Survey: 19% of downtown now owned by the lenders.

In a survey of 200 office buildings in downtown Manhattan, Jones Lang Wootton USA has found that ownership of 37 (19 percent) of the sample buildings has reverted to the lender or were in a state of transitional ownership in the past two years.

"This should prove to be a significant trend in determining the future of Downtown Manhattan,' says Helen R. Arnold, senior director of Investment Research for JLW USA and author of the report.

The buildings surveyed tend to be the older product in the Downtown market, all built before 1987. Most of the buildings are in somewhat dire straits in the leasing market. The average vacancy rate for buildings built between 1836 to 1931 is 38 percent; the average for those built between 1955 and 1971 is 37 percent; and the average for the newest group of buildings, built between 1980 and 1987 is 26 percent. In total, the buildings comprise 31.1 million square feet, or 25 percent of the total Downtown office market.

The JLW survey confirms a well-known fact that pre-1970s buildings are less competitive in the current soft leasing market. The survey also shows that pre-1980s buildings that have recently changed ownership also have substantially higher vacancy rates for their age group categories in the total market. The only buildings to have positive net absorption in the last two years have been constructed after 1985.

Life insurance companies are the predominant former lenders who now find themselves in ownership positions. Fifteen of the 37 buildings are in the hands of insurance company lenders, JLW reports. Other buildings involve U.S. banks, savings and loan organizations, foreign banks, domestic pension funds and a foreign property company. Thirteen buildings in the survey are witnessing transitional ownership due to corporate or other types of debt restructurings.

Jones Lang Wootton points out that the new lender/owners will be facing a wide range of options on how to manage their buildings, and their decisions will have significant impact on the overall character of the Downtown market.

One option for the new owners is to continue to operate a partially occupied building at current low rents, which may neither cover all building operating costs nor allow for complete debt service. Another option is to persuade tenants to leave the building and moth-ball it for future decisions, such as a return to market, demolition, adaptive re-use or deed to the county.

"Strategies taken will depend on how the owners see the future of the downtown economy," Arnold says. "Overbuilding and recession are usually cited as the villains in the present Downtown scenario of high vacancy rate and low rents. While overbuilding is certainly a contributing factor, the sluggish demand in the Downtown market of the last two years is the continuation of a long-term employment decline and not a short-term recessionary episode."

The weak market demand for much pre-1970 stock Downtown is a weakness that is likely to prevail for years. Many analysts contend that major redevelopment or re-orientation of uses will be necessary to avoid an urban area too heavily comprised of sub-occupied or closed buildings. But the current market and economy make it difficult for owners to upgrade or rehab Downtown buildings for office use unless the upgrade could create a product that is directly competitive with the 1980s product -- and rent at levels which justify such construction costs. "The current low rents even for Class A space hardly justify the construction expenditures," Arnold says.

"As market trends evolve over the next decade and it becomes clearer how many buildings might be left in operating inventory Downtown, the greatest need emerging may be for demolition and site clearance. Barring clear-cut public sector expectations and policies, the emerging lender/owner group will be an increasing force in determining this future," Arnold speculates.