The real estate industry is continuing to regroup and reassess following the horrific events of Sept. 11. And what the marketplace is finding are effects that are reaching both deeper and wider than many thought possible.

Business people are trying to get back to "business-as-usual." But business is anything but usual, as hotels suffer their lowest occupancies in years and real estate stocks astound the market with their resilient returns.

First, in the city of New York, many World Trade Center tenants appear to be reconsidering their previous declarations that they would keep their businesses in the Big Apple. While sentiment once ran high to stay put in Lower Manhattan, the long-term costs are proving insurmountable for many of these previously New York-based businesses.

A decline of business in Lower Manhattan was predicted in the early 1990s. The technology boom and a resilient economy, however, prevented such a weakening and resulted in substantial growth in the area. But an already-slowing economy, coupled with the events of Sept. 11, may have changed things for the long-haul.

According to research by TenantWise.com, a majority of large World Trade Center tenants have made long-term plans to relocate outside Lower Manhattan.

There were 188 non-governmental tenants that used more than 10,000 square feet of space in the World Trade Center and 14 surrounding damaged buildings, TenantWise.com determined. It may take five years to rebuild the destroyed properties and from six to 12 months to repair the damaged properties.

TenantWise.com surveyed 75 of the largest tenants from the destroyed buildings of the World Trade Center. Of those, 40 admitted that they had made plans to relocate outside of Lower Manhattan. These 40 tenants account for 82 percent of the square footage of the 75 larger tenants surveyed.

What's more, 11 of the largest tenants of the damaged properties surrounding the World Trade Center are also relocating outside of Lower Manhattan. Twenty-eight companies from the destroyed buildings remain undecided.

From the perspective of companies returning to their offices, 31 of the total of 113 companies located in the damaged properties have stated their intentions to resume operations in Lower Manhattan. This represents only 17 percent of the total square footage of the damaged properties. On the flip side, 71 companies representing 39 percent of the square footage of the total damaged properties have not indicated whether they will or will not return once repairs are complete.

Meanwhile, on the West Coast, the decline of tourism in the wake of the terrorist attacks is taking a heavy toll on destinations like San Francisco and Los Angeles. In fact, according to Ernst & Young, the California hospitality industry has hit a 10-year low.

In San Francisco, only 42 percent of hotel rooms are occupied. The silicon city already has been suffering financial pain thanks to failing dot-coms. Now, hotel occupancy has dropped a full 55 percent from this time last year. Revenue per available room in San Francisco has fallen 69.3 percent from last year.

Los Angeles is seeing its convention travel dry up. Revenue per available room us down 42 percent in Los Angeles, while occupancy has dropped to 53 percent.

But there likely is a ray of sunlight on the horizon for these beleaguered cities.

"With the exception of San Francisco, where significant room rate reductions were occurring way before the Sept. 11 attack, most California hotels have not had to lower rates," said Jeff Dallas, Ernst and Young's West Coast hospitality practice leader. " Instead hotels have chosen to maintain their average daily rates. In fact, given California's geographic distance from these events, coupled with the state's lodging demand characteristics and operating results post-Sept. 11, it appears that the California lodging market should keep pace with the overall U.S. market and outpace many major U.S. city markets on the road to recovery."

And on the bright side, owners of real estate stocks should be tickled pink at the hedge these issues offered them through the last month's tragic events. As many major consumer, travel, financial services and transportation stocks have foundered, real estate stocks have dropped only slightly.

The top 100 public real estate equities dropped only 5.7 percent in September, according to the National Association of Real Estate Investment Trusts (NAREIT).

NAREIT's real estate sector index indicates that REITs overall dropped only 4 percent in September, holding onto gains of nearly 10 percent on the year. Mortgage REITs actually managed to rise 4 percent for the month, to an year-to-date return of 56 percent.

For more articles by Lesley Hensell, please press here.

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Can New York Replace Lost Office Space?

Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net

Written by Lesley Hensell

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