Vacancy rates soar in NY's Financial District
NEW YORK, Dec 11 (Reuters) - Businesses are deserting offices in New York's Financial District, reluctant to move back to an area devastated by the attacks on the World Trade Center on Sept. 11, according to a new report by Grubb & Ellis and Merrill Lynch.
Making the situation more grim, the area's tenants continue to dump office space onto the sublet market, driving down rents that are expected to eventually drop by as much as a third, the report said.
The research report, completed by Grubb & Ellis and Merrill Lynch this month, said vacancy rates in the Financial District have reached 10.6 percent and would peak at 16 percent to 17 percent next year. Before Sept. 11, vacancy rates were 7.5 percent for the area.
The attacks destroyed or damaged more than a third of the area's total office space, leading analysts to initially project that the downtown rental market would tighten. But with vacancy rates actually rising, it means demand for office space in the area has shrunk by far more than a third.
The report said tenants in the area have either scattered outside of New York City, taken new offices in Midtown Manhattan, or decided that they didn't need as much office space as before, in some cases because of layoffs.
Tenants still have concerns about transportation and air quality issues as well as working so close to the ongoing cleanup work at Ground Zero, according to Justin Stein, who worked on the report for Grubb & Ellis.
The vacancy rate for the entire New York City rose to 9.3 percent from 8 percent before the attacks, as the midtown market held steady at about 7 percent.
But several big name tenants have already announced plans to sublet a large amount of their downtown office space, including Citigroup's (NYSE:C - news) Salomon Smith Barney, Merrill Lynch (NYSE:MER - news) and Dow Jones & Co (NYSE:DJ - news). Without the demand to support the exploding supply, rents are in a free fall.
Rents have dropped to about $42 per square foot per year, from $45 per square foot prior to Sept. 11, but the report sees rents eventually bottoming out in the low to mid $30s range.
That means that the average-sized office building floor of about 35,000 square feet that once rented for roughly $1.5 million per month could end up dropping to about $1 million a month.
Stein said that the Financial District would need government incentives such as tax breaks to lure business back to the area.
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