In Chapter 3, Franz Fuerst analyzes the effect of 9/11 on the market for commercial office space. His overall message is that in the three years since the attack, New York’s office building market has held up surprisingly well.Some 31.1 million square feet of office space—approximately 10 percent of the total inventory of New York City and 60 percent of downtown’s class A space—was destroyed or severely damaged by the 9/11 attack. All other things being equal, the sharp decrease in the supply of office building space would have been expected to raise rents and reduce vacancy rates in Manhattan. This did not happen, for three reasons. First, the decrease
in supply was offset by a pronounced decrease in demand for office space,owing to the combined effects of 9/11 and the recession. Second, it turns out that real vacancy rates prior to 9/11 were higher than indicated by the data because firms were inventorying large amounts of unused space at various
locations throughout Manhattan. Third, the higher prices for space in alternative midtown locations led firms to economize by reducing the amount of space per worker. In aggregate, companies that had occupied buildings in the
affected area rented about 15 percent less space in their alternative locations.
Fuerst estimates that half of the anticipated demand from tenants displaced
from the attack site was accommodated through backfill into existing space,
reduced staff, subleasing, and reduced space per worker. Contrary to expectations
that the WTC attack would dramatically drive down the price of office
buildings in New York, there was a significant increase in sales prices per
square foot. Though factors such as low interest rates may have had some
influence, in retrospect this price behavior seems at the least to be consistent
with the trends in rents and vacancy levels.
Where did displaced tenants go? The core markets of midtown and downtown
Manhattan captured about 80 percent of the stream of displaced tenants
after 9/11 through reoccupation of restored buildings, backfill of previously
underutilized space, and new leases. The back-office agglomerations for Wall
Street located along the New Jersey waterfront dominate the residual. Notably,
as of September 2003, more than half or the originally displaced tenants had
returned to a downtown location. However, a number of leases in the downtown
area were due to expire in 2004 and 2005, and there is some risk that,
despite the substantial federal subsidies for public and private infrastructure,
many tenants may choose not to renew at that time. The finding of limited
spatial and temporal effects is also supported by a regression analysis. Though
the downtown market, especially the World Trade Center submarket, was
affected more clearly in the first two years after the attacks than the other
submarkets, even in these submarkets the changes in vacancy rates have been
moderate. That is a much weaker medium-term impact of the attacks than
expected.
In light of the attack, tall buildings might have been expected to be particularly
vulnerable to apprehensions about security. The tallest buildings (fifty
stories or more) did record a sharp hike in vacancies after 9/11, even relative
to buildings of forty to forty-nine stories, but in general the expected flight of
tenants from tall office buildings has not occurred in the first three years following
the attack. Over time the vacancy rate differential for the tallest building
has decreased. Thus, the attack on the tallest buildings of all seems unlikely
Introduction 11
to permanently alter Manhattan’s signature industrial characteristic, which is an
enormous density of employment supported by very high ratios of capital (in
the form of buildings) to land.