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WTC Area Tenants Find Silver Lining in Net Crash

Scoop up furnished dot-com spaces; mutual benefits

Crain's New York Business

By Mary Sisson

January 14, 2002

With its textured carpets, sliding glass doors and silver-ceilinged lobby, the new international headquarters of Helen Keller Worldwide is one stylish office.

"It's really nice," says the organization's president, John Palmer. "This is better than we thought we would do."

The nonprofit, which fights preventable blindness, was hardly expecting the best when it was forced to find a new location on short notice. Helen Keller Worldwide's old office was located at 90 West St., near the World Trade Center. When the towers fell, the force of the collapse devastated the office. A fire destroyed computers, records and historical archives, including irreplaceable letters written by founder Helen Keller.

Yet, like many companies and organizations once located in and around the trade center, Helen Keller Worldwide quickly found a well-wired, furnished office for a reasonable rent in space that was made available by a different kind of collapse: the Internet bust. The nonprofit's new office, at 352 Park Ave. South, was built out by Jupiter Media Metrix, but the Internet consulting firm occupied it only briefly before consolidating operations.

Spaces once occupied by new media firms have proved to be welcome havens for refugees from the World Trade Center attack. Companies ranging from CIBC World Markets to Zurich Reinsurance have snapped up large chunks of high-tech space to get back up and running. In the process, they have allowed troubled dot-coms to escape expensive, long-term leases, despite a slow market for commercial real estate.

Pop goes the market

"There has been, for a very unfortunate reason, this pop in the market," says Mark Mandell, a senior director at Cushman & Wakefield Inc. "Dot-coms benefited, landlords benefited and the (displaced) tenants benefited."

The Internet collapse, combined with a slowing economy, meant that there was plenty of vacant new media space available. By the end of the first half of 2001, Internet and telecommunications companies had put more than 10 million square feet of office space on the market in Manhattan, according to brokerage TenantWise.com.

Dot-com offices can be especially attractive to tenants in a hurry. Unlike some sublets, dot-com space is often fully furnished and wired with the latest in telecommunications technology.

Before the attack, the fact that new media offices were furnished was a liability. Dot-coms "wanted to appear funky," says Peter Turchin, a managing director at Insignia/ESG Inc. Bright colors, weird furniture and open layouts without offices were the norm-hardly attractive to more traditional businesses.

The attack made prospective tenants focus on the essentials. "You might not like the color, but the value (of dot-com space) is in the technology," Mr. Turchin says.

And open layouts have an advantage: More workers can be put into them, because space is not eaten up by hallways and walled-in offices. For companies dislocated because of the World Trade Center collapse, the need to get as many employees as possible back behind a desk has been paramount.

The emphasis on speed has required brokers, landlords and tenants to use what Barry Gosin, chief executive of Newmark & Co. Real Estate Inc., calls "unusual techniques for unusual times."

Instead of signing long-term leases, which call for lengthy negotiations, some displaced WTC tenants have been inking modified license agreements, which are usually used only for occupancies of 30 days or less. These modified agreements, however, apply for much longer terms, 10 or 15 years. They also require that leases be negotiated, but those are taken care of after tenants move in.

"It's amazing what a deadline can do," Mr. Gosin says.

Despite the obvious need of former trade center tenants-and the occasional bidding war among them-rents for old dot-com space have stayed relatively stable, ranging from the low $30s to the mid-$50s per square foot, according to Mr. Turchin.

That's because many dot-coms have an equally urgent need to get out of leases: Even if firms have ceased operations, they must continue to pay rent or risk losing a security deposit or being sued. "They're really not interested in getting an extra dollar so much as getting rid of the liability," says Mr. Turchin.

Straight to the source

The well-publicized problems of dot-com companies have made would-be tenants reluctant to sublease from shaky operations. Consequently, in many of these deals, the new tenant is not subletting space from a new media firm but instead is negotiating a new lease with the owner while the dot-com surrenders the old one.

That sits fine with landlords, who welcome the rock-solid credit of many displaced World Trade Center tenants. The deals work out well for the dot-coms, too. Take LivePerson Inc., a customer service firm for companies doing business on the Internet, which was released from an 82,000-square-foot lease at 330 W. 34th St. when The Bank of New York took over that space.

LivePerson got back its $4.2 million security deposit. "That was like a $4 million investment in the company-for free," says LivePerson's president and chief financial officer, Tim Bixby.

The rent on the old space was $250,000 a month. The firm now rents a 7,000-square-foot office for less than $20,000 a month. While the old rent wasn't going to break the company, Mr. Bixby says, the savings "just frees us up significantly."

And LivePerson was able to get its new space without much trouble; it just found a furnished office vacated by a troubled dot-com. "It was sort of musical chairs," Mr. Bixby says.

Copyright 2002 Crain Communications, Inc

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