LOWER MANHATTAN REAL ESTATE MARKET REPORT

Lower Manhattan’s office market continued to show mixed indicators in the second quarter. Government leasing helped increase office market activity from the beginning of the year, but vacancy rates remain stubbornly high, particularly in Class B properties. The district’s ongoing challenges are mirrored across all Manhattan submarkets as the city’s office market navigates continued macroeconomic uncertainty. Though office leasing is still trying to find its footing, other sectors of Lower Manhattan’s economy continue to recover. Median apartment rents are still high as Lower Manhattan remains a residential neighborhood of choice. The hospitality industry has reason for optimism, with new hotels under construction, increased travel and positive momentum in both hotel occupancy and room rates. Twenty-one retailers have opened in the spring, up from rates seen at the beginning of the year, and another 10 recently announced plans for new storefronts in Lower Manhattan.

Large Government Deal Propels Leasing Activity

Lower Manhattan recorded 1.13 million sq. ft. of office leasing according to CBRE — more than double the activity recorded in the first quarter and the highest quarterly total since the beginning of the pandemic. Leasing activity grew an enormous 126% from the previous quarter and finished 13% above the five-year quarterly average. Lower Manhattan’s leasing activity in the second quarter was driven by the NYC Administration for Children’s Services’ 641,000 sq. ft. lease at 110 William Street. Activity in the rest of the market remained sluggish and high vacancies have persisted across asset classes in the district.

Midtown saw 2.53 million sq. ft. of leasing activity in the second quarter, roughly on par with the previous quarter, but 27% behind the five-year quarterly average.

Lower Manhattan Annual New Leasing Activity, 2017-2023

1,130,000 Square Feet Of New Leasing In The Second Quarter — 13% Above The FiveYear Quarterly Average

This is the third consecutive quarter below 3 million sq. ft., as leasing activity in the Grand Central, Penn District and Times Square submarkets lagged well below their five-year quarterly averages. Midtown South recorded 729,000 sq. ft. of leasing in the second quarter — down 12% from the first quarter and 38% below the five-year quarterly average. Technology tenants, who drove an outsize share of leasing in Midtown South in recent years, pulled back sharply in the second quarter as fallout from the banking crisis earlier in the year suppressed activity. Leasing in Midtown South has now fallen below the five-year quarterly average for four consecutive quarters.

Downtown Leasing Activity Improves

Moves within Lower Manhattan accounted for 687,000 sq. ft. of second quarter leasing — nearly two-thirds of the quarterly total. This increase was driven by a single government tenant deal: the NYC Administration for Children’s Services (ACS) signed a 20-year lease for 640,000 sq. ft. at 110 William Street, relocating within Lower Manhattan and expanding from its current 434,000 sq. ft footprint at 150 William Street. ACS’ deal brings 110 William Street to nearly 100% leased and surpasses Lower Manhattan’s entire first quarter leasing total of 500,000 sq. ft. Other notable tenants to move within the district include Curtis Ginsberg Architects, which relocated and expanded from its 10,307 sq. ft. offices at 55 Broad Street to a 12,602 sq. ft. space at 1 Battery Park Plaza; Carnegie Mellon University, which also relocated from 55 Broad Street to a 12,014 sq. ft. space at 88 Pine Street; and Tomorrow Health, which moved from 225 Broadway to a 11,487 sq. ft. space at 217 Broadway.

Recommitments to Lower Manhattan also accounted for a sizable share of second quarter leasing: in the World Trade submarket, the Bank of Nova Scotia (Scotiabank) renewed its 131,048 sq. ft. lease at 250 Vesey Street, the Municipal Credit Union of New York renewed its 93,500 sq. ft. lease at 22 Cortlandt Street, and Scale Facilitation, an Australia-based professional services firm, took an additional 34,382 sq. ft. to house its Access New York tech startup incubator program after moving into a 36,099 sq. ft. space last year. Along the Water St. corridor, the Legal Aid Society extended its 72,091 sq. ft. lease at 199 Water Street and engineering firm Walter P. Moore expanded its footprint to 11,719 sq. ft. at 180 Maiden Lane. Finally, flexible office provider Regus renewed its 37,031 sq. ft. lease at 14 Wall Street.

Lower Manhattan Top Leases, Q2 2023

Relocation activity, historically a large driver of Lower Manhattan leasing, was fairly muted in the second quarter. Only three firms inked deals to move to Lower Manhattan, all relocating from Midtown: The Levin Group, an HR recruiting platform, signed a 13,000 sq. ft. lease at One World Trade Center, relocating from 500 7th Avenue; PowerFlex, a solar energy company, signed a 11,163 sq. ft. lease at 75 Broad Street, relocating from 805 3rd Avenue; and Kain Capital LLC signed a 4,700 sq. ft. lease at One World Trade Center, relocating from 360 Madison Avenue.

Other notable tenants to commit to Lower Manhattan include The Messenger, a newly-formed digital media company, which signed a 41,854 sq. ft. lease at 195 Broadway, taking sublet space from Orchard Technologies; CFC USA Holdings, a UK-based boutique insurance firm, which signed a 14,499 sq. ft. lease at 48 Wall Street; and Vernon Capital Group, an investment firm, signed a 14,000 sq. ft. lease at 88 Pine Street.

Vacancy Rates Remain High Across Manhattan

According to Cushman & Wakefield, Lower Manhattan’s overall vacancy rate grew by 1.6% to 24.2% in the second quarter, reaching a new record high and remaining the highest among Manhattan’s office markets. Overall vacancy increased by 2.6% year-over-year, reflecting the continued addition of large blocks of space to the market. Across office-class types in Lower Manhattan, Class A vacancy grew by 1.2% from the previous quarter and 2.5 % from last year to 23.7%, reaching a record high for Class A vacancy both in Lower Manhattan and across Manhattan’s office markets. The class B vacancy rate also grew to a record high of 27.1%, up 2.5% year-over-year.

Even as leasing activity increased in Lower Manhattan, the addition of new direct and sublease spaces outpaced new leasing in the second quarter. Though flight to quality continues to drive much activity in the market, Class A and overall vacancies in the World Trade submarket (consisting of mostly newer buildings in and around Brookfield Place and the World Trade Center campus) increased by 2.3% and 2.8%, respectively, growing to 22.5% and 21.3% as over 346,000 sq. ft. were added to the market in the second quarter. Additionally, Lower Manhattan now contains two submarkets with vacancy rates above 35 percent: the Financial West submarket

(roughly west of Broadway, south of Liberty Street) is now 35.2% vacant. Vacancy rates in the Financial West submarket grew by 1.3% over the past quarter, reaching the highest vacancy among all Manhattan submarkets for the second consecutive quarter. In the Insurance District (roughly east of Broadway, north of Maiden Lane), vacancy rates grew to 35.1%, up 2.3% from the previous quarter.

Stubbornly high vacancy rates have persisted across all the Manhattan office markets. Class A vacancy rates in Midtown South rose for the second consecutive quarter, reaching parity with Lower Manhattan at a historic high of 23.7%. Overall vacancy rates also reached record highs in Midtown South in the second quarter, growing to 23% as several large blocks were added to the market in NoHo/ SoHo, Chelsea, and Hudson Square. Midtown’s overall and Class A vacancy rate dipped over the previous quarter, however, by 40 and 60 bps respectively, as over 650,000 sq. ft. of sublet space was removed from the market. Nonetheless, Midtown Class B vacancy inched up by 30 bps to a historic high of 24.2% amid competition from newly built space at Manhattan West.

Overall Vacancy Rates by Submarket

Source: Cushman & Wakefield

Class A Vacancy Rates by Submarket

Source: Cushman & Wakefield

Class A Asking Rents Grow Modestly

Class A rents rose across Manhattan in the second quarter as large blocks of higher-priced office product became available throughout the borough’s office markets. Lower Manhattan’s overall asking rents, however, decreased slightly while Midtown and Midtown South recorded modest gains, returning to a pattern of bifurcating prices seen last year.

According to Cushman & Wakefield, Lower Manhattan’s overall average asking rent inched down by 10 bps over the previous quarter, and fell by 90 bps to $56.27 per sq. ft. year-over-year. This marks the seventh consecutive quarter below $60. Direct asking rents held flat over the past quarter at $59.64 per sq. ft., though sublet asking rents grew by 1.6% to $49.80 as large blocks became available for sublet at Four and Seven World Trade Center. Class A asking rents inched up by 30 bps over the past quarter to $60.03 per sq. ft., surpassing $60 for the first time in a year, but remain 80 bps lower year-over-year. Class B average asking fell by 1.3% over both the quarter and year to $51.55 amid high vacancy rates and diminished demand.

Overall and Class A office rents in Midtown inched up modestly over the past quarter to $77.05 and $83.95, respectively, as an eleven-floor block of space came onto the market at Two Manhattan West. In Midtown South, overall and Class A asking rents grew by 5.8% and 3.8% respectively year-overyear as higher-priced direct blocks entered the market at 555 Broadway and 376 Hudson Street.

Overall Asking Rents by Submarket

Source: Cushman & Wakefield

Class A Asking Rents by Submarket

Source: Cushman & Wakefield

Second Quarter 2023 Property Sales

Mixed-Use Building Sales

119 South Street: Investor Adam Ibrahim purchased the 14,053 sq. ft., 5-story building at 119 South Street in the Seaport from seller Emilio Barletta for $11.4 million. 119 South Street contains 16 residential units and a commercial space occupied by the Paris Cafe.

Recent Pending Sales Announcements

61 Broadway: RXR Realty entered into default on 61 Broadway after it reportedly stopped making payments on its $240 million loan on the property in December 2022. RXR agreed to return the 787,000 sq. ft. building to lender Aareal Bank in a deed-in-lieu-of-foreclosure transfer. Aareal Bank is seeking to sell the outstanding debt on the building for a tobe-determined amount.

144 Fulton Street: Crown Acquisitions has listed the 5-story, 8,625 sq. ft. retail property at 144 Fulton Street for $44 million. The firm originally acquired the property for $25 million in 2015. The building is fully occupied by Chick-Fil-A, whose lease lasts until January 2038.

Return to Office and Pedestrian Traffic Show Positive Momentum

Lower Manhattan’s sidewalks are increasingly bustling as workers continue returning to offices and pedestrian traffic increases. A Downtown Alliance analysis of Placer. ai data revealed midweek daytime office occupancy rates in Lower Manhattan at an average of 61% of pre-pandemic levels in the second quarter, up 3% from the beginning of the year. Using a representative mix of Class A and Class B properties, including buildings in the World Trade Center complex and Brookfield Place as well as offices in the Water Street Corridor and Financial West submarkets, the analysis showed occupancy rates in Lower Manhattan to be consistently higher than widely reported NYC Metro-wide data would suggest.

In particular, Placer data shows World Trade Center and Brookfield Place midweek occupancy at an average of 74% throughout the second quarter, up 4% from the beginning of the year. Conversely, the largely Class B properties in the Financial West submarket saw occupancy rates at an average of 52% throughout the quarter, up 5% from the beginning of the year but still lagging the district-wide average and well below occupancy rates seen in Class A properties.

Placer data shows occupancy rates across property class types largely mirroring the flight to quality trend, with the strongest return to office seen in newer, well-located and amenity-rich buildings.

Recent pedestrian counts in Lower Manhattan have also increased. By the end of June, foot traffic throughout the spring was up an average of 28% from the end of the first quarter and 12% from the second quarter of 2022. Growing tourism, warmer weather and increased office occupancy, particularly midweek, are driving weekday traffic and contributing to a busier feel on the streets.