In a recent TV interview, Donald Trump called Ground Zero’s Freedom Tower a ‘huge white elephant’ that could be a ‘catastrophe’ for New York. He mused: ‘Can you build a building with millions of square feet when office space is going begging? They should think about not building [it] because there is no market.’
I asked him how he could justify that statement, given that the Freedom Tower, which is slowly rising, won’t be completed at the earliest until the end of 2013, when the market will be completely and unpredictably different from today’s.
Trump declared that the world is in a ‘virtual depression’ and said the ‘office market’s not good and it’s getting worse’. He feared the partly subsidised Freedom Tower will ‘drain tenants out of a lot of taxpaying buildings in Lower Manhattan’ as the Twin Towers did in the 1970s.
Trump owns one downtown office building, 40 Wall Street, which is 100% full.
Terrorist bombings in big cities since 11 September 2001, though horrific, took many fewer lives than the 2,751 who died in Manhattan. By comparison, 52 were killed in London, 191 in Madrid, and 171 in Mumbai.
None of those atrocities destroyed huge office buildings, nor forced traumatic relocations of companies, nor left a 16 acre (6.5 ha) crater in a city’s commercial heart. It’s appropriate to deride the slow progress of rebuilding at Ground Zero. But the larger story is how the city, confounding dire predictions to the contrary, has prospered and grown since 9/11.
One reason for optimism is the continuing commitment on the part of foreign companies. German investment bank West LB amazed naysayers this month when it leased the top of Larry Silverstein’s new 7 World Trade Center for the highest rent ever paid downtown – more than $70/sq ft (£46.60/sq ft) on average for three floors, and more than $80/sq ft (£53.27/sq ft) for the top floor. It isn’t the first time overseas firms have shown confidence in a wounded New York.
In the fiscally challenged, crime-ridden days of the 1970s, Japanese giants like Sony and Nikon kept the bright lights on in Times Square, and Rupert Murdoch’s Australia-based News Corp purchased both New York Magazine and the then-faltering New York Post.
Today’s city is in immeasurably better shape, but the wider economic collapse, with no bottom in sight, alarms the most optimistic locals. Banks won’t lend. Investment sales have all but ceased. One broker told me he ‘could sell anthrax more easily’ than a development site. Stalled or aborted projects have left holes in the ground that might remain empty for years.
CB Richard Ellis reports that Manhattan’s vacancy rate for November rose to 6.9% from 4.6% in the same month of 2007. Availability, including sublet space, rose to 11% from 8.2%.
And ‘taking’ rents, as a fraction of asking rents, fell to 91.4% from 92.7%. There’s no denying that things will get worse – perhaps much, much worse.
The potential loss of 165,000 financial-sector jobs in the New York metropolitan area threatens to empty 40m sq ft (3.7m sq m) – Manhattan’s total inventory is about 380m sq ft (35.3m sq m). Many fear rents will plummet from more than $100/sq ft (£67/sq ft) in class A buildings to below $50/sq ft (£33/sq ft).
The loss of property-related tax revenue has begun to strain the city’s $60bn (£50bn) annual budget. But some of the rhetoric seems even worse than reality.
There’s a relative pittance of new office space in the pipeline – perhaps 3m sq ft (278,700 sq m) over the next two years in a handful of locations, against an existing Manhattan inventory of 380m sq ft (35m sq m). Even so, fears of a ‘glut’ have some people pushing the panic button.
Not only the media, but some brokers are whining over the fact that no leases have yet been signed for the 1.1m sq ft (102,190 sq m) 11 Times Square, which will not even be finished until a year from now.
Less pessimistic views are hard to find, but they do exist. CB Richard Ellis global brokerage chief Stephen Siegel notes that even if the direst job-loss forecasts prove correct, it does not necessarily mean rent will not still be paid on the empty floors.
‘Companies won’t be so fast to put their space up for sublease, because in the last upturn, they found they had to pay a lot more when they needed the space back,’ he says.
Certain recent deals also challenge the prevailing wisdom. Enormous renewals continue to be signed amid all the paranoia. Among them is media giant Viacom, controlled by Sumner Redstone, which extended leases totalling 1.3m sq ft (120,775 sq m) at 1515 Broadway in Times Square until 2013.
Then there’s West LB’s 129,000 sq ft (11,985 sq m) lease at 7 World Trade Center. Even though the bank will have slightly less space there than it does at 1211 Sixth Avenue, its impending move to Larry Silverstein’s 52-storey tower overlooking Ground Zero contradicts every local orthodoxy. Financial firms supposedly do not want to be downtown any more.
They especially do not want to be near the World Trade Center site, a construction mess for years to come.
And the dollar’s recent strengthening against most currencies makes Manhattan a less desirable or necessary place for foreign-based companies to grow amid a global economic meltdown. In fact, West LB’s move is not such an aberration.
The two other firms that earlier came close to deals for peak floors at 7 World Trade Center were also based overseas – China’s Beijing Vantone and HSBC.
Australia’s Macquarie Group recently expanded by 160,000 sq ft (14,865 sq m) in Midtown. Deutsche Investment Management America, a Deutsche Bank unit, just renewed a long-term lease for 150,000 sq ft (13,935 sq m). French bank Natixis is looking for 200,000 sq ft (18,580 sq m).
And of course, the rescue of some Lehman Brothers divisions by Britain’s Barclays saved more than 6m sq ft (557,413 sq m) of prime space from going on the block.
Had Barclays not swooped down, the debacle would have emptied Lehman’s 1m sq ft (92,900 sq m) headquarters tower at 745 Seventh Avenue and left it at the mercy of creditors and the courts.
It’s a different story on the investment front. Even the most cash-rich Asian and Middle Eastern players have given up their Manhattan treasure-hunting. Dubai’s Istithimar, for one, has been shedding its holdings here for a while, and gave up on a scheme to combine the former Knickerbocker Hotel – now an office building – with a development site next door into a single glamorous property.
Yet, although it is heretical to say this, the collapse of the financial markets could actually benefit Manhattan in the long run. The pause ensures there will not be any new office construction for a while, which will only make the existing buildings more valuable – so much so that global buyers will once again want them for trophies to add to their collections.