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Special Report - Commercial Real Estate
January 13, 2003

Early last year, with her 10-year lease at midtown's Graybar Building coming up for renewal, Terri Edelman was facing an 80% rent increase if she wanted her marketing business to stay put. Understandably, she began to evaluate her options, looking not just around midtown but downtown as well.

"What I found was that the downtown area was much more welcoming for growing companies," says Ms. Edelman, president of the Edelman Group.

Not to mention compellingly cheaper. Last month, the Edelman Group moved into 2,000 square feet on the 20th floor of 50 Broad St. There, the asking price was about $24 per square foot. That cuts Ms. Edelman's rent bill almost in half. She is also applying for rent tax abatements as well as cash grants of $3,500 per employee, designed to attract or retain businesses downtown.

Attracted by lower rents and landlords eager to strike deals, an influx of public relations firms, law firms, nonprofit organizations, engineering firms and other service companies is beginning to subtly alter downtown's tenant mix. "We're seeing smaller service companies moving downtown, because they really need to control their occupancy costs," says James Meiskin, president of Plymouth Partners Ltd., a tenant representation firm.

For cost-conscious companies, downtown has become a major destination. The spread between Class A rents in midtown and downtown now stands at 35% or 40%, according to Adam Foster, senior managing director at Insignia/ESG Inc. Just one year earlier, it was about 25%.

"A lot of the smaller service firms that are coming out of midtown signed leases in the early 1990s and are finding sticker shock when they expire," says Elizabeth Houley, senior managing director at Newmark & Co. Real Estate Inc. "By coming downtown, they can upgrade their building from B to Class A for effectively the same rent."

Not only does downtown offer acres of older space in B and C class structures, but now there are big gaps even in trophy properties like the World Financial Center.

In one of the biggest deals of last year, law firm Thacher Proffitt & Wood returned to downtown, where it had lost its World Trade Center home. The 200-attorney firm took a 15-year lease for 137,000 square feet previously occupied by Merrill Lynch & Co. in 2 World Financial Center.

By moving into Class A space, where the rent is sharply lower than that of comparable midtown space, Thacher chairman Jack Williams believes, his firm will both do well and do good.

"We do hope that what we're doing here is going to be meaningful in terms of helping restore downtown," he says.

Shedding space

Arguably, however, one of the most important drivers of the changes in tenant mix downtown has simply been the massive shrinkage of the financial services industry. With successive waves of thousands of job cuts, plus the need for Wall Street firms to decentralize operations for security reasons, large downtown tenants like Lehman Brothers and Merrill Lynch are shedding office space.

In the first 11 months of last year, according to Cushman & Wakefield Inc., financial services companies accounted for only 25% of the 2.8 million square feet of downtown transactions, a far smaller portion than in previous years. Meanwhile, nonprofit groups soared in the deal rankings, accounting for the second-largest chunk of space bought or leased.

Big nonprofit deals

The largest of those nonprofit deals was the United Federation of Teachers' purchase of 50 Broadway and long-term leasing of 52 Broadway. The moves coincided with the UFT's decision to sell buildings it owned on Park Avenue South and in the East 20s. When it completes its move early this year, the union will occupy about 750,000 square feet in the adjoining buildings.

New York University's School of Continuing and Professional Studies also saw and seized an opportunity downtown. It took 94,000 square feet at the landmark Woolworth building, at 15 Barclay St.

In addition, more and more engineers are turning up downtown. The Port Authority of New York & New Jersey took 60,000 square feet at 115 Broadway for its engineering unit. DMJM+Harris/Arup, an engineering firm, sublet more than 70,000 square feet at 20 Exchange Place.

A potent mix of the declining fortunes of the financial services sector, significant rent subsidies and growing pressure on managers to reduce fixed costs will probably continue to alter the character of downtown's office market.

"It won't cater as much to the FIRE (finance, insurance and real estate) sector," says Plymouth Partners' Mr. Meiskin. "It may ultimately cater more to the creative sector-advertising, publishing, architectural and design firms."