Landlords say that despite delays, corporate tenants will pay a premium to fill new downtown buildings
(Bloomberg) -- Rising demand for high-tech, modern spaces will prevent an office glut in downtown Manhattan as new towers rise at the site of the former World Trade Center, three landlords in the area said.
The bulk of the demand at the site of the Sept. 11, 2001, terrorist attacks will come from tenants now working in Midtown as they outgrow their space there and seek more technologically and environmentally advanced buildings, the office owners said at the Real Estate Briefing hosted by Bloomberg Link in New York today.
"People will very much want to be here because it will be the only game in town," said Larry A. Silverstein, chief executive officer of Silverstein Properties Inc., which has the right to construct three buildings at the Ground Zero site.
The two towers being built at Ground Zero -- 1 World Trade Center and Silverstein's 4 World Trade -- will add 4.4 million square feet (409,000 square meters) of office space to the downtown market, where the vacancy rate in the third quarter was at a six-year high of 12.1 percent, according to Cushman & Wakefield Inc. Were 1 and 4 World Trade to be delivered empty, that would push the rate to more than 16 percent, according to Kenneth McCarthy, head of New York-area research for Cushman.
Renters will pay a premium for new offices and the glamour of being in the city's newest office neighborhood, Silverstein said.
"We'll be seeing most of the tenants coming from Midtown to Downtown," he said.
Expected demand has pushed Brookfield Office Properties, the owner of the World Financial Center, to invest "hundreds of millions of dollars" renovating and upgrading the complex, Ric Clark, president of the New York-based real estate investment trust, said during today's panel discussion.
Since 2005, some 235 tenants have moved from midtown to downtown and collectively leased 5 million square feet, Clark said. The new tenants are a mix of technology firms, professional services, media companies and non-profits, rather than being from the financial services industry that dominated the area's leasing before Sept. 11, he said.
"There's been a great diversification of the mix in lower Manhattan," Clark said. The addition of new space across West Street at Ground Zero is not a problem, he said. "It's an opportunity."
Bank of America
Bank of America Corp. has leases expiring in 2013 on 4.6 million square feet of space at Brookfield's World Financial Center. The Charlotte, North Carolina-based lender inherited that space when it bought Merrill Lynch & Co., which had its headquarters at the property. Bank of America has told Brookfield it plans to "maintain a presence" at the financial center, Clark said in February.
Delays in completing the 1 World Trade Center may have made it more commercially viable, said Douglas Durst, chairman of the Durst Organization Inc., which has agreed to take at least a $100 million cash equity stake in the property.
With the bulk of the building ready for tenants in 2013, years behind the original plans, demand for new space will be higher, Durst said. He said he is planning to hold the top floors of the 1,776-foot (541-meter) tower off the market until at least 2015, in part to allow demand to recover and rents to rise.
'Definitely Make Money'
"The building will definitely make money," Durst said at the conference. "It's not going to make the level of return that a typical investor would seek from the building."
Durst said plans to lease a large block of space at 1 World Trade to the state of New York may not go through, with the state's budget in disarray and cheaper space potentially available elsewhere.
With about 400 million square feet of office space in New York, and the bulk of it more than 50 years old, demand for new, high-tech space won't ease, Silverstein said. Tenants have shown a preference for buildings that meet stricter energy-efficiency standards and are wired to use the latest technology.
"There are so many tenants out there with a need to be on the cusp of technology, and you can only get that in a new building," he said.
Conde Nast is negotiating final details of a lease of as much as 1 million square feet at 1 World Trade. The closely held company, the publisher of Vogue and The New Yorker magazines, has its current headquarters at Durst's 4 Times Square tower in Midtown.
Two more buildings are planned at the Ground Zero site, with an additional 4.4 million square feet of space.
Construction of the foundations of those properties, known as 2 and 3 World Trade Center, has begun. No completion dates have been set pending additional financing.