Within hours of the Sept. 11 terrorist attacks on New York's World Trade Center, real estate brokers and tenants began to scramble for replacement offices amid fears of a space crunch and soaring rents. It didn't work out that way.
Instead, three months later, it's New York City landlords who are scrambling to fill a huge and growing pool of available space that has sent vacancies rising, rents falling and has complicated efforts to rebuild lower Manhattan.
The New York office market's surprising turn for the worse is partly the result of the many displaced businesses that have so far replaced only about half of the space they once occupied, according to industry estimates.
More significant, the slowing economy has prompted many companies--particularly Wall Street and financial services firms--to retrench and give up office space they no longer need. As a result, an unprecedented 20 million square feet of space--about twice the size of Century City--has flooded the nation's largest office market during the last three months, according to brokers.
"I think Sept. 11 brought a lot of things to bear and gave companies the opportunity to get rid of space they weren't using," said Justin Stein, regional research director for real estate services firm Grubb & Ellis. "The initial wave is certainly over, but if we continue to see layoffs in the banking industry, I'm sure we will see more space coming on to the market."
That's almost a certainty given the city's deteriorating economy, which was weakened further by the terrorist attacks. New York lost a record 79,000 jobs in October, and its economy is expected to shrink by 3.1% next year, according to government projections.
"Firms are leasing a lot less space than they previously did because of the slower economy," said Michael Burlant, a broker at Cushman & Wakefield.
Despite the destruction and damage to about 30 million square feet of New York's giant office market, the city's overall vacancy rate climbed to 9.3% in early December from 8% just before the Sept. 11 attacks, according to Grubb & Ellis. Conditions are even worse in downtown and lower Manhattan--home to Wall Street and the World Trade Center--where the vacancy rate has climbed above 10% and is expected to peak at 17% next year.
Landlord "asking" rents also have weakened since the attack, edging down 3% citywide and 8% in downtown and lower Manhattan. But tenants eager to sublease huge amounts of space are undercutting landlords by 15% or more, brokers say.
"If you are a tenant out looking for 5,000 square feet, your options are limitless," Burlant said.
The attacks and subsequent jump in available space revealed that the New York real estate market was in much weaker shape than many had thought. Only two days after the attacks, John Powers, vice chairman of Insignia/ESG, the city's largest commercial real estate broker, said his firm was deluged with tenants eager to unload about 5 million square feet of office space.
"People were saying, 'What kind of space can we free up?'" Powers said. "Then the space started dropping on the market."
But the deluge of space has far exceeded demand. Facing economic uncertainty and still reeling from the attacks' emotional and human toll, many displaced tenants have leased only a fraction of the space they formerly occupied at the World Trade Center and nearby buildings.
Sandler O'Neil & Partners, an investment banking firm once located on the 104th floor of 2 World Trade Center, took slightly less space in a midtown building in part because it lost 66 employees, about 40% of its staff, during the terrorist attack, said Fred D. Price, chief operating officer.
"We knew that initially we were not going to rehire as many people as we lost," said Price, whose firm will move into its new offices in late January. "We knew going in that we would have less need for space than before."
Investment banking firm Morgan Stanley, one of the World Trade Center's biggest tenants with about 1.2 million square feet of space, has committed to leasing only about 300,000 square feet of replacement space in addition to renewing leases in some existing buildings.
Morgan Stanley spokesman Bret Gallaway would not say whether the firm will lease as much space as it lost. "We're considering all our options," he said.
In addition, Morgan Stanley has decided against moving its institutional sales and trading operations into a million-square-foot building nearing completion in Times Square, just a short block from its headquarters. Instead, it has sold the building to rival Lehman Bros. Holdings Inc. and reportedly is considering locations outside Manhattan as part of an effort to spread out its operations and make itself less vulnerable to catastrophe.
Some firms have opted for less space in response to higher rents in midtown Manhattan, where many former World Trade Center tenants have relocated.