Special Report: After Attack, Companies Scramble to Find New Space

NEW YORK CITY-When the October 2001 issue of Real Estate Forum came out, New York was still reeling from the previous month's attacks and real estate was just beginning to assess the damage. The following piece appeared in that issue and shows just how far the city has come. For instance, as you'll read, concern was that companies would flee Downtown, never to return, or that there would be a dearth of skilled workers available to rebuild when the time came.

What a difference a decade makes. Ten years on, in nearly every respect, the exact opposite has happened. Companies are again flocking to a renewed, revitalized Downtown and construction workers--their industry in the midst of record unemployment levels--are anxious to build, both Downtown and elsewhere in the city, to fill the ongoing need for class A office space here.

Special Report: After Attack, Companies Scramble to Find New Space

The dust had barely settled from the collapse of the World Trade Center's twin towers when news stories began to address where firms displaced by the tragedy would find space to start up business again. Though most commentators stress that it is too early to gauge the long-term impact of the tragedy, several common threads have emerged. Not surprisingly, one is that in the short-term, other parts of Manhattan plus the outlying suburbs of New Jersey, Westchester County, NY and Connecticut will see a surge in office leasing. The other likely outcome may be a construction boom elsewhere in Manhattan as developers speed up plans. That is, of course, if they can find enough skilled workers to handle the jobs, as the massive task of clearing out Lower Manhattan continues.

Estimates from various sources place the amount of destroyed or severely damaged space in Lower Manhattan at between 26 million and  29 million square feet. That translates into nearly 26% of the Downtown space and some 7.5% of the total office supply in the city. As for the dollar amount of the damage, Jones Lang LaSalle calculates that direct losses attributable to real estate alone may reach $10 billion.

The immediate question is where to house the companies that used the 110-story towers of the World Trade Center as their headquarters before September 11. At least temporarily, many will have to find office addresses outside of New York City. Already, American Express Co. has leased roughly 175,000 square feet in Stamford, CT. The firm, which had occupied Three World Financial Center, has inked deals for interim corporate HQ space in Jersey City as well as for office accommodations in two New Jersey communities, Parsippany and Short Hills. According to a company spokesperson, about 3,000 workers were stationed in one million square feet in Lower Manhattan. In addition, Lehman Brothers subleased space at the Colgate Center in Jersey City, while the Port Authority of New York and New Jersey took 180,000 square feet at the Gateway Center in Newark.

Peter S. Brooks, principal with the real estate advisory services practice of Ernst & Young in New York City, told Real Estate Forum that his staff is currently aiding medium-sized former tenants of the WTC area search for new offices. He emphasized that their immediate concern is to get up and running, and in some cases that could occur in space outside of New York City. However, he does not foresee a stampede of companies out of the city.

"Some firms, at least in the short run, are going to have to go to the suburbs," Brooks said. "But I don't predict a flight there. I don’t think people are going to abandon New York. In the short run, we lost more space than we have vacant.

"We probably have something less than 20 million square feet of vacant space in New York City," he continues. "Logically, some people are going to go to New Jersey, Connecticut, Westchester or Long Island."

Grubb & Ellis estimates the current inventory of available space in Manhattan at 23.5 million square feet. However, the firm points out that only a small percentage of that has the large floor plates found in the WTC and surrounding buildings. At the same time, there is 22 million square feet for lease in Northern New Jersey, Nassau and Westchester Counties in New York State and Fairfield County in Connecticut.

For that reason, firms may have little choice but to exit Lower Manhattan. "I expect a mass exodus from Lower Manhattan to Midtown South and other ancillary markets such as Long Island City, Brooklyn and Jersey City," said James Meiskin, president of Plymouth Partners in New York City. "Companies right now are focused on the well-being of their employees, but real estate will soon become a major consideration."

While the WTC attack has stirred a flurry of leasing activity, others say the long-term impact is difficult to assess at this time. "There probably will be very short-term consequences in that people will absorb the overhanging sublease space that's been available in the market during the past 10 months,” said Peter Pattison, chairman of Peter Pattison Ltd., a real estate advisor and developer in the city. "The long-term impact will be much harder to judge. New York will not be business as usual for a while. However, I don't think we'll see any mass exodus in the next 60 to 90 days. Everyone will reassess how their business is run. People will defend the core of their business. Whether that'll be good or bad for New York City, who knows?"

That reassessment of business location may mean splitting operations between several sites, contends Richard LeFrak, president of the LeFrak Organization in New York City. "The notion of firms putting their eggs in one basket is now outdated," he said. "The reason being, any firm located in the Financial District and, in particular, near the World Trade Center is essentially out of business at present. Those firms that had multiple locations in the region have the flexibility of taking the employees from the WTC area and relocating them. Companies should consider multiple locations in the event of this type of tragedy or even for an event such as a power outage."

How much displaced tenants will pay for new space is a subject of much discussion as well. In a report tided "NYC's Office Market--Assessing the Damage," compiled by Merrill Lynch and Grubb & Ellis, the authors related that landlords pledged to hold rents at pre-disaster levels. Prior to the attack, leasing costs stood at $68 per square foot for class A space in Midtown Manhattan and $49 a foot Downtown. However, that edict may only apply to tenants who were directly affected by the attack. Considering the tightness the disaster will cause in the office marketplace, "it is doubtful that landlords will choose to hold rents steady at pre-disaster levels for prospective tenants who were not displaced by the terrorist attack," the Merrill Lynch/G&E report stated.

Meanwhile, many agreed that any development proposal slated for Manhattan will get a second look now, even if it could take years for the projects to come on line. LeFrak added that his firm is now speeding up delivery of its properties in Jersey City. "Any place that has been thought of as a new construction site has suddenly gotten very popular," Brooks said. "The World Trade Center area will not be available for construction for six months to a year. Anybody who has an available site, say, on the westside of Times Square, if they are ready to go, you will see a little boom in construction. Money follows tenants: If there are tenants for it, there will be money for it. We have taken out of the market as much space as there was vacant. So it has to mean that vacancy, at least logically if not practically, has gone to zero. And if vacancy goes to zero, new construction will happen."

Yet others point out that finding the construction workers to do the job may be difficult. A published report stated that several major development projects in the city, such as the AOL Time Warner headquarters at Columbus Circle, came to a halt as workers rushed to help with the cleanup in Lower Manhattan.

Once that is done, the challenge will be the reconstruction of the WTC area. Larry Silverstein, the New York City developer who purchased a 99-year lease on the property for $3.2 billion in July, has suggested constructing four, 50-story buildings on the site totaling 10 million square feet, roughly the same size as the destroyed twin towers. However, there are questions over whether he or the Port Authority of New York and New Jersey, which still owns the land, has the final authority on what can be done on the site. The PA appears to be in no rush to make a decision, yet Silverstein is determined to rebuild.

"If we don't rebuild it, we give in to the people who resort to destroying our way of life," Silverstein said in a written statement.--Reported by Eric  Peterson, Martin Elder, Maria Wood, GlobeSt.com and various wire and local newspaper reports.