Now that the unthinkable has happened, where does the country — and for that matter the local commercial real estate industry — go from here?
While our nation''s leaders quickly mount a global campaign in response to the heinous terrorist attacks levied on the World Trade Center (WTC) and the Pentagon on Sept. 11, a different type of frenzied activity is taking place in the city that never sleeps.
Brokers are scrambling to find space for displaced tenants. And even as the debris from the terrorist attack continues to be hauled away — some 133,000 tons and counting — the development community already is thinking of ways to rebuild an even more vibrant New York.
The devastation is staggering. The New York real estate market is reeling after the complete loss of approximately 13.4 million sq. ft. of office space following the explosions that caused the collapse of the 110-story twin towers — Towers One and Two — and four neighboring buildings in the WTC complex.
The explosions stemming from the aerial attacks, combined with falling debris and dust, caused structural damage to 4.8 million sq. ft. of office space in neighboring buildings, according to a special report on the attack prepared by New York-based Insignia/ESG. In addition, the report stated that more than 10 million sq. ft. of office space suffered damage to either the windows or building facades. All totaled, the attack damaged or destroyed 28.7 million sq. ft. of office space in Downtown Manhattan, according to Insignia/ESG.
The office vacancy rate in Manhattan, which had hovered around 7% to 8%, is expected to drop to 2% to 4% once the dust settles and displaced tenants find either temporary or permanent space elsewhere in Manhattan or the tri-state area.
Commercial real estate developers, brokers and consultants are working together to help these tenants find new viable office space. During the days following the tragedy, the Real Estate Board of New York set up a listing of all the available space in the city on its Web site. Likewise, for tenants displaced by the WTC attack, Bethesda, Md.-based CoStar Group made available for free its database listing of office space in New York.
“The major owners have all agreed to hold the line on rents to what they were before Sept. 11,” said Douglas Durst, developer and owner of The Durst Organization in New York and a member of the Real Estate Board. “It''s about helping those who have suffered from this cowardly act. It''s also in our own long-term interest to keep as many tenants in New York City as possible.”
Rents before the disaster were approximately $68 per sq. ft. for Class-A office space in Midtown Manhattan and $49 per sq. ft. for Class-A office space in Downtown Manhattan, according to Northbrook, Ill.-based Grubb & Ellis.
The rents are expected to remain stable while landlords assist displaced tenants, but following this period, Grubb & Ellis expects rents in the New York office market to trend upward, despite the economic downturn in the U.S. economy. The real estate firm explained that the tragedy of Sept. 11 would probably ensure the New York office market remains the nation''s tightest for the next several years, unless there''s a major downturn in the financial industries.
The weeks following this catastrophic attack brought displaced office tenants out in droves to find space suitable to get their businesses up and running. Almost 1,300 businesses in the area were affected by the attack. Thirty-one tenants occupying 100,000 sq. ft. or more were displaced by the disaster.
According to Insignia/ESG, the largest displacements included: Merrill Lynch (3.1 million sq. ft.); Morgan Stanley Dean Witter (1.4 million sq. ft.); Salomon Smith Barney (1.4 million sq. ft.); American Express (1.2 million sq. ft); and The Bank of New York (800,000 sq. ft.).
As of Sept. 26, Insignia/ESG had negotiated 10 leases, or 1.5 million sq. ft., on behalf of displaced tenants. The company had an additional 3.5 million sq. ft. pending.
Tenants are expected to gobble up most of the 25.8 million sq. ft. of available space — including 16.3 million sq. ft. of direct space and 9.5 million sq. ft. of sublease space — that flooded the market due to the dot-com slide, according to Insignia/ESG. Some of these tenants are consolidating into existing offices, while others have found office space that''s ready for immediate occupancy.
Still others are in search of their desired square footage at an affordable price either in the Big Apple or in nearby markets, including Jersey City, N.J.; Long Island City, N.Y.; Westchester, Conn.; and Brooklyn, N.Y.
Compassion in the face of crisis
Some displaced tenants also are among the unfortunate companies that experienced casualties resulting from the attack. In all, approximately 6,000 people are missing and presumed dead. It''s a horrific situation that the commercial real estate industry never thought it would have to encounter.
“Most of the companies and folks I deal with on every side of real estate are trying to approach it as a group,” said Michael Berne, senior managing director with the New York office of Grubb & Ellis. “It''s a unique situation that''s never happened before.”
Jacques Gordon, international director and co-chair of global research for Chicago-based Jones Lang LaSalle, doesn''t take his responsibility in the crisis lightly. “Our industry should remember that the nation is watching us. Now''s the time to take the high road, and do what''s right for the economy and New York City,” Gordon said.
Business as usual has turned to crisis management in the days and weeks following the tragedy. Brokers are working with displaced and shocked tenants, some of whom also are dealing emotionally with the loss of employees. Negotiating deals for these tenants requires more than just the usual real estate expertise, according to Charlie Shorter, principal of New York-based Ernst & Young Real Estate Advisory Group. The delicate situation calls for a compassionate and collaborative approach to deal making.
“Consistent with what you''ve seen in the rest of the city, the real estate industry has been equally cooperative,” said Woody Heller, managing director of the capital markets group for Jones Lang LaSalle in New York. Heller explained that New Yorkers are responding in a variety of ways. For example, law firms have offered space to competing law firms until they can get back on their feet. And at least one commercial real estate agency, Kenneth D. Laub & Co., has offered to find displaced tenants space for no fee.
“To date there has been a very emotional and businesslike approach — no gouging to speak of in the marketplace,” said Josh Kuriloff, executive vice president of New York-based Cushman & Wakefield (C&W), the city''s largest commercial real estate services firm. Firms such as C&W are working with existing clients and new ones. C&W has established a “war room” to assist others, whether or not the company is directly involved in the transaction. Also, C&W has set up a Web page on which displaced tenants can see a list of available office space that C&W is marketing.
“I must tell you, there''s a true sense of guilt at the thought of being opportunistic in this crisis,” Kuriloff said. “As a firm, we are truly helping our clients find homes in an efficient and business-like manner.”
Sea change in office sector
Prior to the terrorist attack, office brokers had noticed a decreasing velocity of deals and an availability of approximately 26 million sq. ft. of office space. Like the rest of the country, New York already was feeling the effects of an economic slowdown. In particular, Wall Street had been suffering badly in the wake of the tech wreck, and quarterly earnings reports were dismal.
The terrorist attack has only served to exacerbate the problems in the public markets, careening the U.S. economy into what economists predict will be a full-blown recession lasting at least through the end of the year. The New York Stock Exchange stood eerily silent for four business days following the attack. And when trading did resume Sept. 17, the Dow Jones Industrial Average dropped 684 points, a one-day record, closing below 9,000 for the first time in more than two-and-a-half years.
Prior to Sept. 11, the office market had been undergoing a transition from a landlord''s market to a tenant''s market due to the abundance of sublease space. Almost overnight, the tables turned and the city finds itself once again in a landlord''s market, said Drew O''Malley, managing director and head of the New York region for CSFB Realty.
Normally, it would take a broker between six months and two years to lease millions of square feet of space. In this extraordinary case, the leasing process is literally happening in just days, explained Kuriloff. “Our firm has been working around the clock since the crisis. I''ve never witnessed the ability to complete these transactions so efficiently,” he said.
In fact, the entire commercial real estate industry is working in cooperation with tenants, the Economic Council of New York and civic leaders to restore businesses to working order.
“This flurry of activity will abate very quickly,” said Jeffrey Bernstein, managing director at Insignia/ESG. “New York is a huge engine, and it''s moving very quickly.” Bernstein said Insignia started receiving calls a few days after the tragedy, and the phone''s been ringing ever since. He said that as a brokerage firm, Insignia is trying to negotiate aggressively on behalf of displaced tenants.
The short-term goal is to get affected businesses established in working offices. Then in the following few months, Heller of Jones Lang LaSalle anticipates a flurry of spending on office equipment such as furniture, computers and telephones. Heller also predicts that the bricks-and-mortar fallout from the terrorist attack will force some firms to relocate outside the city. “There aren''t enough large spaces to accommodate all of them,” Heller said.
In the near term, as some companies choose to relocate, Manhattan''s tax base will take a direct hit, industry experts predict. The market also will experience a loss in spending by office workers as hordes of tenants set up shop elsewhere for at least the short run.
But Heller and other industry players said they expect tenants to return to the city due to the quality of life in Manhattan. Heller admitted that any tenant''s decision to return likely will hinge on the overall environment, as well as the mood of leaders and residents of the city.
Gauging long-term effects on the office market
Rescue and recovery officials at the site, now known infamously as “ground zero,” are overseeing a massive cleanup effort of incomprehensible proportions. Undaunted, the leadership of the city seems to favor rebuilding, but so far no specific proposal is under serious consideration as the government and the private sector struggle to determine what will be built.
And just days after the attack, Larry Silverstein, the developer who purchased a 99-year leasehold on the WTC towers for $3.2 billion in July, announced plans for rebuilding the area. Even so, Silverstein must work in conjunction with the owners of the building, the Port Authority of New York and New Jersey, as well as state and local officials.
It''s doubtful that “rebuilding” would mean the construction of two more 110-story towers. One informal proposal calls for the construction of four, 50-story buildings and the establishment of some sort of memorial to honor the victims of this tragedy. According to a Grubb & Ellis special report on New York, the rebuilding of Downtown will provide a surge in construction and development activity, but more than likely it will take more than five years for the city''s inventory of office space to return to its pre-disaster level.
For the real estate community, Silverstein''s announcement to rebuild didn''t come as too much of a surprise. “We all hoped that this is what he would say and do,” said Justin Stein, regional director of client services at Grubb & Ellis.
O''Malley of CSFB Realty said that any rebuilding project will likely be put on a fast track once an idea is agreed upon, particularly because local and state governments appear committed to providing financial assistance. Undoubtedly, major corporations will want to lease space in any future development at the site, O''Malley believes. “The financial center is not going away,” he declared. “It''ll always be in New York, and it''ll always prosper.”
Carliff of C&W echoed the sentiments of O''Malley. “We have not seen a flight out of New York.” Those companies forced to relocate probably will return to lower Manhattan when office space becomes available, Carliff predicts.
“There''s definitely going to always be something about being close to your customers,” O''Malley said. He expects that firms will migrate back to Manhattan when new buildings are constructed and ready for occupancy.
The land of empty hotel rooms
As a prime vacation and business travel destination, New York normally is one of the best-performing hotel markets in the world. Through June 2001, hotel occupancy in the Big Apple registered 76.1%, down from 84% during the same period in 2000, according to San Francisco-based PKF Consulting, which specializes in the hospitality industry. A decrease in corporate business travel and the opening of new hotels contributed to the occupancy decrease, according to PKF.
At press time, the terrorist attacks were having a profoundly negative effect on the hospitality industry and the entertainment sector, including Broadway, which has been forced to close four shows since Sept. 11. Other shows also are in financial trouble.
Even with Mayor Rudy Giuliani''s plea for visitors to help by filling New York restaurants, shops and hotels, the city''s tourist numbers have plummeted, according to John Fox, senior vice president with PKF Consulting in New York. Hotel occupancies in the weeks after the attack sunk to unheard of lows of 30% to 40%, compared with this time last year when occupancies registered 90%.
“This event has devastated the hotel market in New York,” Fox said. What Fox is loath to predict is the duration of this incredible slowdown. “It could be 30, 60, 90 days or longer. It''s anybody''s guess at this point.” So far, New York hotels have been forced to lay off employees and to reduce operating expenses as warranted.
An August 2001 report from PKF Consulting found that the average daily rate (ADR) of hotel rooms in Manhattan was $209.35, a 3.4% decrease from the ADR of $216.70 in 2000. After the attack, the pricing remained fairly stable. According to Fox, pricing should remain at nearly the same levels. He added that this drop in visitors isn''t a pricing issue. “I wouldn''t advise anybody to do any price-cutting,” he said.
Fox said that hotel owners and operators in New York are better positioned to weather this economic downturn than the 1990s recession. “There''s a lot less debt on hotel properties than the early ''90s, and hotel owners have learned to operate more efficiently.”
Four hotels in close proximity to the World Trade Center were damaged or destroyed as a result of the attack. The Marriott World Trade Center Hotel, with 750 rooms, was destroyed. Three other hotels suffered damage, including the 550-room Hilton Millennium, the 400-room Marriott Financial Center Hotel and the 400-room Embassy Suites. Before the disaster, New York boasted 60,000 available hotel rooms.
Last year, 37.4 million visitors spent a total of $17 billion, according to NYC & Co. Fox explained that the terrorist attack occurred two months before the busiest travel season in New York, which runs from Nov. 15 to Dec. 15. Whether the travel industry will rebound by the start of that period remains to be seen, Fox said.
Will retail continue its reign?
With a drop in tourist dollars, retailers of all niches and sizes will feel the reverberating effects of the attack. That sobering news holds true for even department store icons such as Macy''s, Bloomingdale''s and Saks Fifth Avenue, as well as specialty retailers located in all sections of the city.
Fifth Avenue, Madison Avenue and 57th Street remain the hottest retail districts in the city. These streets are lined with national and international brands. Soho boasts its own flair reminiscent of the Left Bank of Paris, according to Faith Hope Consolo, vice chairman at Garrick-Aug Associates, a retail brokerage firm in New York.
Soho, dubbed Lipstick Alley, is the hip place for accessory stores selling makeup, handbags and shoes. The average asking rate on 1,643 retail locations was $77.50 per sq. ft. in 2000, but Consolo said early estimates reveal that the price per square foot has decreased about 8% this year. The supply has remained at about the same level because new stores have opened and others have closed their doors.
Retail space destroyed after WTC attacks
The terrorist attacks erased the 472,000 sq. ft. Westfield Shoppingtown WTC, the retail component of the twin towers, which was located on the ground level. At $900 per sq. ft., the mall had one of the highest producing sales volumes in America, according to Los Angeles-based Westfield America Inc., which along with Silverstein held a 99-year lease on the WTC complex.
Replacing the dollars from this high-traffic area will be a focal point. While the immediate needs of displaced retail chain stores may not be as critical as office tenants affected by the attack, displaced stores will be looking to replace that lost dollar, said Bill Melville, senior director at Lansco Corp., a New York-based retail brokerage firm.
Regardless, retailers still are reporting quite a bit of shopping activity. “People can''t stop shopping forever,” said Consolo. She expects the holiday shopping season in the city to be “not great, but good.”
“In general, demand is still strong,” Consolo added. “I haven''t seen any leases out there that are not being signed. If anything, there are stores on a national and regional level [that were formerly located at the WTC] that will need to be replaced.”
Melville said that retail tenants displaced by the WTC attack might consider building replacement stores on the site, but in the near term he expects some of the retailers to expand into different areas of the city.
According to Melville, retailers thinking of entering the Manhattan market should consider the long-term picture. “If they [retailers] are thinking of doing something like an entry into the New York market, by the time they negotiate space, sign a lease and establish a store, it''ll be nine months to a year from today,” Melville said. “They can''t think in terms of today''s headlines.”
Melville also expressed reassurance that retailers are still signing leases and going forward with plans made before the attack. Some retailers have put decisions on hold, but no stores are pulling out of the market.
Consolo said there are conflicting messages. Consumers are returning to stores and shopping centers, but other sectors, such as the hotel industry, are reporting huge drops in occupancy with no travelers in sight. She said tourism numbers already had been slumping before Sept. 11, so the attack resulted in a double-whammy for the retail sector. Holiday shopping will not completely dry up, however, as consumers will want to purchase items for their families and loved ones, Consolo said.
Slowly but surely, New Yorkers are returning to the stores. Melville said city residents have to lead the pack. “The only thing we can do as New Yorkers is to continue to set the example, and go out and live our lives and carry on.”
Multifamily market remains robust
The multifamily market in New York continues to thrive with a vacancy rate between 2% and 3%. It''s still a challenge to find an apartment in New York as demand outstrips supply, according to David Michonski, CEO and chairman of the residential division at Coldwell Banker Commercial Properties.
“We are definitely in a transition period. We''re transitioning from the frenzied days of last summer,” said Michonski. “We haven''t really seen a full-blown downturn yet, just a small uptick in inventory.”
The only area that is experiencing a blip is Downtown near the site of “ground zero.” The WTC attack forced the temporary displacement of thousands of lower Manhattan residents. Many of these residents were allowed to move back into their residences, but some are months away from returning. Other residents are questioning whether they want to continue to live in such a desolated area.
New York is home to some of the most expensive apartments in the country, but prices appear to be leveling off. “The era of high-priced rentals (monthly rents of $4,000 to $5,000) is over for the time being,” Michonski said. Even so, supply continues to be an issue.
According to the Real Estate Board of New York, there is demand for 40,000 units a year, but the city is adding only 3,000 to 4,000 units per year. The market definitely has peaked somewhat, according to Larry Sicular, executive director of the appraisal and consulting firm of Brown Harris Stevens in New York. “What we''re seeing this year is prices are beginning to fall,” he said.
The long-term outlook
With the uncertainty spawned by the terrorist attacks, the local economy is shaky right now, but everything is relative. The commercial real estate sector is expected to fare better than the volatile stock market, according to Gordon of Jones Lang LaSalle. “The attack on the World Trade Center and a whole host of other ill effects will plunge us into a deeper recession,” Gordon explained. Gordon believes the key to recovery is to move slowly and deliberately, and to avoid rushing into decisions.
For New York, rebuilding the city and the financial district has become a top priority. “This is a great city from a civic point of view and a business perspective,” boasted Carliff. “This city will rebound.”
NREI Associate Editor Cristina Gair is based in New York.
WHAT''S UNDER CONSTRUCTION IN MANHATTAN?
Nine major office developments were in the pipeline in Manhattan at the time of the attack. Most of these projects are build-to-suits with 87% of the space pre-leased. Listed below are fully pre-leased office buildings under construction. The information includes the building location, main tenant, square footage and the expected completion date.
- 1 Rock Plaza W., Morgan Stanley, 1.04 million sq. ft., April 2002
- 383 Madison Ave., Bear Stearns, 1.2 million sq. ft., April 2002
- 10 Columbus Circle, AOL Time Warner, 1.6 million sq. ft., December 2003
- 731 Lexington Ave., Bloomberg L.P., 850,000 sq. ft., December 2003
Listed below are office buildings under construction in Manhattan with available space. Details include building location, signed tenant, total square footage, square feet available, and expected completion date.
- 222 E. 41 St., Jones Day, 373,646 sq. ft., 120,000 sq. ft. available, April 2002
- 5 Times Square, Ernst & Young, 1.1 million sq. ft., 20,000 sq. ft. available, April 2003
- Times Square Tower, Arthur Andersen, 1.25 million sq. ft., 500,000 sq. ft. available, April 2003
- 300 Madison Ave., CIBC, 1.2 million sq. ft., 200,000 sq. ft. available, June 2003
- 610 Eighth Ave., The New York Times, 1.4 million sq. ft., 500,000 sq. ft. available, September 2003
Source: CB Richard Ellis
Venerable brokerage firm copes with Sept. 11 tragedy
NEW YORK — For commercial brokerage firm Julien J. Studley, the deadly attack on the World Trade Center (WTC) was personal. Two employees located in the company''s Downtown office on the 86th floor of Tower One of the WTC, one floor below where the first hijacked plane hit, failed to escape before the tower''s collapse.
Jim Gartenberg, an associate director and broker with the firm, and Patricia Puma, an administrative assistant, were trapped together on the 86th floor. They could not escape due to debris blocking the stairways. Another employee, Jan Maciejewski, an information technology consultant assigned to the Midtown New York office, also is listed as missing.
Gartenberg and Puma spent their last precious moments phoning loved ones as well as emergency services and human resources personnel before the building crumbled. Gartenberg and Puma were hoping emergency personnel would arrive to lead them to the safety of solid ground. But the building collapsed before the crews could arrive.
Chairman and CEO Julien Studley said the loss of employees in this vicious attack was staggering. He takes small comfort in the fact that “by some miracle” 10 other employees who worked in the tower weren''t at the office at the time of the attack. “It would have been even more catastrophic,” Studley said.
Two other employees arrived at the WTC tower around 8:50 a.m., just a few minutes after the initial attack. One was in the downstairs lobby, another was about to board the elevator. This close call is affecting these two employees greatly, Studley explained. “These people have really been highly traumatized,” he said.
At home on the Upper East side when the attack occurred, Studley tried to get information about the impact on the Downtown office. “They didn''t have detailed information on where the plane hit,” he said.
During those anxious moments, Studley felt the same shock and confusion that registered across the nation. Like others, he questioned whether the first impact was an accident, which soon was answered when the second plane slammed into Tower Two.
Working through their grief
For most commercial real estate firms, the process of assisting clients who suffered the loss of both employees and office space in the attack was a delicate one. For Julien J. Studley, the burden was even greater because of the company''s personal loss.
Following the attack, the company is addressing the tragedy one day at a time. First, the company offered counseling to those employees trying to cope emotionally with the crisis. And because the Studley office at the WTC was destroyed, the company was forced to relocate 10 employees to either the corporate headquarters located in Midtown at 300 Park Ave., or the Edison Park, N.J., office at 333 Thornall St.
Easing back into a normal work routine has been difficult for most New Yorkers affected by the attack. Studley admitted that some employees at his firm have had problems coping. “You have to deal with it,” he said. “You have to continue with life.”
The tragedy brought the employees at Julien J. Studley closer together, according to the chairman. At the memorial service for Jim Gartenberg, nearly 1,000 people attended, including many employees of the firm. Six people spoke at the service, including Gartenberg''s brokerage partner at Studley. At press time, memorial services had not been held for Puma and Maciejewski. Studley said most employees planned to attend to show their support for the victims and their families.
The brokerage firm has established the Studley Memorial Fund. The company will make contributions to the fund that will assist the families of the three victims. Contributions from Studley employees and other patrons also are welcome.
In the weeks following the attacks, brokers have been scrambling to find suitable office space for tenants. Transactions have occurred at record speeds. But a chilling reminder of the tragedy remains: the gaping hole where the twin towers once stood.
Two days after the attack, Studley smelled the acrid smoke filtering from “ground zero” through Midtown Manhattan. He was reminded at that moment of an attack that neither he, nor his employees, would ever be able to erase from memory.
— Cristina Gair