Lower Manhattan CRE Market Struggling to Recover from COVID-19; Residential Sector a Different Story
Real Estate In-Depth | May 4, 2021
NEW YORK—First quarter office leasing in Lower Manhattan was up from the previous quarter’s record low but still more than 60% below the five-year quarterly average, according to the Alliance for Downtown New York’s Lower Manhattan Real Estate Market Report, Q1 2021 released today.
The report noted that while the commercial real estate market lags, the number of Lower Manhattan residents are on the rise. The daily residential population in Lower Manhattan recovered to 85% of the pre-pandemic population, after falling to a low of 66% in June 2020.
The report noted that the current hesitancy in real estate decision-making might change as increased vaccination rates and relaxed capacity restrictions draw more employees back to offices across the city—an effort being led by the city, which welcomed its staff back this week and has set July 1 as the date when spaces can return to full capacity.
On the retail front, 26 Lower Manhattan retailers closed in the first quarter, in addition to 163 closures that were recorded in 2020. The quarter also saw 13 businesses open and opening announcements from 25 more.
“The economic impacts of COVID-19 are deep and real but we are starting to see a gradual reawakening of Lower Manhattan. Vaccinated workers are starting to return to their offices. Locals are meeting for dinner. Tourists are taking in the sights,” Jessica Lappin, president of the Alliance for Downtown New York, said. “We can’t say for certain what the next few quarters will bring, but Lower Manhattan is a vibrant neighborhood and we’re excited to welcome those who are ready to return.”
The first quarter saw Lower Manhattan record 440,000 square feet of office leasing according to commercial brokerage firm CBRE. This was up from the record low seen in the previous quarter, but 60% lower than the five-year quarterly leasing average. The past four quarters combined still only amounts to what was seen in individual quarterly leasing in 2019. Real estate decision-making continues to be put on hold and is further influenced by office workers’ present slow and limited return to the physical office. A recent survey by the Partnership for New York City estimates that only about 10% of workers across the city’s business districts were back in the office as of March 2021, the report stated.
Increased vaccination rates are an encouraging sign and companies are beginning to plan for employees to return to the office, as capacity restrictions continue to be relaxed. By late April, more than half of all city adult residents have been partially vaccinated. Mayor de Blasio announced the full reopening of New York City by July 1 and that city workers who have been working remotely since the start of the pandemic (totaling 80,000 workers across New York City) will begin returning to the office in early May. This is viewed as an important signal encouraging other companies to follow suit. The Partnership for New York City also estimates about half of the employees across the city will be returning by September 2021.
Midtown Manhattan saw 1.92 million square feet of leasing activity in the first quarter, up 34% from the previous quarter; however, the market is 50% behind the five-year quarterly average. Midtown South leasing activity more than doubled to 519,000 square feet over the previous quarter; however, leasing remained 56% below the five-year quarterly average.
According to Cushman & Wakefield, Lower Manhattan’s overall vacancy rate rose from 10.8% to 14.4% over the past year as the pandemic created havoc in the market. Almost 600,000 square feet of direct and sublet spaces was made available in the past quarter. Over the past year, Class A vacancy grew by nearly five percentage points from 10.8% in the first quarter of 2020 to 15.5% by the end of 2020. The Class B vacancy rate rose to 12.8%.
Midtown’s overall vacancy rate increased to 16.8%, up year-over-year from 12.3% and the highest rate since 1993. Class A office vacancy in Midtown jumped to 15.9% as 1.8 million sq. ft. became available; class B office vacancy also increased dramatically to 19.5%, up 6.6 percentage points from the first quarter of 2020.
Midtown South’s overall vacancy had the most dramatic increase since the pandemic began, rising 8.5 percentage points from 8.5% to 17%, driven by large increases in Madison/Union Square and Hudson Square. Class A office vacancies in Midtown South continued to increase to 14.9%, while class B office vacancy hit 19.5%, a nearly 10 percentage point increase year-over-year.
In terms of the residential market in Lower Manhattan, the report states Lower Manhattan has 33,714 units in 341 residential buildings. There are 3,796 units in 15 buildings under construction or planned for development, with about 57% currently planned as rental units and 43% as condos.
Two new buildings received their temporary certificates of occupancy in the first quarter of 2021, adding 334 new condominium units. Final aspects of construction will still continue on these buildings throughout the year.
According to residential statistics published by Miller Samuel/ Douglas Elliman, the median rent in Lower Manhattan was $3,000 in the first quarter, down 8.2% from the fourth quarter of 2020 and a 22.5% decrease from the beginning of 2020. This was the sixth consecutive quarter during which median rents continued to fall and the lowest median rent in over a decade. Manhattan’s overall median rent trended down 15.7% year-over-year to $3,000, but remained flat compared to the last quarter. Lower Manhattan now is on par with median rents seen across Manhattan. Over the past five years, Lower Manhattan has seen much higher rents than the rest of Manhattan — typically between 8% and 10% higher, the Alliance report noted.
Renters responded enthusiastically to Lower Manhattan’s falling rents. New apartment leasing has increased steadily over the past couple quarters after rents fell to a 10-year low point. Relatively more affordable rents should be considered a positive note for Lower Manhattan, particularly as employers begin to return to work and new legions of young professionals start jobs in the city, the Alliance report stated.
The sales market also woke up in the first quarter. The selling season was compressed during the pandemic with the busy spring sales period in 2020 being essentially halted. Old inventory has since cleared the market and buyer enthusiasm is higher. The median sales price for co-ops and condos fell to $1.481 million, down over 8% from the previous quarter. Lower Manhattan’s average price per-square-foot was $1,648, down 6.4% from the previous quarter. Buyers responded to the decline in prices with sales volume nearly 171% higher than over the previous quarter.
The Alliance also covered the exodus by Lower Manhattan residents due to the pandemic and noted that a vast majority have returned now that infection rates are on the decline and vaccinations are on the rise.
The Alliance partnered with Placer.ai, a technology company that analyzes location and foot traffic information by collecting anonymized geolocation and proximity data from mobile devices enabled to share such information. Using data from Placer.ai, the Alliance measured the impact of COVID-19 on residential migration patterns in Lower Manhattan and comparable neighborhoods.
Compared to a pre-pandemic January 2020 baseline, Lower Manhattan’s estimated residential population began to decline in March 2020 and reached its trough by June 2020 as many residents left temporarily to ride out the worst of the pandemic in second homes or with friends or family. Some of these residents have moved permanently out of the neighborhood. Placer’s data estimated that by June 2020, only 66% of Lower Manhattan’s population was still living in the neighborhood. The daily residential population began to recover by the fall and currently Lower Manhattan has 85% of the population it had pre-pandemic. The residential recovery in early 2021 can also be evidenced anecdotally by how cheaper rents have driven leasing activity in Lower Manhattan apartment buildings, the report noted.