Downtown poised to take in midtown's overflow: brokers predict surge in leasing activity.

While midtown and midtown south markets continued the trend of modest improvement in the second quarter of 2004, downtown is still giving New York's commercial brokers cause for concern.

According to Cushman & Wakefield's quarterly market report, total vacancy in midtown and midtown south decreased by 0.5% and 1.1% respectively, while downtown posted a vacancy gain of 0.1%. In addition, the rents downtown have slipped from $33.68 per s/f in the first quarter to $32.25 in the second, continuing a downward spiral which started several years ago.

Not that it's necessarily a bad thing. According to Ken Krasnow, Cushman & Wakefield's New York area leader, the rising rents in midtown and midtown south would eventually force smaller tenants to look at lower Manhattan for their space needs.

"The rents are starting to rise in midtown, but they are falling downtown," he noted during his speech at Cushman & Wakefield's market forecast breakfast on July 13. "That gap will create activity downtown. Through the balance of 2004 you will still see some price deterioration, but it will reverse itself once activity downtown picks up. What's encouraging is that the [tenants who look at] downtown are becoming more diversified."

Kfisten Hickcox, national director of research with Newmark & Company, agrees with that assessment, noting that such has been the trend during previous cycles.

"It is definitely going to happen. As prices in mid-town rise, downtown becomes a much more attractive alternative," she said. "It's already starting to occur, people are looking downtown, but how many will go there remains to be seen."

In addition, brokers hope that all the residential conversions going on in the area will take old space off the market and leave only the most attractive, technologically advanced properties in the office sector.

"Downtown posted 500,000 s/f of completed conversions, with more scheduled for the rest of the year," Krasnow said. "That's 5,500 residential units that have been completed." According to Andrew Peretz, executive director of downtown office brokerage with Cushman & Wakefield, that means more incentive for businesses to come downtown.

"Young people can now live [in the area]," he said. "That makes locating your company downtown a much more attractive proposition."

At the same time, Hickcox is concerned about large blocks of space re-entering the downtown market. The JP Morgan Chase/Bank One merger is creating vacancies at 1 Chase Manhattan Plaza, 75 Wall St., 95 Wall St. and 4 New York Plaza. Still others might be in the making. "There was a decrease in availability rate downtown, but there are so many rumors about space being put on the market, it will probably not be sustained," she said.

She is confident, however, that Manhattan's real estate market in general will continue to improve, at a steady, healthy rate.

"The major trends haven't changed since the last month. There has been some improvement driven by midtown and midtown south," she said. "I don't think that we are going to have a spike, but I do believe that it's more of a healthy recovery ultimately. Tenants are being much more cautious about how they lease up their space now."

Law firms continued to lead the leasing activity in Manhattan in the second quarter, followed by financial services firms, accounting firms, insurers and business services. According to Krasnow, the good news is that tenants are taking new space, not just renewing or expanding old leases.

"Leases are up by 3 million s/f since the 2003 and positive absorption means that we are seeing new leases, not just renewals," he said. "And the trend has been toward larger leases--we have 18 deals in 2004 over 100,000 s/f. This is a continuation of last year's trend, with tenants taking opportunity of the market."