Cushman & Wakefield research: Migration to downtown Manhattan now strong and steady

Reversing historic trends, the magnetic appeal of Downtown Manhattan is now attracting a strong and steady outflow of commercial tenants from Midtown and Midtown South, with Lower Manhattan now seen as a mature, diversified submarket with tempting rent differentials, according to new research from Cushman & Wakefield. Both large, corporate space users and small and mid-size firms are drawn to Downtown's talented workforce, the emergence of a first-class transportation infrastructure, and proximity to full-service amenities, including new hotels, restaurants, retail, a bustling residential community, and breathtaking views. Further, Lower Manhattan includes a combination of new, state-of-the-art, glass-and-steel towers as well as boutique office buildings — at a range of rental rates difficult to find anywhere else in Manhattan — thus appealing to a broad array of tenants of varying sizes and business lines. According to Cushman & Wakefield executive vice chairman Tara Stacom, Condé Nast's 2011 decision to relocate its global headquarters from Midtown to One World Trade Center was a "game changer" in Manhattan's big-picture leasing dynamics, setting the trend for Downtown migration. In the ten quarters since that transaction closed, leasing in Lower Manhattan has outpaced the long-term average by nearly 30%. "We are witnessing a persistent and unmistakable migration Downtown," Stacom said. "When Midtown and Midtown South tenants evaluate their relocation options, they are finding Lower Manhattan difficult to resist. Downtown is no longer the leverage option, but increasingly, the first and best option." Four major Midtown-to-Downtown relocations last year — totaling 3.6 million s/f alone — illustrate this migration trend. The moves included Citigroup's consolidation of 2.6 million s/f of space to 388-390 Greenwich Street, a 516,000 s/f lease by GroupM at Three World Trade Center, Jones Day's 330,210 s/f lease at 250 Vesey Street, and a 180,703 s/f lease by Harpers Collins Publishers at 195 Broadway. The overall demand for Downtown office space is further evidenced by the leasing velocity this year already, with January 2014 alone having recorded 740,668 s/f of leasing in Lower Manhattan. "I expect some major leasing announcements Downtown early this year, putting us well on our way to reaching 5.5. - 6 million s/f or even surpassing this level," Ms. Stacom said. "This pace of leasing activity will likely become the new norm for Lower Manhattan. Additionally, Cushman & Wakefield forecasts that growing demand for class A space in Lower Manhattan will cause vacancy rates to decline by approximately 20% over the next several years (from 14.9% year-end 2013 to 12% in 2017), and class A asking rents to similarly rise 20% (from $53.82 per s/f year-end 2013 to $64.73 per s/f in 2017). The five-year trend validates this forecast. As recently as 2008-2010, Downtown accounted for 18% of the total%age of s/f leased in Manhattan during that period. But the proportion has since run significantly and consistently higher, with Downtown accounting for 20.5% of total Manhattan leasing in 2011, 27.8% in 2012, and 31.4% last year. Further, migration to Downtown Manhattan has not been limited to large tenants. Many small and mid-size companies relocated to the area in 2013, including such companies as Shutterfly, OrderGroove, Rock Shrimp Productions, Shop Architects, and Beyer Blinder Belle. Pricing is one of many factors, with average asking rents in Midtown ($69.52 per s/f) and Midtown South ($62.61 per s/f) both considerably higher than Downtown ($48.26 per s/f). These attractive margins are enhanced by an array of incentives available to tenants relocating Downtown. Moreover, the range in average asking rents within Lower Manhattan — $54.10 per s/f for class A space and $38.64 per s/f for Class B space — appeals to a wide range of tenants. "Lower Manhattan has clearly emerged as a mature, fully-developed market, creating intense demand for spaces users of all sizes, and ranging across a diversity of business sectors," Ms. Stacom said. "The pricing differential is one factor, but the migration is also propelled by the wealth of amenities in Lower Manhattan, with tenants feeding on the energy and excitement of that market. We are witnessing a real-time transformation that will set the stage for years to come." The past decade also has witnessed Lower Manhattan's steady emergence as the demographic core of the metropolitan area's huge pool of high-value, knowledge workers. The area's most coveted employees — its young and mid-career adults — are turning away from suburbia and concentrating in easily accessible communities in Manhattan and Brooklyn, and along New Jersey's Hudson River waterfront. Downtown itself is now home to more than 64,000 residents. The district marked two recent major milestones with the completion of Four World Trade Center in the last quarter of 2013 and the upcoming completion later this year of the 3.0-million-square foot One World Trade Center. The two towers are both 55% pre-leased. The Fulton Street Transit Hub is scheduled for completion later this year, and the imposing Calatrava designed World Trade Center Transit Hub is expected to be finished in 2015. At completion the venue will offer 450,000 s/f of Westfield World Trade Center retail space, including 360,000 s/f at the opening and an additional 90,000 s/f on the completion of 2 World Trade Center. The Westfield complex will comprise nearly half of some 750,000 s/f of destination retail that will soon serve the World Trade Center vicinity.