Report of the Citizens Housing and Planning Council on Housing Development in Downtown September 19, 2002

CHPC/Downtown Housing

The Ad Hoc Committee on Downtown Housing Frank Anelante Robert Berne Shirley Bresler Howard Chin Bob Cook Sylvia Deutsch Mark Ginsberg Gale Kaufman Henry Lanier Sander Lehrer James Lipscomb Kenneth Lowenstein Marvin Markus John McCarthy Gerry Vasisko Mark Willis Barry Zelikson

CHPC Staff Frank Braconi Martha Galvez Kimberly Miller Elaine Toribio

Maps and Technical Assistance Terrace GIS Associates

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Executive Summary

The Citizens Housing and Planning Council of New York believes that the policy goal of encouraging a mixed-use, commercial/residential/cultural district in is even more imperative as the area seeks to recover and rebuild from the terrorist attack of September 11, 2001. This report explores the role of residential development in that recovery process and offers our recommendations regarding residential development in downtown’s mixed-use environment. Our principal findings and recommendations are:

Lower Manhattan remains a critical generator of wealth and jobs for the region and housing development should not preempt that role.

Of the approximately 100 million square feet of commercial space downtown, approximately 25 million square feet built before the Second World War is suitable for conversion to residential use.

Given plausible forecasts of future office demand and construction in Lower Manhattan, about 3 million square feet of this older office space could be converted to residential use without impinging on job-creating commercial uses.

The balance between commercial and residential reuse of older office buildings is effectively regulated by market mechanisms. Any intervention by public agencies should focus on facilitating the conversion of appropriate buildings in existing residential areas.

The potential for further residential development downtown, including new construction and conversions, is between 4,000 and 8,000 dwelling units.

Public agencies should create a commercial consolidation program aimed at helping companies relocate from buildings slated for conversion to other space downtown.

New, unassisted housing development downtown remains economically viable given prevailing development costs and rents in Manhattan, but that housing will be accessible only to households earning $100,000 or more. The use of tax-exempt Liberty Bonds can reduce feasible rents by about 6 percent.

Liberty Bonds should be used to fashion a more flexible model of mixed-income housing than that allowed through the use of conventional private activity bond financing. Public agencies should not impose restrictions on the use of Liberty Bonds that mimic existing restrictions on private activity bond financing.

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Approximately $128 million of federal appropriations for downtown recovery, in conjunction with Liberty Bonds, should be used to create 1,500 apartments for middle-income households earning, on average, 150 percent of the area median income.

Liberty Bonds, in conjunction with an amended 421-g tax incentive program, should be used to encourage mixed-use conversions where appropriate.

Public agencies should encourage future conversions in specific areas where residential clusters already exist. If dispersed throughout downtown, the potential for additional housing development is not substantial enough to change the office district tempo of lower Manhattan.

The neighborhoods identified in this study represent better opportunities for new housing than the former World Trade Center site. Although mixed-use redevelopment, including some residential, may be appropriate, new structures at the site should be primarily for commercial use.

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I. Introduction: Downtown Development After 9/11

It has been the policy of several successive Mayoral administrations to encourage residential development in Lower Manhattan and to promote the evolution of the area into a diverse, mixed-use district that offers residential and commercial options, sight- seeing and recreation, dining and entertainment, and other activities that will contribute to the prosperity and appeal of the city. The terrorist attack of September 11, 2001 may have temporarily impeded the redevelopment of downtown Manhattan, but CHPC sees no reason why the fundamental goals of the city’s redevelopment policy should be altered or why they should be considered less feasible in the wake of the attacks. Indeed, the World Trade Center tragedy may have made a mixed-use development pattern even more imperative, insofar as the physical and economic damage to Lower Manhattan’s commercial base was severe and possibly long-lasting. Consequently, CHPC endorses the principles for action articulated in the LMDC’s Principles and Preliminary Blueprint for the Future of Lower Manhattan, which included among its goals to “Develop Lower Manhattan as a diverse, mixed-use magnet for the arts, culture, tourism, education, and recreation, complemented with residential, commercial, retail and neighborhood amenities.”

From an urban development perspective, September 11 changed many things dramatically while leaving other realities undisturbed. It did alter the commercial market equilibrium between Lower Manhattan, Midtown Manhattan, and secondary centers like Long Island City and Jersey City. It remains to be seen what new equilibrium is established, but it is likely that Lower Manhattan’s commercial base has been permanently diminished relative to those alternative locations. A smaller office sector will mean higher vacancies and lower rental prices, especially in older buildings, making some of them more attractive conversion candidates than they were previously. Other

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factors have not changed since September 2001. With the exception of the World Trade Center site itself, there remains very little vacant land on which to construct new residential or commercial buildings in Lower Manhattan. At the same time, the market’s voracious appetite for housing in Manhattan should not be quelled, and once the environmental conditions and transportation networks of downtown are restored, so should be the market demand for apartments there. This combination of new circumstances and old considerations will probably make the climate for residential conversions more favorable than it was during the period of peak office demand during the late 1990s.

Another new factor is the availability of additional federal resources that have been provided to assist the city in its recovery from the attack. These resources include $8 billion in tax-exempt Liberty Bond authority, of which $1.6 billion can be used for housing finance, and nearly $3.5 billion in additional Community Development Block Grant (CDBG) funds. These resources are free of many of the restrictions that they usually carry, and can be utilized to accelerate the re-use of obsolete commercial buildings. While CHPC believes that there are persuasive planning reasons for encouraging as much affordable housing as is possible downtown, we do not believe that city agencies should impose on the use of those resources restrictions that mimic the usual federal requirements. The nature of downtown development promoted by government agencies should be determined according to what will facilitate the most attractive and sustainable development pattern there, not by the city’s overall needs for affordable housing or other facilities. In the long run we believe that a healthy and prosperous downtown district will best serve the city’s economic and social needs.

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II: Downtown Office Needs and Residential Development

The traditional clustering of financial services firms on and around Wall Street in Lower Manhattan represents one of New York’s most valuable economic resources. By mid- 2001, some 368,000 people worked in Lower Manhattan below Chambers Street, nearly half of whom worked directly in the Finance, Insurance and Real Estate (FIRE) sector and many others in service occupations supporting that sector. The FIRE sector, plus legal services which are often associated with it, account for 19 percent of the city’s private jobs and it has been estimated that they generate over one-quarter of the city’s entire economic output.

In normal economic times, when the commercial and residential markets are in rough balance, residential developers cannot typically out-bid commercial developers for prime sites in midtown or downtown Manhattan. Moreover, as a matter of policy, CHPC does not believe that government programs should artificially tip that balance in favor of housing at the expense of jobs. Consequently, the potential for downtown residential development must be gauged against the space demands of commercial tenants and against the probable needs of financial and related industries that are concentrated in Lower Manhattan.

With the city’s geographic expansion from its colonial nucleus, Lower Manhattan has had a continuously diminishing share of the city’s employment. That share fell particularly rapidly after the Second World War, when mid-town Manhattan emerged as a rival, and eventually, the larger locus of office development. By the 1990s, Manhattan’s “financial district” contained about 9 percent of the city’s private-sector jobs and, because of the many government agencies headquartered there, of a slightly larger share of the city’s overall employment.

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Although financial and related service firms have been gradually dispersing to other parts of Manhattan, during mid-1980s a number of major firms made long-term commitments to the downtown area, leasing or buying space in new buildings. Those include Merrill Lynch at the World Financial Center, Prudential Securities at 199 Water Street, and Barclays Bank at 75 Wall Street. All told, over 25 million square feet of modern office space was built downtown during the mid to late 1980s.

The downtown building boom was at its height when the stock market crashed in October 1987. The crash ushered in a period of serious retrenchment for the city’s financial service firms, with overall employment in the FIRE sector falling from 615,000 in 1988 to 541,000 in 1996. Employment declines were particularly severe in the city’s banking industry, where mergers, relocation, deregulation and increased competition reduced employment by almost 30 percent in eight years. Reflecting these employment losses, the vacancy rate in downtown office buildings soared, reaching over 20 percent in 1996. The vacancy problem was especially acute for pre-War, “Class B” office buildings, in which the vacancy rate topped 30 percent, according to Jones Lang LaSalle. It was in this environment that the Giuliani Administration implemented its Plan for the Revitalization of Lower Manhattan, which included a number of incentives for the conversion of office space to residential use, including the 421-g tax incentive program.

The downtown inventory of Class B office space, most of which was built between 1900 and 1932, totaled about 32 million square feet at the beginning of the 1990s. Much of that inventory is obsolete, or nearly so, for modern financial firms who require large floor plates and extensive electrical and communications capacity. The amount that was vacant more than doubled between 1990 and 1995, reaching nearly 10 million square feet. With high vacancies and depressed rents, many building owners found the new conversion opportunities appealing, and converted their buildings to residential use or sold them to developers who intended to do so. Although some conversion activity had

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occurred earlier in the 1990s, the conversion market picked up steam after the new downtown plan was in place. All told, close to 6 million square feet of older space was withdrawn from the office inventory since the beginning of the 1990s.

The withdrawal of older commercial space from the market contributed to declining office vacancies, but a much more important factor was the recovery in space demand. From its low point in 1993 to the peak of the expansion in 1999, utilized office space downtown increased by some 14 million square feet, or over 15 percent. Nearly three- quarters of the increment was leased by securities and commodities firms. The huge increase in space leased by the securities industry reflected its swelling employment roles, which increased by over 30 percent citywide from August 1995 to August 2001. Much of the industry’s increase in space needs was met downtown, which actually recaptured much of its share of the industry’s employment that it had lost to Midtown during the early 1990s (Table I). This was fortunate for downtown building owners, as the banking industry, undergoing rapid consolidation, reduced its downtown employment by nearly 17,500 workers and its utilized office space by over 4 million square feet.

Although the downtown office market began to weaken during 2000 with the technology “wreck” and a soft stock market, the securities and legal services industries continued to add employees through the summer of 2001. Vacancies in both Class A and Class B buildings remained below 8 percent and asking rents topped $40 per square foot in the most desirable buildings, and over $30 per square foot in Class B buildings. With such rental prices and low vacancies, a number of building owners scrapped plans to convert older buildings to residential use.

The terrorist attack in September 2001 dramatically changed the office space market in downtown Manhattan. Some 11 million square feet of office space was destroyed or severely damaged, and far more tragically, several financial firms suffered a horrifying

8 Table I Financial Industry Employment in Downtown Manhattan, 1991-2001

Total Financial Employment by Industry Area Empl Empl Banking Securities Insurance Real Estate Hldg Cos Legal (thousands) (thousands) 1991: NYC Total 2,745.1 563.6 163.5 129.5 86.3 95.3 15.7 73.2 Downtown Total 255.5 175.1 53.5 73.7 23.1 2.9 2.5 19.4 Downtown % 9.31 31.06 32.70 56.87 26.78 3.06 15.64 26.52

1996: NYC Total 2,848.4 539.4 163.7 148.7 76.6 101.3 17.4 69.7 Downtown Total 248.8 160.7 46.4 62.2 22.2 3.3 2.0 14.9 Downtown % 8.73 29.79 38.59 41.83 29.00 3.30 11.55 21.37

2001: NYC Total 2,976.3 572.0 107.2 190.6 70.6 105.3 18.0 80.0 Downtown Total 270.2 173.7 28.0 100.5 23.8 3.0 0.9 17.6 Downtown % 9.08 30.37 26.12 52.70 33.71 2.85 5.19 21.95

Note: Employment figures for 1991 and 1996 for 4th Quarter; for 2001, 2nd Quarter. Source: New York State Department of Labor; CHPC CHPC/Downtown Housing

loss of life. As displaced companies scrambled for replacement office space in Midtown or outside of the city, the recession deepened and the stock market experienced a parade of bad news and declining values. The effects of the disaster, the recession, and the stock market slump combined to reduce downtown office space usage by over 15 million square feet.

Future Downtown Office Space Demand

In order to ascertain the potential for further residential conversions, CHPC has forecast downtown commercial space demand through 2011 (Table II). The forecasts are based on the historical cyclical pattern of the major office-using industries downtown and on a structural analysis of their local employment and growth patterns. The projections represent moderately optimistic forecasts for the growth of employment and office space in downtown Manhattan. A total of 7 million square feet of new office space built at the site of the former 7 World Trade Center and on the World Trade Center site itself is assumed.

Our projections show office vacancies peaking at 15.4 million square feet in 2004, or at about 16 percent of the total inventory. Vacancies trend downward thereafter, dwindling to 8.9 million square feet, or 8.8 percent of the inventory, in 2011. By that time, office space utilization downtown would have increased by about 12 million square feet over 2002. We believe, however, that a relocation of part or all of the New York Stock Exchange out of Lower Manhattan or out of the city altogether would have a seriously adverse impact on office space demand, and under those scenarios no net increase in office space utilization is probable.

The projections do not show any further conversions of downtown office space to residential use. That assumption is purely for analytical purposes; we think further conversions are probable and desirable. The analysis indicates that approximately 3

9 Table II Downtown Office Space Demand Projections

Total Office Total Occupied Total Vacant Vacancy Year Inventory Space Space Percent 1989 113,392,000 97,433,040 15,958,960 14.1 1990 112,999,000 96,122,386 16,876,614 14.9 1991 112,497,000 93,149,987 19,347,013 17.2 1992 112,446,000 90,893,190 21,552,810 19.2 1993 112,446,000 90,861,350 21,584,650 19.2 1994 112,441,000 93,293,725 19,147,275 17.0 1995 112,441,000 92,300,208 20,140,792 17.9 1996 112,441,000 94,949,099 17,491,901 15.6 1997 112,120,000 100,445,600 11,674,400 10.4 1998 111,494,000 103,658,180 7,835,820 7.0 1999 110,693,000 104,650,067 6,042,933 5.5 2000 109,193,000 100,057,118 9,135,882 8.4 2001 93,043,390 81,226,879 11,816,511 12.7

2002 93,043,390 80,482,532 12,560,858 13.5 2003 94,043,390 80,219,012 13,824,378 14.7 2004 95,043,390 * 79,646,361 15,397,029 16.2 2005 95,043,390 80,881,925 14,161,465 14.9 2006 96,543,390 * 82,641,142 13,902,248 14.4 2007 98,043,390 * 84,807,532 13,235,858 13.5 2008 99,543,390 * 85,607,315 13,936,075 14.0 2009 101,043,390 * 88,412,966 12,630,424 12.5 2010 101,043,390 90,130,704 10,912,686 10.8 2011 101,043,390 92,151,572 8,891,818 8.8

*additions to inventory Source: Jones, Lang, LaSalle; Cushman and Wakefield, The Downtown Alliance; CHPC CHPC/Downtown Housing

million additional square feet of Class B office space can be converted to residential use without impinging on potential growth of the job-creating commercial sectors. Beyond that figure, which represents about 3,000 additional apartments, the shrinkage of the office inventory would begin to constrict growth in office employment. If new office space is built downtown, over and above the 7 million square feet we assumed, the potential for additional residential conversions would be increased accordingly.

This analysis clearly indicates that further residential development downtown is likely to be limited, with new construction and additional conversions likely totaling under 6,000 units. That may increase residential population density by as much as one-third, but that will still not bring the downtown density to the level of other residential districts of Manhattan. The planning implications of that conclusion are discussed in more detail in Section IV. If the commercial recovery of the financial district is slower than anticipated, however, additional space for residential uses will be available.

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Section III: Options for Residential Development

There are about a half-dozen vacant development sites in the financial district (excluding the Trade Center site and Battery Park City) that are suitable for sizeable commercial or residential buildings. Several of them are already slated for residential development and we expect that all of them will eventually be developed. If all are developed as residential buildings to their full zoning potential, they will add about 1,400 housing units to the downtown inventory. Added to the build-out of the remaining Battery Park City sites, new residential construction may increase the residential inventory by about 2,500 housing units. Additional housing units will be created through the conversion of underutilized office buildings.

Facilitating Residential Conversions

The extent of office-to-residential conversions will continue to be determined by market conditions. There is a self-regulating aspect to conversion activity; if office space demand is weak, with high vacancy rates and relatively low rents, owners of suitable office buildings will seek to convert them to residential use. If office demand is strong, owners will usually find it more profitable to keep buildings in commercial use, limiting conversions. We expect soft market conditions for downtown office space to prevail through the middle of the decade, creating a favorable environment for residential conversions. Later in the decade, as demand for office space revives, there is likely to be less incentive to convert buildings and the pace of residential development will slow.

The self-regulating nature of residential conversions suggests that there does not need to be substantial public involvement in creating downtown housing. In fact, the market mechanism may be more flexible and attuned to market conditions than government programs can be, and thus more likely to achieve a proper balance between commercial

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and residential use. There may be a useful role for public programs, however, in facilitating the conversion of appropriate buildings, in promoting affordability, and in channeling residential development toward the corridors that would create the most cohesive residential communities.

Even in buildings with relatively high vacancy rates, the costs of preparing for conversion may be formidable. The building may need to be kept partially vacant for a period, as the developer waits for commercial leases to expire, or expedites the process through relocation assistance or lease buyouts. Moreover, the workings of the marketplace may create a high vacancy rate in the aggregate but disperse the vacancies widely, providing few owners an overwhelming incentive to convert. Public agencies can help to rationalize the process of office consolidation by helping firms wishing to stay in Lower Manhattan relocate to buildings in areas that are most likely to remain in commercial use. A carefully crafted public relocation program could help keep firms in Lower Manhattan, while facilitating the creation of additional housing. Such a strategy could also improve the rental climate for the owners of the remaining commercial buildings whose properties have been devalued due to the terrorist attacks. Funds that can be used for such a commercial consolidation program are already available through the $3.5 billion in special Community Development Block Grants (CDBG) allocation provided to assist in the recovery from the September attack. CHPC recommends that such a program be established, but that the LMDC or other administering agency retain the discretion to target the assistance geographically or according to other planning criteria.1

Residential conversions can also be facilitated with a flexible approach to financing mixed-use development. Many of the older office buildings downtown are of the

1 If a commercial consolidation program were to provide moving expenses and rental subsidies equal to $30 per square foot of leased space, and half of all converted space was eligible for the program, it would cost about $45 million over approximately five years.

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“wedding cake” form—large lower floor-plates with progressively smaller upper floors as the structure sets back from the lot line. The upper floors of such buildings are often ideal for residential conversion, while the lower floors are too deep to accommodate sensible apartment layouts. Some of these buildings may be particularly well suited for mixed-use redevelopment but such projects are often difficult to finance. Federal statutes governing the use of tax-exempt bonds for housing development, for example, limit the non-residential component to no more than 5 percent of the overall development. The flexibility of Liberty Bonds, however, may make financing such projects more feasible. Credit enhancement can be obtained through the State of New York Mortgage Agency or the Rehabilitation Mortgage Insurance Corporation. Although we expect only a few of these mixed-use conversions to occur, government agencies should not allow the divided responsibility for issuing housing and economic development Liberty Bonds to stand in the way of creative approaches to financing mix-use redevelopment.

Another obstacle to the creation of mixed-use developments is the 421-g program’s statutory limitation of commercial space allowed in a converted building. Currently, if more than 25 percent of the aggregate floor space is used for nonresidential purposes, the entire building is ineligible for 421-g tax benefits. This restriction should be eliminated. Furthermore, the 421-g benefit area might be extended to Chambers Street (two blocks north of the current border) in order to fully cover the area of Lower Manhattan that has the highest proportion of obsolete office buildings.

Housing Affordability in Lower Manhattan

All housing development, whether conversion or new construction, must pass the test of market feasibility. That is, the developer must be able to rent the apartments at prices sufficient to cover debt service, maintenance and operations, and to provide an adequate return on his equity investment. The availability of $1.6 billion in “Liberty Bonds”

13 Table III Comparison of Residential Conversion Parameters With and Without Liberty Bonds

Conversions Without Liberty Bonds: 7.25% Final Annual Development Costs Monthly Monthly Monthly Annual Per Square Foot Monthly Income Cost Ft2 Size Ft2 Tot Cost Debt Svc M&O Brk Even Brk Even Profit Total Rent Needed 1-Bedroom 245 910 222,950 1,141 546 1,687 22.24 6.13 28.37 2,151 103,251 2-Bedroom 245 1,155 282,975 1,446 693 2,139 22.23 6.13 28.35 2,729 130,980 3-Bedroom 245 1,400 343,000 1,755 840 2,595 22.24 6.13 28.36 3,309 158,838

Conversions With Liberty Bonds: 6.00% Final Annual Development Costs Monthly Monthly Monthly Annual Per Square Foot Monthly Income Cost Ft2 Size Ft2 Tot Cost Debt Svc M&O Brk Even Brk Even Profit Total Rent Needed 1-Bedroom 245 910 222,950 1,002 546 1,548 20.42 6.13 26.54 2,013 96,621 2-Bedroom 245 1,155 282,975 1,272 693 1,965 20.42 6.13 26.54 2,555 122,630 3-Bedroom 245 1,400 343,000 1,542 840 2,382 20.42 6.13 26.54 3,097 148,638

Notes: Acquistion costs estimated at $75 per square foot, other development costs at $170 per square foot. Developer's equity estimated at 25% of development costs; developer's profit at 10% on equity annually. Monthly operating costs estimated based on data tabulated by the Rent Guidelines Board for Rent Stabilized Manhattan buildings with 100 or more units, less taxes. Annual income needed estimated at rent-to-income ratio of 25%. CHPC/Downtown Housing

bonding authority, allocated by Congress specifically to promote residential rental developments in Lower Manhattan, can enhance the feasibility of downtown projects. That bond authority, which is subject to only some of the usual federal restrictions associated with “private activity bonds,” can allow developers to access the financial markets at below-market, tax-exempt interest rates. Tables III and IV show the effects of using the tax-exempt bonding authority on the cost, feasible rental prices, and required household income for hypothetical apartments in converted and newly-constructed buildings downtown, respectively.

The estimates are based on what we believe to be reasonable cost parameters for converted and new residential space. The figures reflect the greater cost of constructing new housing compared to converting existing office space, as well as the greater efficiency in apartment layout that can be achieved in newly-constructed buildings. The net effect is that dwelling units with a similar number of rooms would achieve approximately the same rents per month, an equivalence which we believe the normal workings of the housing market tends to bring about. The estimates of feasible rents and required household income are, however, extremely sensitive to the cost of acquiring vacant sites or convertible buildings, the prices of which may fluctuate widely with prevailing market conditions.

The tables indicate that monthly rents of approximately $2,100 for a 1-bedroom apartment and $2,700 for a 2-bedroom apartment are currently achievable for converted and newly-built apartments with market-rate financing.2 Tax-exempt financing could lower those feasible rents to about $2,000 and $2,500, respectively. Both sets of figures are well under the average downtown rental rates for luxury units reported by the

2 The interest rates used to construct these estimates are slightly higher than the rates prevailing at the time of this writing, but are more reflective of the rates likely to prevail once the economy recovers from the current recession.

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Corcoran Group for year-end 2001. The feasible rents for 1-bedroom apartments with market-rate financing would require a household income approximately twice the area median for a two-person household, however, and the 2-bedroom rents would require about 220 percent of the area median income for a 3-person household. The analysis suggests that the market is likely to support the conversion or development of surplus office space and vacant sites into new residential units, but at rent levels that will be accessible only to a relatively high income group.

CHPC does not believe that the severe housing cost problems of our region can be solved in Lower Manhattan. The area can accommodate a relatively small amount of additional housing, and its unique importance and disrupted condition argue that, in the long-run, what’s best for the financial district is what’s best for the city. Nevertheless, there may be some rationale for encouraging a more diverse income mix downtown that the ordinary workings of the market would produce. Specifically, a diverse income mix implies a diverse demographic mix. The presence of families with children, singles, students, artists and others who may not be able to afford market rents would add to the general ambiance of downtown as a residential district, supporting a more diverse array of retail, cultural and entertainment services and encouraging more street and subway station traffic at different times of the day and week. Furthermore, greater demographic diversity may promote the type of social interactions that encourage creativity and innovation in business and culture.

Tables III and IV show that access to Liberty Bond financing can help developers to lower rents and enhance market feasibility. They cannot, however, lower costs enough to create truly mixed-income housing projects. That will require direct public subsidy of development or financing costs. The flexibility of the Liberty Bonds can nevertheless be used, in conjunction with direct subsidies, to devise housing models not constrained by the rigidity of the usual 80-20 formula.

15 Table IV Comparison of Residential Construction Parameters With and Without Liberty Bonds

Construction Without Liberty Bonds: 7.25% Final Annual Development Costs Monthly Monthly Monthly Annual Per Square Foot Monthly Income Cost Ft2 Size Ft2 Tot Cost Debt Svc M&O Brk Even Brk Even Profit Total Rent Needed 1-Bedroom 270 825 222,750 1,141 495 1,636 23.79 6.75 30.54 2,100 100,783 2-Bedroom 270 1,050 283,500 1,447 630 2,077 23.74 6.75 30.49 2,667 128,039 3-Bedroom 270 1,275 344,250 1,760 765 2,525 23.77 6.75 30.52 3,242 155,635

Construction With Liberty Bonds: 6.00% Final Annual Development Costs Monthly Monthly Monthly Annual Per Square Foot Monthly Income Cost Ft2 Size Ft2 Tot Cost Debt Svc M&O Brk Even Brk Even Profit Total Rent Needed 1-Bedroom 270 825 222,750 1,002 495 1,497 21.78 6.75 28.53 1,962 94,153 2-Bedroom 270 1,050 283,500 1,273 630 1,903 21.75 6.75 28.50 2,493 119,682 3-Bedroom 270 1,275 344,250 1,549 765 2,314 21.77 6.75 28.52 3,031 145,473

Notes: Acquistion costs estimated at $65 per square foot, other development costs at $205 per square foot. Developer's equity estimated at 25% of development costs; developer's profit at 10% on equity annually. Monthly operating costs estimated based on data tabulated by the Rent Guidelines Board for Rent Stabilized Manhattan buildings with 100 or more units, less taxes. Annual income needed estimated at rent-to-income ratio of 25%. CHPC/Downtown Housing

Thousands of housing units have been built in Manhattan during the past 15 years utilizing Congressionally-limited tax-exempt financing, coupled with exemption from local property taxes under the city’s 421-a program. Both programs require the resulting building to comply with 80-20 requirements: 80 percent of the units may be rented at market levels while 20 percent must be reserved for households earning 50 percent or less of the area median income. While the coupled programs have promoted new housing development in Manhattan, including several thousand low-rent units, the program arguably produces a highly-skewed version of income mixing while leaving the majority of the city’s middle-income families without residential options in Manhattan. The federal assistance to help Lower Manhattan recover from the World Trade Center attack provides an opportunity for the city to test a more flexible model of mixed-income housing development.

Several Liberty Bond authorizations have already been made or are pending before the New York State Housing Finance Agency (NYSHFA) and the New York City Housing Development Corporation (HDC), each of which is authorized to issue $800 million in residential Liberty Bonds. The NYSHFA requires each developer to allocate 5 percent of the housing units to families earning no more than 80 percent of the area median income; the rest may be rented at market rates. In order to create a more diverse and lively residential community downtown, CHPC recommends that the agencies implement a subsidy program aimed at making one-third, or approximately 1,500, of all new and converted housing units (exclusive of Battery Park City units) affordable to households earning between 100 and 200 percent of area median income.

Further analysis of Tables III and IV indicates that direct public subsidies of approximately $68,000 per unit would enable developers to offer 1-bedroom units to 2- person families earning 150 percent of the area median, or approximately $75,000

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annually. Per unit subsidies of approximately $121,00 would enable them to make 2- bedroom apartments available to 3-person families earning a similar proportion of the area median, or about $85,000 annually. These middle-income apartments could be tranched at different rent and subsidy levels so that they average to the above figures. Implementation of such a program would create a significant middle-income presence within the downtown residential community without impairing the feasibility of new housing development. We estimate the total cost of such a program at $128 million, a relatively small proportion of the special $3.5 billion allocation of CDBG funds.

CHPC would not want to see excessive regulatory restrictions imposed on such mixed- income housing. A viable model for downtown mixed-income housing can be found in the HDC’s NewHOP program, which has subsidized the creation of several thousand middle-income apartments in upper Manhattan and the other boroughs. That program limits initial rents and tenant selection, but thereafter relies on Rent Stabilization to maintain affordability, rather than creating an entirely new and separate regulatory structure. If the city desires additional lower-income, permanently affordable housing units downtown, there are established mechanisms, such as the Low Income Housing Tax Credit, which can be used. The major obstacle to the use of those programs downtown is the high site costs.

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IV. Enhancing Downtown’s Neighborhoods

Lower Manhattan presents a unique planning dilemma. It contains a substantial residential community, but one that is often overwhelmed by the huge inventory of commercial space. Retail establishments inevitably cater to the daytime population of office workers, who outnumber the residential population by a ratio of ten to one. Many of its streets, closely packed with office towers, are deserted and forbidding in the evening hours. The challenge to planning officials is to foster an ambiance conducive to neighborhood life without impinging on the important economic role Lower Manhattan plays in the regional and global economies.

The analysis presented in the previous sections suggests that the scale of future residential development, whether through new construction or conversion of older office buildings, will not fundamentally alter the balance between commercial and residential uses downtown. Moreover, residential conversions tend to occur in a somewhat scattered pattern, determined as much by the obsolescence of buildings for commercial use as by their inherent appeal as housing sites. CHPC believes that while public policy should not discourage residential development anywhere in the financial district, the beneficial impact of future residential conversions can be maximized by encouraging them in particular locations. Combined with a policy of promoting cultural and institutional uses, strategically-directed development may help to integrate existing housing clusters into cohesive residential corridors.

To identify the downtown locations most appropriate to residential conversion or construction, CHPC undertook a mapping study to determine the geographic distribution of land uses and development potential below Chambers Street. Land use mapping allowed us to identify growing residential districts with at least some level of retail service, while a three-dimensional analysis of unused as-of-right and bonus floor area

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indicated specific quadrants of downtown with a high degree of development potential. By overlaying land use maps with the three-dimensional maps, we identified three areas that have experienced a gradual expansion of residential units through the 1990s, and contain additional Floor Area Ratio (FAR) potential for residential development. Increases in housing units specifically targeted to these three zones would impact the residential density and character of the individual neighborhoods, without placing pressure on long-term, area-wide needs for commercial space. The concentration of residential population would also create an atmosphere more favorable to neighborhood retail. Despite the fact that average income in the downtown neighborhoods is significantly higher than the citywide or Manhattan averages, residents have long complained of a shortage of neighborhood-oriented retail services.3 Creating new density would be likely to attract some retail investment without public support, or if assistance were to be granted, to allow for more easily targeted residential retail attraction and retention programs.

Lower Manhattan’s Evolving Neighborhoods

Although Lower Manhattan is often referred to as a single entity, the area contains several distinct residential communities. The best known and most established are Battery Park City and Tribeca along the western waterfront, which in turn contain individual neighborhoods. The three zones under examination in this report have been referred to by a variety of different names by organizations such as the Department of City Planning and the Alliance for Downtown New York, but for the purposes of this study they will be referred to as Battery Park City East, South Street Seaport and Tribeca

3 2000 median income ranged from $75,000 to $128,000 in the areas south of Chambers Street, with the exception of the Southbridge Towers Mitchell Lama development area, which had a median income of $40,000. Census 2000.

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South.4 Our analysis focuses on the areas surrounding the World Trade Center site rather than on the site itself. However, we offer some observations regarding the nature of potential development on that site insofar as it may impact other goals for Lower Manhattan that we discuss in this report.

All three neighborhoods are in close proximity to, but distinct from, more established neighborhoods, and all have a residential density of at least 20 people per acre. All three also have significant amounts of unused as-of-right floor area and a substantial stock of pre-WWII commercial structures. While there are vacant sites ideal for residential development in two of the three areas, their presence was not a primary consideration in identifying the areas. The scarcity and distribution of large vacant sites is such that, even if all were devoted to housing, they would account for a relatively small number of residential units in proportion to the potential contained in the overall neighborhoods, or in Lower Manhattan as a whole.

We identified seven vacant lots with significant development potential, all of which are discussed in detail below. Two of the seven appear unlikely to be used for residential development. If all of the remaining five were devoted to housing and developed to their maximum basic FAR, they could conceivably provide Lower Manhattan with 1300 to 1400 housing units. The majority, approximately 640 units, could be constructed on two lots located in the Historic/Financial core.5 One of the two Historic core lots has already been earmarked for residential development, while the future of the other, a site previously considered as a relocation option for the New York Stock Exchange, remains unclear. Of the remaining three vacant lots with significant development potential, two are located in South Street Seaport, and one in Tribeca South.

4 In order to collect statistical information about the demographic and economic characteristics of the neighborhoods, it was necessary to expand the boundaries of each area slightly to be coterminous with a census tract or zip code boundary.

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South Street Seaport

The South Street Seaport neighborhood occupies the largest land area of the three, at approximately 86 acres, and includes the South Street Seaport Historic District. The neighborhood extends from and on the west, to Frankfort or Dover Street on the north. To the east, it follows a line running along South Street turning west on Beekman, south on Water Street, west on John Street and south on Pearl to Maiden Lane. At Maiden Lane, the southern boundary continues to Broadway. Although the district had a historic role in housing Manhattan’s early settlers, the Mitchell-Lama project known as Southbridge Towers established the first residential presence here in the modern era. Located south of the between Water and Gold Streets, the Tower complex has 1,651 co-op ownership units occupied by middle-income families and seniors. As recently as 1990, the Southbridge Towers units accounted for 50 percent of all housing in the two census tracts comprising this neighborhood.6 Conversions of office and warehouse space in the last decade have added an additional 1,178 units to the area during the 1990s, and at least 100 more apartments are in the works. Currently, the residential density of the area is 47 dwelling units per acre, as compared to a median density of 68 units per acre in all of Manhattan. In all, 27 buildings were converted to housing in the South Street Seaport area between 1995 and 2000, five of which, containing 49 units, were in the historic district.

Changes to structures located in the ten-block Historic District are subject to review by the New York City Landmarks Commission. Special zoning provisions within the historic district establish three Transfer and five Receiving Lots, for the reallocation of building rights in the area. The Transfer Lots are the least likely to undergo significant changes in terms of residential or commercial density, as many of the buildings are New

5 Estimate based on average unit size of 1,000 square feet. 6 Census Tracts 15.01, 15.02

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York City Landmarks that cannot be altered, while others would profit more from selling development rights to Receiving Lots than from building on-site. The Historic District area directly south of the Brooklyn Bridge has the greatest potential for significant change in density or use, since the Receiving Lots are located in that area, and buildings in the area have a significant tally of unused as-of-right floor area.

Although it is not eligible for transfer of development rights, one of the largest vacant sites in downtown Manhattan is located in this portion of the Historic District. The site, a 47,880 square foot lot at 246 Water Street, is currently used as a 286-car parking facility. The lot is primarily zoned C6-4, with a maximum FAR of 10 for either residential or commercial construction. Because of the site’s relative proximity to residential developments as compared to Class A office space, the site would be best suited to residential use and could accommodate approximately 478 residential units if developed to its full potential. Milstein Properties, the owner of the site, has prepared plans for a residential development at this location which are currently under review by the Landmarks Commission. However, Community Board One recently initiated an effort to downzone the site to C6-2A, which would reduce the basic commercial FAR to 6.0, and the residential FAR to 6.02. The decrease in FAR from 10 to 6.02 would result in approximately 190 fewer housing units on the site. Two other vacant lots are located within the South Street Seaport area. One of the two is under construction as part of a renovation and extension of the South Street Seaport Museum; the other is currently an active parking lot. The parking lot at 175 Front Street, which faces large Class A office buildings, could potentially accommodate approximately 92 housing units.

Because of the restrictions placed on development within the South Street Seaport Historic District and the location of older commercial buildings, most of the units created in the South Street Seaport area during the past decade are located in the lower half of this neighborhood, between Maiden Lane and Fulton Street. These conversions are

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primarily located on the north-south corridor between Fulton and John Streets. In addition to the existing residential units, we have identified three more clusters of buildings that are ideal for conversion. Specifically, the areas with Class B office space that show promise for residential conversions in the South Street Seaport area are: • the four-block area bounded by Beekman to the north, Theater Row, Ann and Nassau Street to the west, Fulton Street to the south and a line running from Gold to Ann to William Street to the east. • the three-block area bounded by John Street and Maiden Lane to the north and south and William and Broadway to the east and west. • the five-block area located between Pearl and William Streets, bounded to the north and south by Platt and Pine Streets.

A stockpile of potential development sites exists to the west of , continuing all the way to Broadway along Fulton and John Streets, where many of downtown’s older buildings are located. Although many commercial buildings in this area have already been converted to residential use, the replacement of buildings with limited historical significance and low commercial potential would result in the creation of a higher density residential community and contribute to a livelier residential environment in the area.

Battery Park City East

Battery Park City was the area most dramatically affected by the September 11 terrorist attack on the World Trade Center. Despite its proximity to the World Trade Center, and the resulting hardships many of its residents endured, the apartments and condos of Battery Park City continue to form the core of a highly successful residential neighborhood. Although vacancy rates soared in the first months after the disaster, and the commercial vacancy rate remains high, industry reports indicate that residential occupancy rates have stabilized and returned to nearly pre-September 11 levels. While

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the social and economic characteristics of neighborhood households may be changing more rapidly than census 2000 trends reflect, the snapshot taken of Battery Park City-area residents by the 2000 census remains a reliable indicator of the neighborhood’s current population and density.

The 2000 Census recorded 7,951 residents and 5,382 housing units in the entire Battery Park City area, of which 4,623 units and 6,614 residents were located in the portion of the neighborhood south of Liberty Street referred to here as Battery Park City South. In recent years, these households have been joined by the area we will refer to as Battery Park City East, a residential community of mostly converted properties on the opposite side of West Street and extending east roughly to Broadway and south from the World Trade Center site to Bowling Green. Since 1990, at least seven residential buildings in this area have been created through the conversion of commercial space, and by of 2000 there were 978 units and 1,447 residents in Battery Park City East. In early 2002, a Ritz Carlton Hotel at 2 West Street brought 277 hotel rooms and an additional 150 luxury condos to the BPC East area. In total, approximately 400 additional units, including those located in the Ritz Carlton building, have been created in the area since the census was conducted in March of 2000.

Significant potential for conversions or new development still exists in the older commercial buildings in Battery Park City East, particularly along the corridor between West Street and West Broadway. In the area closest to the World Trade Center site, however, where many buildings were damaged or demolished, future development plans are uncertain. A large vacant lot located at 148-152 Washington Street formerly contained a parking lot and a Greek Orthodox church that was destroyed on September 11. Although it is unclear as of yet how the redevelopment is to be financed, Governor Pataki has repeatedly stated his commitment to rebuilding the church. If that is the case,

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there will be no residential development on this site, which could potentially accommodate approximately 240 units. This site is also owned by Milstein Properties.

Another block where a cluster of older buildings seems to possess significant conversion potential is also facing an uncertain future. Just south of the World Trade Center site, between West and Washington Streets, from Albany Street to Cedar Street, stand the badly damaged 90 West Street, also known as the Little , and 130 Liberty Street, the Deutsche Bank building. Engineers are currently investigating the extent of the structural and environmental damage to those two buildings.

As illustrated by our three-dimensional map, eight of the twelve blocks from West Street to Trinity Place and Exchange Place to Liberty Street are underbuilt to their permitted FAR of 15. The existing structures range from six to twenty-seven stories. Were the existing structures to be replaced by new construction, the developers could build as-of- right to a higher density than that which is already in place. This seems to be an area where site assemblage is an appropriate response to strengthen the Battery Park City East residential district.

Before September 11, residents both east and west of West Street, but particularly Battery Park City residents, depended heavily on the 600,000 square feet of retail located in the World Trade Center complex. The confluence of residential density and retail services also created a favorable environment for continued conversion activity throughout downtown Manhattan. During an initial recovery period, many former owners and tenants in Battery Park City and the adjacent area east to the sold their properties or opted out of their leases. Although the speed with which landlords have been able to fill their vacancies in the months since speaks to the strong demand for housing downtown, long- term rental values and conversion potential may have been seriously undermined by the loss of the World Trade Center. The replacement of the retail services that previously

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existed at the World Trade Center will be a key factor in preserving the quality of life in Battery Park City and maintaining the pace of population growth in Battery Park City East.

Depressing West Street and/or decking over the Brooklyn-Battery Tunnel have been discussed as two of the planning iterations for Lower Manhattan. Pursuing either of these strategies would improve connections between the eastern and western neighborhoods, create additional area for development, and address significant drawbacks to Lower Manhattan living by calming traffic and increasing pedestrian amenities. Residential life on Battery Place from Trinity Place to Liberty Street would be particularly enhanced by access to the retail and service opportunities located to the west of West Street.

Tribeca South

Strengthening the residential character of Tribeca South would help to create a bridge between the contrasting residential communities of northern Battery Park City and Tribeca. While the growing commercial, residential and entertainment district in Battery Park City North is built to modern standards, Tribeca contains primarily older, historic buildings with smaller footprints, which were converted from their original uses to new residential, “creative commercial” and artist spaces. There are approximately 40 buildings within Tribeca South boundaries that are already residential or mixed-use. By fostering the continued development of Tribeca South, the city could provide a transitional link between the best historic and modern features that downtown has to offer.

Within the 59-acre census tract bounded by Reade Street to the north, Broadway to the east, Vesey Street to the south, and West Street to the west, there are 2,400 residents in 1,183 housing units.7 The resulting residential density is twenty housing units to the acre.

7 Census Tract 21

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As of 2000, the entire Tribeca area to the north of Chambers Street had a population of 7,988 and an expanding neighborhood retail services base.8 Battery Park City North, where at least 577 units are under construction, housed 1,337 residents in 2000, and boasted close proximity to high quality schools, retail, hotels and a Cineplex. The Tribeca South area, despite its proximity to Battery Park City North and the most heavily populated area of the greater Tribeca neighborhood, has had less robust residential or retail activity.

Post-9/11 recovery is already occurring in Battery Park City North, where two new apartment buildings are currently under construction and are financed in part by Liberty Bonds. The first, a 27-story, 293-unit building at 20 River Terrace and the second, a 24- story building with 264 apartments on the southwest corner of Warren Street and North End Avenue, will be the earliest to benefit from Liberty Bond financing.

The creation of new residential space in Tribeca South is on the rise as well. Although only three buildings were converted to housing during the 1990s, and 550 residents added, at least four conversions are currently underway in the neighborhood. One of the most recent projects in the area is an office building conversion at the eastern edge of this neighborhood, at 270 Broadway / 80 Chambers Street, which will add 39 condos and 48 rental apartments to the housing stock. The largest vacant site in the Tribeca South area is already marked for development as part of a demolition and new construction project at 12-16 Barclay Street.

The location of this area, plus the age and scale of its construction, means that it is poised for additional residential development. At least eighty buildings here are potential candidates for conversion. The intricate facades that characterize many of these

8 Census Tracts 33 and 39

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structures have an enduring appeal for residential use, while structurally the form is increasingly unpopular with those seeking new commercial space: nearly three-quarters of the eighty buildings have a narrow street frontage measuring between twenty-five and forty-five feet, and approximately half were built before 1900.

There is significant unused floor area in Tribeca South as a whole that could be used to facilitate new housing construction. As most of the structures in the area precede the technology that made high rise construction possible or profitable, few take advantage of their basic allowable FAR. The greatest concentration of unused floor area available to developers looking to expand existing structures or assemble sites for new construction is located on the blocks between Broadway and Church Streets, bounded by Park Place to the south and Chambers to the north. While the existing lower-density character of the area may add to the neighborhood’s residential appeal, the proximity to Battery Park City’s high-rise housing and the district’s own large-scale commercial buildings, make it unlikely that the addition of a few larger residential structures along this corridor would have an overwhelming effect. Public intervention may be necessary to spur new construction, however, as the cost of site assembly and demolition currently pose major barriers to the full utilization of existing development rights in this important transitional area for downtown.

Within the boundaries of Tribeca South, the Landmarks Preservation Commission is contemplating a proposal to extend the existing Tribeca North, West, and East Historic Districts to include the roughly nine-block area below Chambers Street to Park Place and along an easterly line halfway between West Broadway and Greenwich Streets, following a westerly line halfway between Church Street and Broadway. Our only concern is that any method to preserve existing historic resources not inordinately constrain development by extending into surrounding blocks of a less distinguished character.

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The World Trade Center Site

CHPC shares the concern that many members of the professional planning community and the public at large have voiced about the density of commercial development envisioned for the former World Trade Center site. However, we do not share the view expressed by some housing advocates, neighborhood residents, and others that the site should be redeveloped primarily for housing. Its strategic value is greatest as a commercial center. Maintaining the predominantly commercial character of the World Trade Center will preserve a continuous commercial district that connects the World Financial Center to the west with the historic Commercial Core to the southeast. As the city begins to rebuild the regional transit hub uniting New Jersey and New York City, and thus ease access to Lower Manhattan for workers from the entire metropolitan area, reconstruction plans for the former World Trade Center should aim to restore this area as a locus of the city’s economic vitality.

Because of the interplay between commercial and residential uses throughout the financial district, office space built on the WTC site does not necessarily preempt housing development downtown. As companies move into new, more functional office space built there or elsewhere, more of downtown’s older office space becomes available for conversion to residential use. Conversely, the less new office space built on the site, the tighter will be the downtown office market, and the fewer older buildings will be converted.

The LMDC has stated that a mix of commercial, cultural and perhaps residential uses— and of course an appropriate memorial—would be desirable for the site. We agree with that vision and believe that some limited residential development may enhance the design and functioning of the area. It may be especially appropriate to locate a few larger residential or mixed residential-commercial buildings along the northern edge of the site.

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That, along with additional residential development already planned or underway in Battery Park City, would solidify the residential corridor that is developing from Battery Park City North through Tribeca South. The southern and eastern portions of the WTC site would appear to be better suited to commercial development, allowing the World Financial Center to be reconnected to the core financial district, which is bounded by Liberty Street to the north, Water Street to the east and Broadway to the west.

Furthermore, if the relocation deal negotiated between the Giuliani Administration and the New York Stock Exchange is really defunct, as recent press accounts suggest, we believe that serious consideration should be given to relocating the Stock Exchange to the WTC site. Both symbolically and functionally, we believe that its presence there would be highly appropriate, and it is imperative to the city’s future prosperity that it be retained in Lower Manhattan.

Neighborhood Retailing Downtown

The common wisdom has been that as the downtown population continued to increase, neighborhood convenience retailing would follow. In the meantime, the relative lack of amenities would be reflected in rents lower than those prevailing in other Manhattan neighborhoods. Downtown rents did remain slightly lower than other Manhattan areas even during the real estate boom of the 90s, and downtown apartment buildings often provided amenities such as slightly larger units, fitness centers, pools or doormen to balance the lack of local retail and entertainment.

The pace of residential growth – the population of Community Board One, which includes Tribeca, increased 134 percent between 1970 and 1980, 59.4 percent between 1980 and 1990, and 35.7 percent between 1990 and 2000 – seemed to support the idea that a critical mass needed to spur neighborhood-oriented retailing would eventually be

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achieved. Although the downtown community does not suffer from a lack of retail space per se (with the notable exception of the destroyed World Trade Center space), retail businesses have remained geared to the daytime office population. There remains a demonstrable shortage of resident-oriented retail services such as dry cleaners, video stores, green grocers and the like, while other establishments, like drug stores and restaurants, tend to close their doors in early evening.

Our analysis does not indicate that downtown’s retailing bias is likely to change simply through increases in residential density. The likely increase in resident population is too small relative to the daytime population to significantly alter the market incentives retailers face. Nevertheless, there may be some measures government agencies can take to enhance the supply of neighborhood retailing. Most obviously, zoning and housing finance policies can encourage ground-floor retailing in new or converted residential buildings. In addition, a targeted residential development policy can create corridors of resident pedestrian traffic that would allow neighborhood-oriented retail shops to prosper.

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