http://www.therealdeal.net/issues/JU...1183145459.php
Midtown office development outpaces Downtown
Center of gravity for construction shifts north
By Catherine Curan
July 2007
Now that he's assembled a plot encompassing two city blocks at Ninth Avenue from 31st to 33rd streets, Ric Clark, president of Brookfield Properties Corp., is bullish on the prospects for 3.8 million square feet of office space.
Clark is betting on success because his two office towers will rise across from the new Moynihan Station -- and be part of a massive planned redevelopment of Manhattan's far West Side.
Brookfield's project reflects the shifting axis of commercial development in Manhattan. After the attacks of Sept. 11, 2001, with the resulting loss of 15 million square feet of office space Downtown, attention focused on rebuilding there. Since then, however,
Midtown has surged and overtaken Downtown in the amount of office space under development.
There are now 13 million square feet under construction or planned Downtown, most of it at the World Trade Center site. However, Midtown, with a flurry of projects -- from the 2.1 million square feet at One Bryant Park announced farther back, to the more recent 1.1 million square feet at 11 Times Square -- totals 16.3 million square feet. Yet more activity is in the works at Hudson Yards, the rail yards in the west 30s.
While both Downtown and Midtown are benefiting from the tight office leasing market with higher rents and lower vacancy (see story on page 20), each area has distinctive features that dictate how much development will occur there, and what type. Downtown's redevelopment is dominated by the World Trade Center site, with Larry Silverstein as the key player. The investment bank Goldman Sachs, meanwhile, is building a new 43-story headquarters tower on West Street near Ground Zero. Last month's announcement that JP Morgan Chase is planning a 42-story skyscraper on the site of the soon-to-be demolished Deutsche Bank building indicates that there will be more office development Downtown, but still not as much as Midtown.
On the whole, though, development Downtown is hampered by the difficulty of assembling a large parcel and the traditional need for government incentives like the ones Chase is said to be pushing for.
Meanwhile, Midtown is poised to outstrip Downtown for the simple reason that there is more land available.
"The West Side keeps inching closer and closer to the Hudson River," says Stuart Saft, a partner at the law firm LeBoeuf, Lamb, Greene & MacRae. "We'll see the kind of development on Ninth Avenue that we saw on Eighth Avenue 20 years ago."
The far West Side can accommodate 24 million square feet of new space, against a projected 15 million for Downtown, according to a 2005 speech by Senator Charles Schumer.
But just because there is the capacity, it doesn't automatically follow that tenants will want to move to the far West Side if projects are built there, much less pay a premium. The Empire State Building's early days as the "Empty State Building" and the World Trade Center are just two major commercial developments that languished at first.
What Midtown developers are basing their bets on are the current sky-high rents. When Douglas Durst's project at One Bryant Park cracked the $100-per-square-foot rental ceiling, developers took notice. Midtown office rents are now averaging $75.48 per square foot, up 32 percent from last year, according to data from CB Richard Ellis.
Harry Macklowe's switch at 510 Madison from residential to commercial is just one high-profile example of a Midtown developer who decided that in today's climate, an office tower made more economic sense.
Overall employment growth is another critical factor for both Midtown and Downtown developers; the New York State Department of Labor forecasts a 6.8 percent increase for the New York City area from 2004 to 2014.
Also, the aging stock of existing space means that tenants are in dire need of high-quality space.
According to CB Richard Ellis, in 2000, 54 percent of office buildings in Manhattan were over 50 years old; in 2010 that percentage will vault to 64 percent. Those pre-Internet office buildings won't be able to keep pace with their tenants' technology needs, and they also lack the latest security and environmentally friendly features.
Most importantly for developers, tenants are willing to pay up for this premium space. And they are particularly interested in eco-friendly buildings even if they cost more, says Brookfield's Clark. Clark is talking with financial services, legal, accounting and entertainment firms about space in his new towers.
"Five years ago, tenants could not care less if you said, 'I want to build an environmentally responsible building, but it will cost a few extra bucks.' They didn't want to hear it," says Clark. "Today it's the opposite. One of the first questions out of a tenant's mouth is, 'What are you doing about green building?' And they are willing to pay a couple of extra bucks."
Construction on his project is slated to begin late next year, and Clark aims to finish the first office tower by 2011. Whether the perfect storm of factors in place now, especially a strong economy, will persist until then is an open question. Clark says he's optimistic, but acknowledges the risks.
"It is sort of a five-year time line," he says. "You never know what happens in Manhattan along the way."