The Manhattan real estate market likely will take years to recover from the September 11th terrorist attacks, attacks which also have put a significant dent into the commercial loan market.

Vacancies have continued to climb in the weeks and months since the destruction of the Twin Towers, and they will not decrease for some time, according to TenantWise.com.

At the end of the second quarter, availability rates for Manhattan ran 8.7 percent. By the end of the third quarter, that number had risen to 11 percent. And in late November, it again increased to 12 percent.

So why are vacancies continuing to open up? According to TenantWise, only one-third of the displaced tenants who could have leased new space in Manhattan did so. In addition, many tenants displaced by the attacks either leased less space than they originally held or decentralized their operations into several locations, both inside and outside of New York.

"Tenants who were in destroyed buildings have overwhelmingly relocated outside of lower Manhattan, and tenants who have been temporarily displaced from damaged buildings have also decided not to return," said Diane Lans, senior director for Fitch, the financial ratings agency. "The potential rollover in the area, combined with depressed rental rates, will result in significant leasing and operating challenges for most building owners."

When the dust settled, World Trade Center properties that were destroyed or damaged accounted for 13.4 million square feet of office space. And 15 surrounding properties that were damaged made up an additional 18.5 million square feet of office space, for a total of 31.9 million square feet.

About 179 large tenants took up a majority of the space that was put out of service -- some 21 million square feet. And about 89 percent of those tenants have made decisions about their long-term real estate needs. Their choices -- many of which make New Jersey a big winner -- are divided roughly equally among three options: backfilling space they already had at another location, leasing new space, or re-occupying properties now damaged as they become available.

About 6.3 million square feet has been backfilled, including 2.9 million square feet in Midtown, 2.5 million square feet in New Jersey and 0.9 million square feet in Downtown area, according to TenantWise.com. More than half of the 6 million square feet of newly leased space is in Midtown, while 1.2 million square feet are in New Jersey and 1 million square feet is elsewhere.

The 179 larger tenants also have moved thousands of jobs out of the Manhattan area. More than 19,000 jobs have moved to New Jersey or elsewhere. Nearly 26,000 employees have been moved to Midtown. Compare that to the nearly 30,000 jobs staying Downtown and the 9,000 "undecideds."

The 22 biggest tenants, which represent 13.2 million square feet from the destroyed and damaged buildings, have decided to decentralize their operations for strategic and security reasons. Many of these are keeping some employees in Manhattan, while taking others outside of the city. These include American Express, Morgan Stanley, Lehman Brothers, Cantor Fitzgerald Securities, Dow Jones & Co., Empire Blue Cross, Royal Bank of Canada and Salomon Smith Barney.

According to Fitch, while some office buildings, multi-family housing and hotels in lower Manhattan will experience short-term delinquencies, defaults or loan modifications, there should not be a dramatic spike in commercial mortgage-backed securities (CMBS) bond defaults.

The prospect for office space in lower Manhattan is more dismal than the multi-family market over the next five years as the World Trade Center site is rebuilt, a Fitch study revealed.

According to the Fitch report, preliminary estimates for vacancies within multi-family housing range from 15 percent to 30 percent. Rental rates on vacant units are also taking a beating, leasing from 20 percent to 40 percent below pre-September levels. What's more, existing tenants have been offered concessions or rate reductions between 5 percent and 15 percent if they remain in their units.

"Over the short term, increasing vacancies, lower rental rates and higher insurance costs will result in declining operating performance for multi-family properties in lower Manhattan," Lans said. "Re-tenanting at lower rates will reduce vacancy from current high levels; however, over the next 12 to 24 months, mortgage defaults may occur on weaker assets."

For more articles by Lesley Hensell, please press here.

Published: December 14, 2001

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