WTC solution to space crunch

Real Estate Weekly, March 15, 2006 by Tiffany Razzano

An upbeat Larry Silverstein told guests and members at last week's AREW luncheon that he expects his 7 World Trade Center tower will be "significantly leased" by the end of the year.

Despite what he referred to as "the fuss" with the Mayor, the State and Port Authority over the fate of the site, Silverstein said plans for completing the rest of reconstruction were moving ahead well.

He blamed the Port Authority's failure to complete foundation work at the site for delays so far, but otherwise said he was confident about his plans for the future rebuilding and the ability of the market to sustain the over 11 million square feet of office space planned for the site. His comments came on the heels of a report by CB Richard Ellis that claimed not utilizing the whole site for office space could prove extremely detrimental to the city's future as a global business center.

The study showed that the city could see a shortage in premium office space as early as 2008, with vacancy rates for top-tier properties dropping as low as 3% by 2009. Currently, the vacancy rate for such properties is 6.82%.

The report by CBRE--which is Silverstein's exclusive broker for 7 WTC--notes that, in Midtown, an average of 9.1 million s/f in office leases will expire annually during the next 10 years. Tenants, facing rent increases when their leases are up, could be forced to other areas in New York City, or even out of the region altogether. Already, tenants whose leases expire this year will see rents as much as 60% higher than their original lease.

The report also states that there are only two areas in Manhattan that would be able to accommodate new commercial development: the Hudson Yards site and the World Trade Center site.

"The city is facing a real shortage of new institutional quality office space," said Simon Wasserberger, first vice president at CBRE.

"So what we're saying in effect is that if you don't build out the Trade Center or Hudson Yards in particular, you'll see a significant spike in rents and risk losing people to other markets."

The report indicates that these submarkets are poised to draw major corporate tenants from more traditional Midtown business centers. The two sites offer access to major transportation hubs. The World Trade Center is serviced by 14 subway lines, ferries and PATH trains to New Jersey, with a planned expansion of the Broadway-Fulton terminal, a rail connection to JFK airport and the new Calatrava PATH terminal. By the time this is all completed, the federal government will have spent $15 billion on infrastructure and mass transit in Lower Manhattan.

The two sites are also the only spots left in the city that have the actual, physical space to build the office space needed to attract corporate tenants.

With the further development of the trade center site for office space imperative to the future of the city, the question arises as to why Bloomberg is pushing to use part of it for residential space.

"You can build residential anywhere in Manhattan. What makes the WTC site unique is the transportation hub," Wasserberger said. "Of all the places to build residential, why build it right where we just committed billions building a commuter hub? There are still millions of square feet in old office building that could be converted."

CBRE also notes that Manhattan's aging inventory might no longer appeal to the requirements of corporate tenants. The average Manhattan office building was built in 1942. Only 15% of the current supply available was built after 1980, making these buildings the most technologically advanced properties.

Silverstein noted that Goldman Sachs is paying $2.4 billion to build a brand new, Class A, 2 million s/f building, directly across the street from the World Trade Center site.

"The change is that it no longer pays to retrofit existing space," he said. "It's a reflection that major tenants want and demand the latest technology."

He added, "By coming down to 7 World Trade Center, they'll have it." 7 World Trade Center, which signed its first major lease for 200,000 s/f to Beijing Vantone Real Estate Co., Ltd. in January, has been seeing more traction lately, and Silverstein promises more leases will be seen in the coming weeks, if not days.

"We've signed leases for eight floors of 7 World Trade Center," Silverstein said, "and there's very significant activity for about 1 million s/f under negotiation at 7 with names people know and understand."

He estimates that by the end of 2006, the building will be significantly leased.