By PETER GRANT
Special to RealEstateJournal.com
January 30, 2002
Many New York office-building landlords and brokers were disappointed by
last week's announcement by government officials of the long-awaited
economic-incentive plan for luring businesses back to downtown Manhattan.
The $250 million program represents the first influx of federal money for
retaining and attracting tenants to the area around the World Trade Center
since the Sept. 11 terrorist attacks. It had been eagerly anticipated by
downtown office-building owners and brokers, who have been suffering through
the bleakest leasing market in recent memory. But now that it's been
announced many feel let down, partly because the incentives amount to a lot
less than what they expected. "This is considerably less than some of the
incentive programs that were outlined shortly after Sept. 11," says Michael
Cohen, president of Williams Real Estate Co. "So it's only natural for
people to be disappointed."
The expectation was that businesses that signed leases downtown would get
grants of as much as $10,000 per employee. In fact the amount spelled out in
the program is much less. Under the plan, which was drafted by the state's
Empire State Development Corp., businesses that employ between 10 and 200
workers will get grants of $3,500 per employee for signing leases of at
least five years south of Canal and Rutgers streets. If the business had
been located in the World Trade Center or in other buildings damaged or
destroyed when the complex collapsed, it will get grants of $5,000 per
employee. (Companies that had been in the ground zero area and moved to
midtown also are eligible for some benefits, but the amount will be less and
the benefits aren't given automatically like the ones for companies leasing
Critics also point out that the program doesn't measure up against other
incentive programs in the region. For example, New Jersey has a Business
Employment Incentive Program, which has been steadily luring companies away
from New York, especially to the fast-growing Hudson River waterfront.
Participating companies receive grants for up to 10 years equal to 80% of
the state income tax their employees pay. New York, meanwhile, has its
lucrative Relocation Employment Assistance Program for businesses that
relocate to the boroughs outside Manhattan or north of 96th Street in
Manhattan. They get $3,000 per employee in tax credits for 12 years.
Compared with these programs, a one-time grant of up to $5,000 per employee
doesn't seem that much, some brokers say. "It's a nice gesture. It will help
some small businesses. But I think we're going to need more," says Bradley
Gerla, of Insignia/ESG.
State officials say the downtown Manhattan incentive program was the best
they could do with the federal funds they have received so far. The $250
million was part of a larger $700 million award from the Department of
Housing and Urban Development's Community Development Block Grant program
that was approved by Congress and President Bush in early November. But the
state decided to use the lion's share of the funds, $396 million, to
compensate small businesses for economic losses. The money left over was not
enough to provide $10,000 per employee in a tenant-incentive program, says
Michael Marr, spokesman for the Empire State Development Corp.
But Mr. Marr noted that more funds might be available for incentives in the
future. Congress has approved another $2 billion in HUD funds and there's
the possibility of more after that if President Bush ultimately makes good
on his promise to send the city a total of $20 billion. "This is the first
installment," Mr. Marr says. "We're hopeful to get much more in the future
that will enable us to broaden our efforts to revitalize downtown."
What's still unclear is whether the incentive program announced last week
will make much of a difference in the leasing market. On this question,
there's some difference of opinion among real-estate industry officials.
Richard Kennedy, a senior director at Cushman & Wakefield, predicts that
businesses will lease up to 500,000 square feet downtown in the next 90 days
thanks, in part, to the incentive plan. He notes that a $3,500-per-employee
grant roughly translates into $17.50 a square foot, assuming that businesses
generally lease 200 square feet for each worker. Using that same formula,
$5,000 per employee is equal to about $25 a square foot.
Supporters of the program note that businesses with more than 200 employees
can do even better than that. The program gives the state the ability to cut
special deals with large employers. Also, the program's benefits will be
complemented by other incentives that were in place before Sept. 11 for
tenants leasing space in older downtown buildings. "Tenants have been
waiting around for things to be announced and now that it's happened, I
think there will be an immediate response," Mr. Kennedy says.
But others aren't so sure. They point out that a $25-per-square-foot grant,
over the course of a 10-year lease, is only $2.50 a square foot. Will that
really make any difference, they ask, given the huge $25-per-square-foot
difference that already exists between downtown and midtown rents? "An extra
couple of bucks isn't going to sway anybody's decision," says one executive
who works for a major landlord.
Other Reasons to Move
Most brokers and landlords agree that up until now economics has not played
a huge part in downtown leasing decisions. Other considerations have been
much more important, such as concerns about possible air-quality problems
and transportation headaches resulting from damage to roads and train
stations. Also, in the wake of Sept. 11, many large financial-services
companies are making leasing decisions based on their desire to spread their
operations throughout the region. This need to diversify was the main reason
behind this week's announcements by Morgan Stanley and Goldman Sachs Group
Inc. that they were moving thousands of workers out of the city.
So far downtown has had limited success in luring back those companies that
were displaced on Sept. 11. Only 40% of 185 tenants larger than 10,000
square feet that had been located in the World Trade Center or the
surrounding damaged properties have announced that they will return
downtown, according to a survey by TenantWise.com, an online
real-estate brokerage. Just as concerning, leases are expiring in the next
five years for downtown businesses that employ 144,000 workers,
TenantWise.com reports. "Those companies will have the opportunity to
get up and move at no cost," says M. Myers Mermel, TenantWise.com's chief executive. "It remains
to be seen whether the incentives will be enough to stop them."
Looking on the bright side, downtown boosters point out that economic
incentives are only one piece of a much broader effort to rebuild the area.
Huge sums of money also will be spent to rebuild rail and road
transportation, compensate business owners and residents for losses and
rebuild the World Trade Center site. "If this were the entire state and city
program, I would think, that's absolutely right, it is insufficient," says
Carl Weisbrod, president of the Alliance for Downtown, a civic group. "But
it's only one component."
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