The Future of Lower Manhattan: Signals from the Marketplace
William C. Wheaton & Jim Costello
My comments will not directly address the very difficult question of how to redevelop or memorialize the World Trade Center site. Instead, I would like to focus on the broader New York Metropolitan economy, its labor market, and the Manhattan real estate market. Clearly, these bear directly on the longer run vitality of Lower Manhattan, and hence indirectly contribute to the discussion about the WTC site.
Let me begin by examining some common misconceptions about the broader New York Metropolitan economy.
First. The financial sectors are not the engines of the region's growth. In the 31 years since 1970, the so-called FIRE sector [finance, insurance, real estate] has seen region wide job growth of only about 25%. In contrast a broad group of Business and Professional (B&P) Services [covering everything from software development to advertising] has increased almost 150%. Some of this growth no doubt results from the outsourcing of support services by the large national financial corporations. Still, independent law or software firms behave quite differently than their internal corporate counterparts - and that appears to be the emerging structure of the region's economy.
Second. While the suburbs [Long Island, Connecticut, Westchester and Northern New Jersey] are not literally "sucking the life" out of Manhattan (as they are in some regions), they are creating formidable competition. Since 1970 the growth of FIRE employment in New York City has been virtually nil (7%), while in the suburbs it raced along with a cumulative 140% growth. The city fared better with B&P Services; here increasing 85% while suburban growth was 215%. Forecasts for the next decade have the region as a whole experiencing little growth in the FIRE sector as technology continues to find substitutes for workers. The city should hold its own in the growth of B&P Services.
Third. Economic Agglomeration (what cities are supposed to be founded upon) does not result from synergy between firms. Rather it results from the scale of the labor market and hence the linkage between firms and workers. Firms compete with each other and do not cooperate. The actors in the labor market do, however, inadvertently cooperate when they make decisions about whom to hire, what jobs to accept, and how much training to incur. A larger labor market, in any profession or skill, generates very significant increases in productivity and wages. It is for common access to more workers that firms cluster, or move to the suburbs.
Fourth. Improved transportation capacity cannot necessarily cure congestion. In the long run, congestion results from trying to assemble too many workers at a common location. Wider highways, or more trains can sometimes help, but sooner or later the laws of physics catch up. In bringing millions of people into a single center, cars, buses, trains and even people themselves soon start to bump into each other - inherently.
The truth is that firms and employees work best together when workplaces and residences coexist in spatial balance - spread out and intermixed to some degree with each other. Cities with bedroom suburbs and concentrated CBDs are becoming dinosaurs. All around the world, polycentricity is both the emerging urban form - and the one that is encouraged by those regional planners who are listening to the signals of the marketplace.
The changes I have just described in the region's economy and labor market are being matched by equally important shifts in the demand for office space. While office space per (office) worker rose steadily during the 1980s, it has consistently declined throughout the 1990s. In effect, the rate of net space absorption was about half that of office worker growth. Our belief is that over the last decade, firms chose to invest limited capital in new technology rather than space.
The combination of these changes, technology and limited job growth, do not auger well for New York office space demand over the next decade. From the current level of 320 million occupied square feet, we see city space demand growing by only 65 million - to 385 - through 2011. It is important to remember, however, that occupied space just 18 months ago was 360 million! The recession reduced demand by 20 million - as of course did the terrible events of 9/11. Put differently, of the 65 million square feet needed over the next decade, only 25 million is "new" - from the vantage of the year 2000.
If we narrow our focus to the Manhattan office market, our "econometric eyes" find some interesting results. First, rents in Lower Manhattan are only 60% of those commanded by comparable Midtown properties. Second, we estimate that much of this lost rent is due to the poorer transportation access of Lower Manhattan versus Midtown. We find that rents in Manhattan decline by 30% for each mile to the nearest subway stop, and by an additional 9% for each mile that stop is from Grand Central Station. Finally, rents downtown increase only 30% between comparable buildings of 60 stories height versus those only 10 stories tall. This "view premium" probably does not match the required additional construction costs - casting doubt on economic wisdom of building ever higher. I should mention that these results use data prior to 9/11, and do not incorporate any further rental adjustments caused thereafter. Without enormous infrastructure investment, the Downtown office market clearly will continue to play "second fiddle" to Midtown.
As one use wanes in urban real estate, other uses rise to take control of both property and land. From Costar-Comps we find that recent sales prices of office space average around $200 per square foot (Downtown B space) to $335 (Midtown A space). Only a very few premier "trophy" properties have crossed the $400 threshold. While I am not an expert in residential real estate, Sunday listings suggest Downtown loft space is worth roughly $500 per square foot while Uptown condominiums fetch between $500 and $900. Even with significant conversion costs - conversion is economic and should be encouraged.
In many US cities, firms continue to move to where residences are located (mostly in the suburbs) while there is renewed interest by households in living in central cities. Perhaps this signal from the market applies to Lower Manhattan as well.
Presented to a conference on the future of Lower Manhattan held by the Institute for Urban Design, New York City, January 10, 2002. Data and analysis are courtesy of Torto-Wheaton Research.
Download a printable version of this paper (pdf, 40K).
William C. Wheaton is a Professor in the MIT Department of Economics. Jim Costello is an Associate at Torto-Wheaton Research in Boston.
