In June 2001, the Group of 35 – a committee of business, civic and community leaders convened by Senator Charles Schumer – issued a report on the development of commercial office space in New York City. Citing estimates that the City's office-based industries could add 300,000 jobs by 2020, the G35 report concluded that the City would need to add 60 million square feet to its existing supply of office space in order to accommodate the projected growth. But to produce new office space on that scale – an average net increase of 3 million square feet annually – the City would need to move aggressively to address a variety of barriers to new development, including zoning constraints, high construction costs and high property taxes.

While the G35's analysis was right on target, its timing was unfortunate. By the time the report was issued, the City's economy was already slipping into recession. The demand for office space was beginning to cool. And in the aftermath of Al Qaeda's attack on the World Trade Center, the issues raised by the Group of 35 seemed far less urgent.

In the bleak days of 2002 and 2003, many of New York's professional pessimists questioned whether the City would in the foreseeable future even need to replace the office buildings that had been destroyed on September 11, let alone add tens of millions of square feet of new space. The Port Authority and developer Larry Silverstein were widely and relentlessly criticized for their insistence on rebuilding all of the office space that had been lost at the World Trade Center.

A few cooler heads – such as economist Hugh Kelly, now at NYU's Real Estate Institute, and Mary Ann Tighe of CB Richard Ellis – argued that the underlying dynamic had not changed, and that the City still needed to worry about the availability of office space as a long-term constraint on the growth of its economy. But for the most part, the issues raised by the Group of 35 disappeared from public view.

Now, six years after the G35 issued its report, we're back to the future. In June 2007, according to CB Richard Ellis, the office vacancy rate in Manhattan dropped to 4.4 percent. Asking rents averaged $63.76 per square foot – a stunning 34 percent increase in just twelve months. In Lower Manhattan, average asking rents were over $46.79 per square foot – and in Midtown, $79.15. On Park Avenue, asking rents in June averaged more than $101. Cushman & Wakefield reports that in the first six months of 2007, 18 new leases were signed in Manhattan with rents in excess of $135 per square foot.

The good news here is that a lot of very bright people and successful companies want to work and do business in New York. And a lot of them are willing to pay rents that, for the first time in perhaps twenty years, can support the construction of new Class A office space. The bad news is that a lot of other companies that would like to stay or expand here are being squeezed out.

Real estate plays such a central role in New York's economy that it's easy to start thinking that real estate development and economic development are synonymous. They're not. Office buildings, after all, don't create jobs – the companies that occupy them do. Nevertheless, when the office market gets tight, the availability and cost of space can become a very real and immediate constraint on the growth of the City's economy. And that's precisely where we find ourselves today. An inadequate supply of office space is costing us business and jobs.

The loss to the City goes beyond the direct loss of office jobs. Manhattan's office-based industries generate powerful spillover effects throughout the City's economy. In a recently-completed study for the Alliance for Downtown New York, Appleseed found that development of a hypothetical new 1.3 million square-foot office tower in Lower Manhattan could produce the following effects:

  • Even after taking into account the fact that some of the jobs in this new building would simply be relocated from other office buildings in the City, we estimated that development of the new building would make possible the creation of more than 3,500 "net new" jobs in New York City's office-based industries.
  • Tenant companies would, through their purchases of goods and services from New York City businesses, generate approximately 3,600 net new full-time-equivalent jobs in other companies throughout the City.
  • Household spending by employees who live in the City would support another 1,900 net new FTE jobs.
  • The building, its tenant companies and their employees, and their purchases of goods and services from other local companies would generate $60 million a year in net new revenues for New York City.

Not all of these economic and fiscal benefits are necessarily lost, of course, when companies move employees out of the City, or choose to expand elsewhere. Some New York City residents employed by these companies will commute to Jersey City, and continue to pay New York City resident income taxes. And even after they move, companies may continue to buy some goods and services in the City.

But over time, the impact on the City's economy from the loss of office-based businesses and jobs – a loss that is at least to some extent avoidable – is bound to be substantial. The lesson is clear: Continued growth in the supply of commercial office space is absolutely essential to the continued growth of New York City's most productive industries.

So what should the City be doing to address this problem? First, let's give the Bloomberg administration credit for what it's already done. It has rezoned Manhattan's far west side and downtown Brooklyn, and is rezoning for higher-density commercial development in downtown Jamaica. It has revised the City's building code, and has actively supported development of new office space in satellite locations such as 125th Street and downtown Flushing. If the Mayor and his colleagues had not had the foresight and fortitude to take on these challenges when the City's economy was reeling, we'd be in a lot worse shape today.

But there's more that needs to be done. Here are some suggestions – we invite you to add yours.

  • The City should do whatever it can to expedite projects already in the pipeline – at the World Trade Center, around Moynihan Station, on the current site of the Hotel Pennsylvania, and over the Port Authority Bus Terminal, for example. Collectively, these projects will over the next ten to fifteen years provide about 20 million square feet of new office space.
  • Beyond the World Trade Center site, the City's primary focus in Lower Manhattan has in recent years been on promoting residential development. The growth of the downtown area's resident population has been enormously beneficial – for Lower Manhattan and for the City as a whole. But it may be time for the City and the State to revisit some of their planning for this area, and to explore opportunities for new office development on vacant or underutilized sites.


    The MTA missed a major opportunity when it decided not to pursue development of the air rights above its new Fulton Street transit center. But there may be other sites worth considering – elsewhere in the Fulton Street corridor, on Broadway between Cortland and Dey Street, and on Lower Greenwich Street, for example.
  • The City also needs to focus on the preservation and development of less-costly Class B and C space. The availability of reasonably-priced office space is critical to the birth and development of new companies, and to maintenance of the City's existing base of small businesses. But due in part to conversion of older buildings to residential use, such space is scarcer and more expensive than it used to be. Conversion of obsolete commercial and industrial buildings to residential use has on the whole been good for New York. But the City now needs to take steps to ensure the availability of lower-cost office space as well.


    For example – as the Fashion Center Business Improvement District has long argued, the City Planning Commission should eliminate the special district zoning that today complicates conversion of obsolete industrial space in the Midtown fashion center to office uses. Commission Chairman Amanda Burden recently announced her support for this change; it should now be implemented as quickly as possible.
  • Finally, the City should not be afraid to use tax benefits and other incentives aggressively to spur new office development. The incentives offered to Goldman Sachs for building a new headquarters in Battery Park City – and more recently, to J.P. Morgan Chase for building at the World Trade Center – have been criticized on the grounds that these companies don't really need the help, and probably would have stayed in the City anyway. But these criticisms miss an important point – whether Goldman would have moved its headquarters or not, and whether or not Chase is really increasing its total employment in the City, New York will in the long run benefit greatly from the addition of 3.3 million square feet to its total supply of office space. The space these companies free up when they move into their new buildings will allow the City to accommodate 13,000 to 14,000 jobs – most of which would probably not be here otherwise.

It's easy to paint deals such as these as being overly generous. But even when the market is tight, developing new office space in New York City is still an expensive and relatively high-risk venture. Without anchor tenants, most developers won't invest in new buildings. And without new office buildings, the City will be severely limiting the growth of its economy – and the opportunities available to its residents.