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Incentives May Not Keep Tenants Downtown

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 space downtown.)

Better Deals

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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