Companies use World Trade Center as rental bargaining chip

Reuters News

9/7/2012 12:16:01 PM - Reuters News

By Ilaina Jonas

NEW YORK (Reuters) - Companies renegotiating their property leases in New York are seeking lower rents by playing the World Trade Center card -- threatening to move to the towers rising from the rubble of the 9/11 attacks.

Many brokers and landlords say they're just bluffing.

The WTC is struggling to fill its millions of square feet of office space at the southern edge of Manhattan amid a real estate slowdown all across the city. It is so bad that construction is set to be halted on two of the four towers planned for the WTC complex until tenants sign up.

The problem: The banks, law firms, advertising and accounting firms that dominate New York are comfortable in Midtown. In many cases, they are close to their clients, and transport links are convenient for people living in most parts of the region. Plus, Lower Manhattan has fewer amenities, such as shops and restaurants.

For some, there is another concern that is often left unsaid: Will staff be uneasy moving to a place that was the target of such a horrific attack, as well as the 1993 truck-bombing? Despite very tight security, could the WTC become a target again?

"Lower Manhattan in my mind has always been a second-tier location to Midtown Manhattan," said James Meiskin, president of real estate brokerage Plymouth Partners Ltd. The 9/11 attacks only diminished the area's standing, he said. "If you don't have to go downtown, why would you?"

And this is despite the appeal of lower rents. The average office asking rent at the WTC ranges from $75 to $80 per square foot, depending on the floor and building, compared with new Midtown buildings where the average asking rent starts at $70 and reaches $120 and more, according to sources with direct knowledge of market.

The asking rents for the WTC are usually significantly higher than the rents tenants finally agree to pay. And on top of that, tax breaks and lower power costs for WTC tenants can shave an additional $6 to $8 per square foot off the cost.

One broker said clients have used the WTC as a negotiating ploy. "We have been hired by tenants and they've said to us, 'We do not want to go downtown. If we need to consider downtown to help the negotiation process for Midtown, we will do that. But it is not a viable solution for us," said the broker, who declined to be named because he is not authorized to speak on the record.

FINANCIAL VIABILITY

While construction of the WTC complex is as much a political as a business effort -- given its importance as a symbol of the nation's recovery from the 9/11 attacks -- it still has to be financially viable.

The entire project, including a memorial park and a museum housing a granite staircase that survived the attacks, has a price tag of $14.8 billion.

"You can't evaluate these sorts of things strictly by market terms," said Jerold Kayden, professor of urban planning and design at Harvard University's Graduate School of Design. But in the end, the project must make money to pass muster with the public and other stakeholders, he said.

Some brokers dismissed concerns about safety, noting that the new towers are smaller than their predecessors and better integrated into the neighborhood, making them seem less like a defiant symbol of capitalism and more like a natural part of the cityscape.

But whatever the reason for companies hesitating to move to the new WTC complex, the impact is being felt across the city.

Marc Holliday, chief executive of SL Green Realty Corp, one of New York's largest office landlords, said tenants occupying hundreds of thousands of square feet have dangled the possibility of moving to the WTC as a fallback option during lease negotiations. Often it is just an idle threat, but occasionally it is more, he said.

NEGOTIATING FROM STRENGTH

Tenants are in a good negotiating position now because leasing in the city began to slow in the 2011 third quarter, according to Studley Inc, a brokerage that represents corporate tenants. In the 2012 second quarter, companies signed leases for 25 percent less office space than in the same quarter a year earlier.

With demand stalling, the overall Manhattan office vacancy rate in August was 9.3 percent, up from 9 percent in June, according to Cushman & Wakefield. The vacancy rate is down from a cyclical high of 11.6 percent in March 2010 but well above the cyclical low of 5.3 percent in June 2007. Lower vacancy rates allow landlords to jack up rents.

Tenants seeking hundreds of thousands of square feet of office space -- just the type of tenant the WTC needs -- have been especially reluctant to make long-term decisions in light of the unclear direction U.S. tax and fiscal policies.

When the law firm Morrison & Foerster LLP needed more space and wanted to be in a brand new building, it briefly considered moving to the WTC.

But it was only a fleeting thought. Time spent shuttling between the WTC and Midtown clients would be too costly for attorneys who charge as much as $1,000 an hour.

"If your goal is proximity to clients, which is the goal of a lot of law firms, our lawyers wouldn't be able to walk to their clients quickly," said Mark Edelstein, chairman of Morrison & Foerster's Real Estate Finance and Distressed Real Estate Practices. "You're going to get that more readily in Midtown only because there are more clients in Midtown. There's more space here. There are more people here."

Morrison & Foerster decided to stay in Midtown, and in May 2011 it signed a lease for Boston Properties Inc's new tower, set to open in 2014 at 55th Street and 8th Avenue.

STILL HOPE

To be sure, there is hope for the WTC site. It often takes years for large office buildings to fill up. For the Empire State Building and the original WTC towers, it took decades.

An upgraded transportation system could drive demand for WTC office space. Traveling to and from the WTC will get easier, thanks to two new transit hubs linking city subways and trains to the suburbs -- one on the WTC site and the other nearby at Fulton Street. The two hubs will be connected through a walkway.

"When the transportation hubs open, the perception of downtown will start to change," said Moshe Sukenik, executive vice president and principal at real estate services company Newmark Grubb Knight Frank.

At the same time, downtown neighborhoods, such as Wall Street and Battery Park City, are attracting young people who used to favor the Upper East and West Sides. So for a growing group of New Yorkers, a commute to the rebuilt towers is easy.

Corporate tenants also could be drawn by the 365,000-square-foot mall that Westfield Group plans to open in 2015 in and under the transportation hub and some of the WTC buildings.

Two buildings on the 16-acre WTC site are slated to open within the next two years. One World Trade Center, with 3 million square feet of rentable office space, is scheduled to open in 2014 and is 55 percent leased, with major tenants including magazine publisher Conde Nast, which is leaving Midtown, and the U.S. General Services Administration, which oversees purchasing and real estate for the federal government.

The Port Authority of New York & New Jersey, which owns the site, and real estate developer Durst Organization Inc are building One World Trade Center.

Silverstein Properties Inc is building Four World Trade Center, with 2.3 million square feet of office space. It is about 50 percent leased. The Port Authority is taking 601,000 square feet and the City of New York 582,000 square feet. The building is slated to open next year.

Two and Three World Trade Center are in the early stages of development and cannot go much further until they lease a set amount of space required to trigger the financing to pay for the building, according to Silverstein.

Seven World Trade Center, adjacent to the site being redeveloped, was completed in 2006. It became fully leased in July with the addition of Midtown law firm WilmerHale.

Downtown was not WilmerHale's first choice. The firm had been negotiating for space in Worldwide Plaza on Eighth Avenue and 50th Street in Midtown, but the talks fell apart.

WilmerHale says it may not be committed to Downtown for the long run.

"I don't think of this as necessarily being a 20-year proposition," Charles Platt, WilmerHale partner-in-charge of the New York Office, said of the firm's lease for five floors. "But if all works out, it will be, and if it doesn't, we'll have to make another decision."

(Editing by Dan Wilchins, Martin Howell and John Wallace)