan tied to RFR Holding’s 17 State Street, a cylindrical office tower downtown.

Commercial real estate powerhouse RXR nearly lost its 33-story office tower at 61 Broadway after defaulting on a $240 million loan. According to a person familiar with the situation, a 49 percent stake in the building was sold in 2016, allowing RXR to recoup substantially all of its equity. Though the company did default on the loan, talks with the lender continue, and a portion of the building may be converted to residential.

Robert Tunis, a Colliers (CIGI) vice chairman and a broker specializing in tenant representation, said he didn’t think Lower Manhattan had any more financial distress than any other part of the city given its size. Midtown is about a 240 million-square-foot market, the biggest in the nation.

Lower Manhattan has seen a pattern of “flight to quality” office leasing similar to Midtown’s experience, with the more chic and modern World Trade Center and Brookfield Place most in demand. The same is true of Midtown’s Sixth Avenue near Rockefeller Center, and Park Avenue just north of Grand Central Terminal, plus the relatively new One Vanderbilt versus older buildings in the submarket. Corporations post-pandemic appear to have placed a premium on newer, well-amenitized spaces to entice and retain talent. 

“In almost every corner of downtown, the availability rate is higher than what would be considered market equilibrium, which is usually 10 percent,” said Frank Wallach, executive managing director for research and business development for Colliers. “But there are pockets of downtown that are not nearly as oversupplied as others, and with the flight to quality, those are the areas that have tighter availability. As of the end of the second quarter, downtown’s availability rate was over 20 percent. But if you look at downtown’s post-2000 product, which is nearly exclusively the Trade Center, that availability rate is much tighter — it’s about 14 percent.”

According to Cushman & Wakefield statistics, overall vacancy downtown for August was 24.2 percent. The so-called Insurance District and Financial West submarkets of Lower Manhattan were neck and neck with 32.6 percent and 33.2 percent vacancy, respectively. The World Trade Center area, which incorporates Brookfield Place, was 19.8 percent, lower than the overall average, and the lowest vacancy rate was the City Hall area, at 12.6 percent. The other submarkets were Financial East and Tribeca.

Colliers data suggests subleasing availability downtown remains alarmingly high, too. As of the end of August, sublet availability downtown was about 5.6 million square feet, or about 26 percent of the total availability downtown. That percentage was actually better than it’s been, the lowest since April of 2022. But overall sublet supply was significantly higher than it was in March of 2020, the last month before pandemic-related lockdowns roiled the market.

At that point, according to Wallach, total availability downtown was just under 11 million square feet, of which sublet was about 2.5 million square feet, or about 22 percent of downtown’s total availability. Twenty-five percent is when brokers get concerned, because sublet, which tends to be cheaper than space offered directly by landlords, undercuts prices.

Tunis described the sublet share of downtown’s office market as “recessionary.” “That we are still at 26 percent today is somewhat 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 that conversion of offices in the market to residential 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’ve made a neighborhood that people work in. It has continued apace, and it has been very beneficial. When this first started in the `90s, there were critics who thought it was foolish and nobody would want to live downtown. Clearly that has not been the case. People love living in Lower Manhattan.”

She mentioned 85 Broad Street, a tower that once was the headquarters of the global investment bank Goldman Sachs, as one of the buildings currently slated for conversion to housing. Asked if she foresaw a revival of Lower Manhattan as an office market once the current wave of conversions ends, Lappin takes “a positive long view,” she said. 

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