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NEW YORK — Almost five years after 9/11, lower Manhattan retailing is a profile in possibilities and challenges.

Larry A. Silverstein, who owns the lease to the World Trade Center, accepted a new deal last month that will reduce his role in the redevelopment of Ground Zero, but still allow him to build three towers. Design plans for the retail component of two of the towers could be unveiled in a few months. There will be a minimum of 575,000 square feet of retail space, said Andrew Flamm, vice president of the Alliance for Downtown New York, a business advocacy group.

“It’s going to be a lot more attractive than the pre-9/11 mall and will be accessible from street level,” he said. “There will be more buildings with retail space at the ground level.”

Although some aspects of the redevelopment appear to be moving forward, the touchstone of the 16-acre World Trade Center site, the memorial to the almost 3,000 people who were killed, faces soaring costs and, therefore, uncertainty.

The estimated tab has risen to almost $1 billion, The New York Times reported. City and state officials, including Mayor Michael Bloomberg, Gov. George Pataki and Gov. Jon Corzine of New Jersey, are said to want to cap the figure at $500 million.

Flamm doesn’t believe the issues surrounding the memorial will have a negative impact on retail development downtown. “Retailers want to see progress and commitment,” he said. “To any extent that there’s clarity and a more certain time frame, that’s helpful. There’s been a lot of movement. The reality is that the development is going to bring over 8 million square feet of commercial use and tens of thousands of people. The memorial is important, but it’s only a piece of the whole puzzle. There are so many things coming together. Overall, people are feeling more positively about the direction of Ground Zero.”

There are other signs of revitalization on the far west side of lower Manhattan. The World Financial Center is considering additional retail space — possibly enough to accommodate a department store anchor, said Ed Hogan, national retail director of Brookfield Properties, owner of the complex. And in a strong endorsement of post-9/11 downtown shopping, and perhaps a harbinger of future interest from the luxury sector, Hermès last month leased a 5,000-square-foot space on Broad Street.

This story first appeared in the May 8, 2006 issue of WWD. Subscribe Today.

The picture at the World Financial Center has improved and retail sales are at an all-time high, said Hogan, who declined to reveal figures.

“By next summer, there will be 40,000 people working at the World Financial Center, which is where we were in terms of occupancy pre-9/11,” he said. “Today, we have about 34,000 people. Without full occupancy, retail sales have reached high water. Our retailers are finding that it’s not just a Monday-through-Friday business. The residential growth has contributed to the center’s success, as have the tourists. All those fundamentals are coming together.”

In the past year, P.J. Clark’s opened a restaurant at the World Financial Center, and Ann Taylor and Gap renewed their leases, Hogan said. Banana Republic opened a store there two years ago.

The World Financial Center now has about 40 shops and restaurants in 180,000 square feet of space. To accommodate more stores, the center would have to undertake new construction, Hogan said, noting that expanding would be tricky because the property’s owners don’t want to touch the Palm Court or other public areas of the structure. “The public areas are very important to us, as are the parks and waterfront,” he said.

The goal of an expansion would be to turn the World Financial Center into a bona fide retail destination by adding more fashion and accessories stores. “If the plan allowed for it, we would be very interested in having an anchor tenant,” Hogan said. “Downtown is equal in size to Chicago and there’s no anchor department store. There’s not a single national jeweler.”

Lower Manhattan is understored, experts said. With 90 million square feet of office space, 300,000 office workers and 32,000 residents, there were never enough stores, even prior to 9/11, when there was 500,000 square feet of retail space at the World Trade Center.

“There’s an incredible amount of unmet demand,” Flamm said. “Average sales per square foot at the World Trade Center were north of $900. It reflected the fact that there was a great deal of demand. We’re half a million square feet short. There’s a lot of untapped opportunities at both the high and moderate levels.”

A study by Economic Research Associates and Madison HGCD estimated that there’s $1.4 billion in unmet retail demand in lower Manhattan.

“When we started to see the future potential, we wanted to be at the forefront and wanted to give our vote of confidence in the rebuilding of lower Manhattan,” said Robert Chavez, president and chief executive officer of Hermès. “The more we studied it, the more convinced we became.”

The store will offer a full range of products, although it may skew a little more to men’s. Hermès plans to draw customers from three core groups — office workers, tourists and residents. “The number of conversions to luxury condos and coops indicated that this isn’t just a business and tourist community. We’re starting to see a residential community.”

Some of the upscale apartment buildings were designed by prestigious architects, such as 20 Broad Street, the building where Hermès will open, which is also known as Downtown by Philippe Starck. Another conversion, at 20 Pine Street, will have interiors designed by Giorgio Armani.

According to the Alliance for Downtown New York’s 2005 report, “The State of Lower Manhattan,” if all the proposed residential developments are completed as planned, lower Manhattan’s housing stock could increase by 40 percent to 28,500 units by 2010.

The Alliance estimated that the residential population would reach 42,000 by 2007 and 50,000 by the end of the decade. The growing residential community is having an impact on retailers. Stores at the South Street Seaport reported that 30 percent of their sales volume comes from area residents. Ten years ago, that percentage was negligible.

Robert K. Futterman, chairman and ceo of Robert K. Futterman & Assoc., said some national chains are taking a wait-and-see approach to lower Manhattan.

“Since 9/11, tenants that had stores in the WTC and wanted to replace those lost sales, have never been sold on going to Broadway,” said Futterman, who served as a consultant to the Port Authority in assessing the retail potential of the World Trade Center redevelopment. “A couple have opened on Broadway, including Sephora, Border’s Books. We haven’t seen a tremendous influx of tenants. A lot of national tenants aren’t used to the streets of New York. The only reason they would have considered downtown was because the mall at the WTC was such a high sales volume location.” Futterman said the potential sales volume for national tenants downtown is enormous. If progress on the WTC continues, he said letters of intent for space at the center could be signed in December with a full blown leasing plan in place by summer in anticipation of a 2009-2011 opening.

Flamm said lower Manhattan has become more attractive to high-end retailers. “Over the last year or so, we’ve seen a bit of movement in that direction,” he said. “BMW opened a showroom on Wall Street and Hickey Freeman opened a store on Broadway. The district is more diverse. Ten years ago, there was less of a 24/7 presence. This is an affluent resident population with an average household income of $153,000.”

Rents are another selling point; space leases for less than $100 per square foot. “The rents are very reasonable,” Chavez said. “You find most luxury companies on Madison and Fifth Avenue are paying much more.”

Several national retailers have opened stores in lower Manhattan since 9/11. Ann Taylor Loft, Nine West, Aerosoles, Chipotle Grill, Starbucks and GNC bowed at 2 Broadway and Brooks Bros. reopened at 1 Church Street. Last week, Sephora opened a large store at 150 Broadway.

Still, there are obstacles. “A lot of property still has institutional tenants on the ground floor,” said Gary Alterman, a broker at Newmark Knight Frank who leased 2 Broadway. “There was never enough good space. Some of the space closest to Ground Zero, on Fulton Street and Maiden Lane, is antiquated. The stores are small, with little frontage. A lot of national chains wouldn’t find that prestigious enough.”

In addition, the amount of construction taking place downtown can be daunting. “There are cranes everywhere,” Alterman said. “There are new buildings, conversions and transit hubs being built. In 18 months, people will have moved into the new co-ops and condos and you’ll have a real sense of community.”

Despite the challenges, Alterman said, “The smart retailers are looking now. Coach is looking. We work with Ruth’s Chris Steakhouse. They would like to have a restaurant in lower Manhattan.”

Joel Isaacs, president of Isaacs and Co., who represented Hermès in the Broad Street deal, said, “There’s opportunity for other brands that sell high-end products to exist downtown. The increase in residential density is going to be both male and female.”