ESG broker sees better days ahead for Downtown.

It's been hard to find too many optimists about Downtown Manhattan these days. Flagging leasing velocity coupled with a sharp increase in available office space have sent the Downtown market into yet another tailspin in 1995.

Across the first nine months of the year, the market has experiences negative net absorption of 2 million square feet - simply meaning that the amount of space made available exceeded leasing activity by 2 million square feet. That's a worse showing than even 1990 or 1991 at the depth of the recession. As a result, the Downtown availability rate has skyrocketed to 25.6 percent at the end of September.

Yet amid a grim year, one keen-eyed observer of Downtown Manhattan detects reasons to be hopeful: Raymond T. O'Keefe, executive director of the Edward S. Gordon Company's Downtown Office. O'Keefe has spent most of his 31-year career in Downtown Manhattan, riding the cyclical ups and downs that have always been this market's trademark.

"It's hard to know when a market has truly reached bottom until the recovery is already well underway," O'Keefe relates. "I think we'll look back two or three years from now and consider 1995 the bottom. That's not to say that availabilities will not rise further from here or that leasing velocity is going to pick up overnight. But if you look past the near-term, you'll see that we're laying the foundation for Downtown's next cyclical recovery. In fact, I think the psychology down here has already started to improve."

What reasons does O'Keefe have for this opinion? There are a few.

First, he points to Mayor Giuliani's Downtown Revitalization package, which Governor Pataki signed into law on October 29. "We have been saying for years that Downtown could not possibly work through its formidable problems without the public sector playing an active role. Now, we finally have that commitment," O'Keefe says.

With an eye toward tenant retention, Mayor Giuliani's plan will offer a three-year full exemption and two-year partial exemption from the municipal commercial rent tax - as well as a potpourri of other financial benefits - for tenants who sign new leases or renewals at Downtown properties built before 1975. Another important component is designed to foster conversions of antiquated office buildings to residential and mixed-use facilities.

"This part is vital because Downtown will not truly recover until we can blend in residential, educational, retail, and entertainment uses in a more meaningful way. Downtown is not viable as a bastion of commerce alone. It needs to be a 24-hour, 7-day community," O'Keefe says.

For proof that residential and mixed-use properties can work Downtown, he points to the success of Battery Park City, the South Street Seaport and The World Trade Center retail concourse, where upscale retailers like Coach, Limited Express and Warner Brothers have recently opened their doors.

"The Alliance for Downtown New York (the Downtown BID established in January) has forecast that as many as 4,000 residential units will be created Downtown in the next several years. That would mean removing roughly four million square feet of what is largely empty office space from the inventory," says O'Keefe. "There is nearly 23 million square feet of office space available today, so we're not talking about a panacea. But it would greatly relive some of the over-supply, while bringing a needed diversity to Downtown."

With memories of past downturns, O'Keefe recalls that the turn-around has always been inspired by a major construction project, whether Chase Manhattan's corporate headquarters in the 1960's or the World Trade Center in the late 1970's. "These projects helped to change people's attitudes and perceptions about Downtown from pessimistic to optimistic. That's exactly what's needed today," he says.

This time, the impetus for recovery will come not from a single, seminal event, but a series of smaller achievements that steadily improves the psychology of Downtown.

One such achievement in Downtown's increased ability to hold on to its existing tenant base, which has been victimized by the flight of tenants to Midtown and the suburbs. Donaldson, Lufkin & Jenrette and Swiss Bank are among the firms that have most recently picked up stakes, or will do so shortly.

O'Keefe praises the Guiliani Administration's efforts to retain the Coffee, Sugar & Cocoa Exchange - and likely the Cotton Exchange as well - which had been near an agreement to move its trading operations to the New Jersey waterfront. Ground has just been broken in the World Financial Center for the new headquarters of New York's two other futures exchanges, the COMEX and the NYMEX.

But retention alone is not enough, according to O'Keefe. "We have to find creative ways to expand and diversify the tenant base. Downtown did not become a single-industry market until the 1980s. It does not have to stay that way," he says.

Therefore, O'Keefe views the Rudin Family's trail-blazing Information Technology Center on Broad Street as one of the most critical elements in the future health of Downtown. The Rudins will invest $30 million to transform the 400,000 square-foot building at 55 Broad (once the headquarters of now-defunct Drexel Burnham Lambert) into an incubator for new media and information technology companies.

"What the Rudins are doing at 55 Broad is vitally important. Their efforts are bringing to Downtown young, vibrant creative companies that otherwise might not choose to locate here," O'Keefe says. "There will be tremendous spillover benefits at the street-level and in neighboring buildings. The Rudins envision Broad Street becoming another SoHo. I tend to agree with them."

If anything causes cynics to question whether Downtown can truly regain its former glory it is the shortage of suburban transportation options serving this area. "Transportation has always been a thorn in Downtown's side," O'Keefe concedes. "It's not only a suburban-commutation issue. There's never been a convenient way to get around Downtown once you're down here.'

That's why O'Keefe is encouraged by one of the Alliance for Downtown New York's first acts: subsidizing a free Jitney service that will circulate passengers from the New York Waterway ferry slip to the World Financial Center to the South Street Seaport to South Ferry and back. "It's a little thing, but little things add up," O'Keefe observes.

For New Jersey commuters, the ferry service (with convenient connections to the Jitney) provides a direct link to Downtown from Weehauken. It's clear, however, that a great deal more needs to be done to overcome the suburban transportation shortcomings, particularly for commuters from Westchester, Connecticut and Long Island.

There has been talk of establishing a ran terminal that would link Downtown to Metro North and the Long Island Railroad. Importantly, the state's principal economic development agency, the Empire State Development Corporation, has just initiated a study to investigate transportation alternatives.

O'Keefe says the investment of public dollars in Downtown will produce positive returns. "There's no real estate market in the country like Downtown," he says. "We have so much history here. It's the birthplace not only of New York City, but in many ways, of the entire nation. It's an asset we've neglected for too long. With a little encouragement, it can come back as strongly as ever."