Downtown feels effects of merger

Real Estate Weekly, Oct 26, 1994 by Lois Weiss

Area brokers agree the proposed acquisition of Kidder Peobody by Paine Webber will affect local real estate owners. With Kidder's current home at Ten Hanover already on the rental market and its decision some months ago to retreat from moves to 30 Rock and 1251 Avenue of the Americas in Midtown, the real estate market is concerned, particularly about the Downtown spaces.

What it is not shrugging off as well is a perception in the market that things are getting better.

Adding to the mix is that sources say Paine Webber is now in the market for 800,000 square feet of space in Midtown, and is about to sign a deal with Cushman Realty and Goldman Sachs to lead its search.

Paine Webber has 451,000 square feet at 1285 Avenue of the Americas, a Tishman Speyer building, and that lease expires towards the end of the century. It has another 1 million square feet in the Lincoln Harbor project in Weehawken, NJ.

Kidder currently has 425,000 square feet in Ten Hanover, about 130,000 square feet at 120 Broadway; 150,000 square feet at 60 Broad; and 72,000 at Two Broadway. It was going to renew all the leases for five years, but that is now all off. "That's not going to have a positive impact on Downtown," said Robert G. Martin, senior managing director of Grubb & Ellis/New York. Kidder blew off signing a sublease from NBC for 250,000 square feet for floors 17 through 23 at 30 Rockefeller Plaza, but did sign the lease at 1251 Avenue of the Americas for 350,000 square feet, which is now on the market. With Paine now looking for space, it may make sense for them to take another look at the Kidder space to hold the realigned firms in the meantime.

Lawrence Tannenbaum, senior director of Cushman & Wakefield and a former Olympia & York executive who handles the Downtown market, is concerned about the perceptions created by the Kidder/Paine merger.

"At the core this is psychological," explained Tannenbaum. "The biggest impact is the uncertainty and drop in profits in the trading areas. That's had more of an impact."

Tannenbaum said the trading layoffs by several brokerage houses will keep tenants in more of a "wait-and-see" mode before making new commitments.

"It's not as dramatic as the post-crash," he added. "This is a pause in what was a turning around of the Downtown market."

Concurred Martin, "Any time companies are merging and jobs are being lost it doesn't help real estate."

The vacancy rate in the post-1980 buildings have gone from 17 and 18 percent 9 to 12 months ago down to 12 percent, he noted. "People were trading up and there was net absorption." The Downtown market is being marketed in the high teens and low twenties, say brokers.

James A. Priot, vice president in charge of operations at Helmsely-Spear who oversees Ten Hanover, agrees the market was looking better. "The Downtown market appears to have turned the corner and seems to be coming back," he observed. "The plus side - if there is one to losing a tenant of that size - it that there aren't many large blocks on the market."

Pirot said they had been in discussions with Kidder to stay on in the building in light of their problems. "That all went down the drain when they announced this over the weekend," he said referring to the merger. "We're going to stay on the same marketing course and look to do it more heavily."

Kidder has 425,000 square feet in Ten Hanover, a building that is owned by a partnership made up of Harry Helmsely and the Goulets, who constructed the building together in 1971.

Its lease is due to expire at the end of 1995. Some of Kidder's space is a sublet from European American Bank that continues to pay on its lease obligation for other space that remains vacant in the building.

"Fortunately, the rent and the lease term with EAB gives the ownership some breathing room," sighed Pirot, "before we have to cross the path of EAB leaving in 2002. We don't have just a vacant building."

Kidder had also made a short-term extension of it 140,000 square foot 60 Broad lease and has a brokerage division at 120 Broadway, and has 70,000 square feet at Two Broadway, an Olympia & York owned 1.5 million square-foot property that has nearly 1 million square feet vacant and is not being actively marketed during that company's restructuring.

Paine was attracted to Kidder by its branch network and clients, said Tannenbaum. "Kidder had a good retail presence," he said. "Their niche was high net worth individuals. That's the attraction."

Kidder had 1,150 brokers in 50 offices and combined with Paine Webber would create a network of 334 offices with 7,253 brokers.

Sources said Kidder told employees last week it expects to lay off 41 percent of its approximately 5,000 workers. About 500 workers were laid off about a month ago. Each day, individuals are being told whether they are being laid off or transferred to Paine Webber territory.

Calls to its hospitality group, headed by Dr. Bjorn Hanson, who left Coopers & Lybrand only last June, were not returned.

Barry Gosin, CEO of Newmark & Company Real Estate Services, who represents 1251 Avenue of the Americas, said "The fact that kidder jobs are going to be lost will affect the market."