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As seen in
September 23, 2001
Commercial Real Estate
Uncertainty In a Landscape Transformed
by JOHN HOLUSHA
The destruction of the buildings at the World Trade Center by
the terrorist attack and the damage to much of the western downtown
business district raise more questions about the future of commercial
real estate in the area than there are quick answers.
Will the destruction or unavailability of 30 million square
feet of office space, 36 percent of the total downtown market
of 82.4 million square feet, send rents sharply higher as landlords
take advantage of tenants desperate to find a place to keep
their business running? That happened in Philadelphia a decade
ago, when a 38-story skyscraper was engulfed by fire, suddenly
rendering a large fraction of central business district office
space unusable.
If New York companies can find acceptable space only in the
suburbs, might they grow comfortable there and not return when
downtown is rebuilt? Once again, the Philadelphia experience
seems to suggest that some relocations to the suburbs could
become permanent.
Will the deliberate destruction of the signature towers discourage
companies from moving into buildings likely to become targets
of terror?
What will happen to the Trade Center site? Because of the loss
of life, there may be pressure to convert at least part of the
site to a memorial, as was done with the site of the federal
building in Oklahoma City that was shattered by a truck bomb.
Whatever the answers, real estate executives agree that the
world as the industry knew it before Sept. 11 has changed.
Nevertheless, some real estate executives counseled caution
for business leaders before making decisions. "Those decisions
should not be made in the emotional conditions of today," said
Mitchell Steir, vice chairman of Julien J. Studley, a brokerage
company that represents tenants. "It would be foolish to draw
long-term conclusions about buildings, downtown or even New
York City."
Security in its many ramifications is now a leading consideration.
"Every single tenant and owner will be going through their operating
procedures with a critical eye toward security and the ability
to get out of a building quickly," said Andrew Davidoff, chief
executive of the Emmes Group, which manages 2.5 million square
feet of office space in New York.
He said the need for a planned evacuation route was brought
home when his company was recently forced out of its offices
at 420 Lexington Avenue by a bomb scare at Grand Central Terminal
next door. He said he noticed that the lighting in the stairwells
was poor and the signs inadequate.
Indeed, some executives said the attack had pushed security
to the top of tenants' list of concerns. "There is a heightened
sensitivity toward security and not just in New York," said
Barry Gosin, chief executive of Newmark & Company Real Estate,
a brokerage and management company. "There has been a huge awakening."
Some companies may be inclined to take another look at their
disaster recovery plans and give human resources more emphasis
in their largely technical prescriptions, said Marcus J. Rayner,
a principal in Cresa Partners, a brokerage firm that represents
tenants. "With the exception of not allowing top executives
to fly on the same airplane, the issue is not addressed," he
said. "Now they will have to decide how many people they want
at the same location at the same time."
Some tenants are expected to try to improve their security by
seeking buildings with lower profiles, either in the city or
the suburbs. "We expect businesses to start shying away from
high-visibility properties and look for more discreet locations,"
said Michael Silver, the president of Equis, a real estate services
company.
"The high-profile trophy building may be obsolete," said Michael
T. Cohen, the chief executive of Williams Real Estate, a brokerage
and services company. "People may think twice about moving into
buildings like Sears Tower or Empire State, and they may want
to steer clear of downtown."
But others say once the horror of the attack wears off, other
factors, like proximity to customers and suppliers and the value
of a well-known address, will once again attract companies to
landmark towers.
For some companies, particularly small ones, having a well-known
address gives them more legitimacy than a location that is harder
to identify, said Bruce Weissberg, the president of D. G. Hart,
a real estate services company. "For some people, being in Rockefeller
Center, the Chrysler or Empire State buildings gives them a
stature that is a reflection of the stature of the building,"
he said.
The trend for large companies in the financial services business
is to create corporate campuses, a group of buildings in close
proximity to one another, said D. Kenneth Patton, associate
dean of New York University's Real Estate Institute. "The drive
is still toward the center," he said. "These companies want
to be able to form teams within minutes to go after business."
Although smaller companies displaced by the Trade Center attack
may find quarters elsewhere in Manhattan, the other boroughs
or suburbs, large space users have a problem, real estate executives
said, because few large blocks are available in the city. This
is prompting them to look at the former corporate headquarters
buildings in places like New Jersey and Westchester County,
which have been difficult to redevelop for use by multiple tenants.
Some companies, like Merrill Lynch and Lehman Brothers, have
moved many of their operations to Jersey City, and buildings
once occupied by AT&T in other parts of the state may provide
a home for refugees from Lower Manhattan. And American Express
last week leased 175,000 square feet of space in Stamford, Conn.
The loss or unavailability of buildings downtown will accelerate
the real estate cycle, said Steven A. Swerdlow, president of
the eastern division of CB Richard Ellis, a brokerage and services
company. Before the attack, the market was softening and the
vacancy rate was rising. "I had been saying that once we got
through the trough, we would have a very tight market," Mr.
Swerdlow said. "This has moved the timing up 24 months. Now
we are in a very tight market with no prospect for relief"
because of the lack of new construction.
An idea of what happens to a market when a large block of space
is suddenly removed may be gained by looking at One Meridian
Plaza, the 38-story skyscraper that burned in central Philadelphia
in 1991. The building, with slightly less than a million square
feet, was an important factor in a market with about 40 million
square feet – a fraction of the New York market, which
has office space that various real estate data compilers estimate
from 328 million to more than 400 million square feet.
The late-night fire forced tenants to scramble for an alternative
place to set up shop, just as companies and firms in Lower Manhattan
are racing to find space, particularly space that is already
built so they can move in furniture, hook up telephones and
get back to work. "The ramifications of that fire were felt
for a long time," said Joseph Pasquarella, managing director
of the Philadelphia region for Integra Realty Resources, a New
York-based company that specializes in real estate appraisals.
One of the first was a spike in rents, with asking prices increasing
15 percent to 20 percent almost overnight, Mr. Pasquarella said.
"And you have to remember this was 1991, when real estate was
in the tank; rates had been going down prior to the accident."
Real estate executives in New York have pledged to avoid price
gouging as suddenly homeless companies desperately look for
new space, but it remains to be seen whether price levels will
hold in a suddenly tightened market.
"No one should try to profit from this
situation," said James Meiskin, president of Plymouth Partners,
a brokerage firm that represents tenants. "Any landlord that
tries to profit will be ostracized for life."
Like today's New Yorkers, the Philadelphians of a decade ago
quickly sought a new place to do business. Some found the space
they needed downtown. But some moved, temporarily they thought,
to the suburbs.
Once there, though, many stayed, permanently leaving Center
City, Mr. Pasquarella said. "A lot of the people who left never
came back."
Another problem was that the fire, which burned for 18 days,
resulted in closed off streets, restricting access to nearby
buildings, which is already a serious problem in the Trade Center
area. "People could not access buildings or retail space," Mr.
Pasquarella said. "The stores couldn't open."
One Meridian Plaza was tied up in litigation involving lenders
and insurance companies for years and was torn down only about
a year ago, Mr. Pasquarella said
The legal and financial aftermath of the Trade Center attack
could be far more complicated, with Larry A. Silverstein, a
developer, and Westfield America Inc., holding a $3.2 billion,
99-year lease on buildings that no longer exist. The Port Authority
of New York and New Jersey still owns the underlying land through
which pass subway lines and some of the PATH commuter trains
from New Jersey. And owners of adjacent buildings, damaged by
the collapse of the towers, may have their own thoughts about
heading to the courthouse.
"There is going to be a ton of lawsuits and it is going to be
a mess," said Mr. Davidoff, who said he was involved in the
One Meridian Plaza situation in a previous assignment. He said
he expected Mr. Silverstein, the Port Authority and various
insurance companies to be litigating for years.
Although all of the Trade Center buildings have been destroyed,
many nearby buildings could be back in service within months
because the damage is primarily to their nonstructural glass
outer walls, said Anthony E. Malkin, president of W & M
Properties. an investment and management company. "If the rest
of the buildings are sound, we could be talking three to six
months to have them back in operations," he said.
A preliminary survey of 195 buildings in the area by engineers
hired by the city reached the same conclusion last week. A few
will need some structural repairs, the report said, but none
need to be demolished and many can be occupied within several
weeks or several months.
But if deep structural problems delay
redevelopment of the damaged downtown, real estate executives
said that could spur construction in other parts of Manhattan.
"If people cannot stay downtown where they want to be, then
we will see conversions on the West Side," said Mr. Meiskin
of Plymouth Partners. Although the attractiveness of these far
west buildings had faded as vacancy rates in more central parts
of the island had increased, the loss of space downtown may
revive interest in those locations, Mr. Meiskin said.
Another place that may benefit from the loss of space is the
Long Island City section of Queens. Just east of Midtown Manhattan
and well connected by subway and roads, a 31-block section was
recently rezoned from light manufacturing to more intense office
development. Although real estate executives had previously
said the rezoning had missed the peak of the market, the signing
of an anchor tenant could start projects for which planning
is already under way. "People are looking to New Jersey and
Long Island City to move their back offices and trading operations,"
said Ruth Colp-Haber, a partner in Wharton Property Advisors,
a brokerage company.
Meanwhile, the Metropolitan Life Insurance Company is planning
to move about 1,000 office workers from Manhattan to a 404,000-square-foot
former factory building in the rezoned area near the Queensboro
Bridge. Real estate executives said they expected the MetLife
operations, and the question of how well the workers adjust
to a location out of Manhattan, to keep the industry's attention
focused on the area.
David A. Brause, vice president of Brause Realty, which owns
the building at 27-01 Bridgeplaza North, said it was originally
marketed as a telecommunications technology center because of
the fiber-optic cables that run nearby. But the retrenchment
of the telecommunications companies has reduced the appeal of
these "telco hotels," and Mr. Brause leased the building to
the insurance company for use as office space.
The attack and its aftermath are changing the way some companies
think about real estate, Ms. Colp-Haber said. She said some
of her customers are considering placing a few top executives
in a prime location in Manhattan and housing the rest of the
staff elsewhere. "This has changed the way businesses plan,"
she said.
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