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Disappearing Downtown?

Employers scatter around metro area, driven by deep emotion and transportation problems; huge damage already done; a comeback possible?

Crain's New York Business

By Lore Croghan

January 14, 2002

Jordan Gruzen is a self-professed booster of Battery Park City, where he lives and has designed several buildings. After the 90 West St. offices of his architecture firm went up in flames on the day the Twin Towers collapsed, he wanted to build a new office downtown.

Instead, he relocated Gruzen Samton to the West Village at 320 W. 13th St. Some of his employees narrowly escaped death and saw others around them die.

"We felt a little guilty about leaving downtown, but the staff was very negative about it from an emotional point of view," he says.

Scores of office tenants such as Gruzen Samton have fled the neighborhood since the terrorist attack, taking more than 62,000 jobs with them. Many of them seem to be gone for good.

The bleeding continues. Driven by the deep emotions associated with Ground Zero and the transportation problems that still exist around it, downtown companies are bailing out as they make long-term decisions about where to re-establish offices. More are expected to leave as their leases expire.

Very few new office tenants are negotiating to take their places.

"In terms of being able to attract tenants, downtown is the least desirable office market in America," says Justin Stein, a regional director of client services at brokerage Grubb & Ellis New York Inc.

The balance is expected to shift eventually, though how long it will take is unclear. Some displaced companies will come back; a handful of big tenants have pledged to return nearly 32,000 employees to properties that were damaged in the attack but repaired. Some firms that want to leave the area will realize they can't afford to vacate their spaces given the difficulty of finding subtenants, and will stay.

Other businesses are expected to come to the neighborhood to take advantage of government incentive packages announced late last month, especially if landlords dish up deep rent cuts as well.

Until incentives and rent reductions kick in, though, the disaster-plagued neighborhood continues to struggle, as companies take space elsewhere in the city or region.

The departures from the city are the most troublesome; for every 10,000 jobs that move, the gross city product drops by $3 billion, says Barry Gosin, chief executive of brokerage Newmark & Co. Real Estate Inc.

About 17,000 jobs have gone to New Jersey, and 5,300 went to other locations outside the city, according to a survey by brokerage TenantWise.com. Among the largest tenants of the World Trade Center or surrounding buildings, companies employing about 3,400 people are still undecided about where to resettle.

Much of the diaspora from downtown is landing in midtown, where more than 27,000 people either moved into new offices or were sent to their companies' own facilities. They wanted or needed to stay in the city-just not in downtown.

Right after the attack, 15 blocks of 100,000 square feet or more were available for rent downtown, but virtually no one wanted them then. They are still vacant now.

Even tenants with the deepest of roots in the neighborhood found it too fraught with uncertainty, such as the Port Authority of New York & New Jersey itself, which owns the World Trade Center site.

"Uncertainty means risk. People were concerned about their ability to keep their business intact," says Howard S. Fiddle, an executive managing director at Insignia/ESG Inc. and leasing agent for 225 Park Ave. South, where the Port Authority rented 300,000 square-feet.

Psychological distress is the major motivator for shunning downtown.

"People associated the place with the event," explains M. Myers Mermel, chief executive of TenantWise.com. "They were worried about transportation, and the environment, and the general level of fear."

Emotional considerations

Sun Microsystems Inc., which lost its office at 2 World Trade Center, chose a new location in midtown at 101 Park Ave. because "they needed to be considerate of employees' feelings, and of clients' feelings," says the company's broker, Kathryne Lyons, a senior vice president at Jones Lang LaSalle Inc.

Buildings that directly border Ground Zero, such as 1 Liberty Plaza, may have the most trouble keeping and attracting tenants. HQ Global Workplaces, for one, hasn't decided whether to return, because it's not clear it will be able to attract clients to fill its temporary office suites there. "We just don't know yet," says Mary Berger, HQ's area sales manager.

Transit derailment

Transportation problems remain a major reason for businesses to avoid the area. Many set up shop there in the first place because their executives lived in New Jersey and liked the easy commute. It will take at least 18 months to build a temporary PATH station to re-establish the transit connection.

Further attrition downtown will come in the next year and a half, as troubled companies file for bankruptcy, predicts Douglas Danzig, chairman of the national real estate department of law firm Fulbright & Jaworski. This will allow them to break their leases and leave the area.

A few indications of the countertrend that's expected to develop later this year are showing up. Some downtown tenants with leases set to expire in the next year and a half are trying to knock down renewal prices by 25% to 30%. And a few big companies from midtown that are looking to take advantage of government incentives are starting to poke around downtown, such as accounting firm KPMG.

It's unclear, though, how low rents will have to go, or how high the government incentives need to be. Some tenants are avoiding downtown at almost any cost.

Gruzen Samton, for one, finds comfort in the benign low-rise neighborhood it now calls home, which is close enough to the Hudson River corridor that some employees bicycle to work. Its new office was once occupied by modernist architect Edward Larrabee Barnes.

As a sign that the Gruzen Samton architects are feeling their creative verve return, after they moved into their ready-built space, they decided to redo it.

"We wanted to let in more light," Mr. Gruzen says.

Copyright 2002 Crain Communications, Inc

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