One year after the Sept. 11 attacks at the World Trade Center, real estate industry experts agree the impact on New York real estate has been minimal.
"Seeds for the slowdown were germinating before 9/11, and that exacerbated it," said David Solis-Cohen, managing director and head of the Northeast Region, Lend Lease Real Estate Investments, Inc., Atlanta. "The tragedy took 13 million square feet off the office market downtown. But what people didn't realize was how much extra space firms had been holding, because those tenants were absorbed so quickly, and the vacancy rate still went up. Many firms had taken a lot of space, thinking they might not be able to get space when they needed it. That was tied to Wall Street, technology, dot-coms and part of the bubble."
Downtown office space was always a "stepchild" in the New York office scene, Mr. Solis-Cohen added, and in the year since the attacks, there has been a major shift back to midtown.
Companies were shocked into breaking up some operations after Sept. 11, noted David Bronner, chief executive officer at the $27 billion Retirement Systems of Alabama, Montgomery. "Instead of consolidating operations into one space, now everyone wants two to three stand-alone operations. The events really changed the dynamics of big commercial spaces," he said.
The Alabama system, which since the late 1980s has owned the 3.6 million-square-foot office building at 55 Water St. in downtown Manhattan, has been trying to rent one-third of the space. "It's become harder to rent huge pieces of space, and it has to be addressed differently than before," Mr. Bronner said. The space had been leased by Chase Manhattan Bank NA before it merged with J.P. Morgan & Co. last year. "A year ago, we would have been looking for one to two tenants to take the space; now we're looking for four to five tenants," Mr. Bronner said.
Each executive interviewed emphasized that it's difficult to predict what the future holds for New York real estate because it hinges on the economy. Stephen Furnary, chairman and chief executive officer of real estate investment adviser Clarion Partners, New York, said: "I think it (real estate) will probably bounce around in a lackluster way for a while, but there is a high certainty it will get better. It's just a question of when. It could be three months or six months. It's a good time to sell," he added, "because there is a lot of capital around that wants to invest in real estate. Rents are down, but capital values are strong. It's completely flaky. It's also a good time to buy because prices will go up. People are accepting lower returns for a property this year that they would not have accepted a year ago. Part of that is because they're looking for returns. They know the midteen returns for stocks are gone; the 5% returns from bonds will go lower once rates go up. So they look to real estate. Even if returns are coming down, a 7% real return on real estate during a period of 2% inflation is highly favorable."
little sales activity
AEW Capital Management LP, Boston, hasn't bought or sold in New York during the past year, said Jeff Furber, managing partner. "We haven't sold because we still think our investments there should be held as good, long-term investments. And it's hard to buy now, because it's too difficult to figure out what rents should be. There haven't been a lot of transactions in the last year, partially because rents have dropped so much. We'll buy when rents stabilize, maybe by the end of the year or in 2003."
Mr. Solis-Cohen of Lend Lease said his firm has been a net seller in the past year. "The markets have become much more competitive in pricing, so we've been taking it easier on the buying side. It's overheated now, so we continue to look for appropriate assets, but pricing is out of whack with fundamentals. Some people believe current pricing may not hold up if interest rates rise and fundamentals decline further."
Stephen L. Green, chairman and CEO at SL Green Realty Corp., New York, like his colleagues, predicted: "We won't see a strong recovery in real estate until the economy recovers, and real estate may not fully recover until the end of 2003 or 2004." His firm, which is one of the three largest owners of New York office properties, has bought during the last year, including 1515 Broadway, headquarters to Viacom Inc. At the same time, it has been selling. "We have a continuous program to sell. And this is a good time to sell, while interest rates are low," Mr. Green said.
Mr. Furber of AEW noted that soon after Sept. 11, many in the business wondered whether the events would tarnish New York as a world-class place to invest or to be located, but that didn't happen. "People have been cautious because of the sluggish economy, but they still want to invest there."
"Sales in the residential sector (in New York) have been very strong for condos and co-ops. People have been taking money out of the stock market, after the recent weakness and investing in real estate, which is a 2002 phenomenon. They don't think they can make money in stocks," Mr. Furber said.
Downtown office space has suffered the most as a result of the attacks. "Lower-quality buildings are having a hard time. But Class A buildings such as the World Financial Center are doing all right. (Class) B and C buildings will be a tough sell both for office and residential because of the emotional repercussions."
Many companies have moved or are moving to midtown. Leasing activity throughout Manhattan also is down a lot, although that is mainly because of corporate downsizing, Mr. Furber pointed out. In 2000, 30 million square feet were leased in Manhattan; that dropped to 13 million in 2001 and only 6 million so far in 2002, according to Colliers ABR, a new York-based commercial leasing firm.
Meanwhile, sales prices have been rising in midtown, reaching $425.74 a square foot at the end of the second quarter of 2002, up from $397.24 a year before, while falling downtown, sliding to $287 a square foot as of June 30 from $328 a year before, according to statistics from the National Real Estate index compiled by Property & Portfolio Research Inc. The Boston-based research and consulting firm also found that the vacancy rate in Manhattanhad grown to 10.7% as of June 30, vs. 8% as of June 30, 2000.
Around 50,000 financial services employees were displaced by the attacks, and some 19,000 of those were permanently moved outside the city, said Bret Wilkerson, director at Property and Portfolio Research. Many of those jobs have gone to Westchester County; Stamford, Conn.; and Northern New Jersey, as companies decentralized.