Ground Zero Office Glut in the Making?

Two questions have dogged lower Manhattan's office market in recent months: Just how much new space can the market absorb, and when will it come online? With construction on the Freedom Tower plus a quartet of additional office buildings now officially under way, roughly 10 million sq. ft. of new office space is slated for completion by 2012.

Timing is a concern as that aggressive supply pipeline will be potentially unleashed over a 12- to 18-month period. “The Freedom Tower does have a lot of emotional baggage,” says Robert Sammons, research director at real estate services firm Colliers ABR. “Could this be too much space delivered in too short a time? That's certainly a possibility.”

Downtown's Class-A office vacancy rate shot up during the first quarter from 9.2% to 11.2% after the 1.6 million sq. ft. 7 World Trade Center tower was officially completed. That jump of 200 basis points underscores how just one new office tower with little pre-leased space can skew market vacancy upwards in a submarket that has roughly 55.5 million sq. ft. of Class-A office inventory.

The good news is that lower Manhattan's office market has posted positive net absorption during each of the past three years. In 2005, for example, lower Manhattan absorbed 2.49 million sq. ft. But the pace has slowed this year. Through the first four months of this year, in fact, Colliers ABR reports that office absorption registered just 270,625 sq. ft.

If Ground Zero's newest tower is any indication, filling space in the Freedom Tower and adjacent buildings will be a challenge. 7 World Trade center, which stands due east of the Freedom Tower site, was just 20% occupied as of mid-May. Brokers report that tenants are kicking tires at the building, but as summer approaches no large commitments were expected to be announced.

The Freedom Tower was 38% leased toward the end of May. All of the signed tenants are government agencies such as the Federal Bureau of Investigation (FBI) and Secret Service.

The Port Authority of New York and New Jersey raised eyebrows in May when it announced its leasing strategy: Four planned buildings at Ground Zero will contain government tenants accounting for about 25% of the space, according to the Port Authority. Some observers believe that filling such a large volume of office space with government tenants is a subtle acknowledgement of how challenging it will be to lure private-sector tenants into the building.

For their part, prospective private-sector tenants might be reticent to occupy a 1,776 ft. tall tower chockfull of government agencies that happens to sit at the edge of Ground Zero. At that height, the Freedom Tower would be the world's tallest office tower. The combination of a high-profile tower occupied by several government agencies could make tenants vulnerable to a repeat attack.

“The Freedom Tower will be a huge target for a terrorist attack. Would you want your office in that target?” says Lawrence Fiedler, president of midtown Manhattan-based real estate firm JRM Development and a former professor at New York University's Real Estate Institute.

There is a silver lining to this perceived risk, however. Asking rents at the Freedom Tower should be well below the market average. While Fiedler sees this discount as an incentive when the pricing gap between midtown and downtown rents is already so wide, he doubts it is enough to quell terrorism concerns.

In April, Colliers ABR pegged average asking rents for Class-A office space in lower Manhattan at $42.75 per sq. ft., 33% less than asking rents of $63.80 per sq. ft. in Midtown.

“You don't have many huge blocks of space left in midtown,” says Sammons of Colliers ABR. “So, I think some tenants will see lower Manhattan as an attractive option because they can keep their people together for less money.”

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