A Chicken-or-Egg Question

Not since Ronald Reagan presided and cell phones were about the size of Whitman’s Sampler boxes have we been on the verge of such an office construction boom in New York City, Bloomberg News reported last week. Cassidy Turley says 28.5 million square feet of new space could be added to Manhattan’s office supply by 2020.

Naturally, that tally includes the World Trade Center complex, but it also encompasses some projects that were put on hold during the downturn. Three years ago, for instance, I heard Joshua Sirefman, SVP of US development at what was then known as Brookfield Properties, tell a CoreNet Global audience about his firm’s plans for Midtown West, a 5.4-million-square-foot mixed-use project that would entail two office towers of 60 stories or more. Fast forward to 2011, and the renamed Brookfield Office Properties is looking to finally get construction going. Farther uptown, Boston Properties is reviving 250 W. 55th St., a $1-billion office tower that was scrapped in early 2009 after foundation work had gotten under way, and has signed law firm Morrison & Foerster as its first tenant.

Now that the general economic outlook has brightened somewhat, the sense is that the demand will be there for new product. The key word here is “new”: Manhattan’s office stock is among the oldest of major cities globally. Within a one-block radius of ALM’s offices in Lower Manhattan, for example, the most recently built office tower dates from 1973. The eldest has been up and running for more than a century.

Yet it’s not clear that this is a harbinger of renewed office development generally. For developers, and especially those outside the core markets, the crucial question around new construction paraphrases the widely misquoted line from Field of Dreams: If you build it, will they come? “They” in this instance is not tenants, but lenders.

The answer to that question still depends on who’s seeking the financing. As with investment sales of existing properties, the greatest glory still goes to the trophies. And REITs such as Brookfield are less dependent on financing, anyway, thanks to their success in the public markets. More generally, banks, life companies and other lending sources have been wary of committing to construction financing, at least outside the multifamily sector.

“If a banker gets a call from someone who owns land, the first question he’s going to ask is, ‘Who's your tenant?’” JP Morgan Chase’s Greg Reimers told Bloomberg. “Twenty percent pre-leased for an office building is not going to be sufficient to get a non-recourse construction loan. Twenty percent leased is another way of saying 80% vacant.”

You might see this as a chicken-or-the-egg question. Do you need construction financing in place to attract tenants, or do you need tenants to get the financing? The answer is probably “both,” and that’s the reality of office development today, outside of the most glamorous, high-profile mega-projects.

By the way, to set the record straight on that Field of Dreams line that has been misquoted so often it’s become a shopworn clich