It's been a year since the Twin Towers fell. But for Brookfield Properties, owner of nearly all the adjacent World Financial Center, the pain may be just beginning.
By Devin Leonard
Monday, September 30, 2002
The flashbacks come at the oddest moments. Suddenly Ric Clark is
staggering through the streets of lower Manhattan, the air filled with smoke
from the flames beneath the heap of rubble and steel that was the World
Trade Center. Then Clark comes to his senses. When he looks out of the
window of his conference room, he can see that the debris has been carted
away. The sidewalks are teeming with office workers and tourists.
Everything's okay. Or is it?
No matter how hard he tried, Clark couldn't stop the corporate exodus. Though Merrill Lynch and American Express returned, Goldman Sachs scattered its employees in New Jersey and elsewhere; CIBC World Markets and Nasdaq set up shop in Midtown. "It's extraordinary in this recession that companies are willing to pay 50% to 100% more rent to be in a neighboring office district," says M. Myers Mermel, CEO of TenantWise, a New York City real estate broker.
Then Lehman put its 1.1-million-square-foot headquarters in Three World Financial Center up for sale. Earlier this month Brookfield bought it for $158 million--less than half what it might have been worth last year. Why on earth would Brookfield increase its downtown holdings when its own tenants were fleeing the area? According to Clark, the company has cash to invest, and there's no better place than downtown. Brookfield also wanted to prevent a competing property owner from getting a foot in the door of the World Financial Center. But now Brookfield has another one million square feet of empty space on its hands--a mighty big number for a company that depends on lower Manhattan for such a big chunk of its net operating income.
It's at times like these that Clark is relieved he did all those long-term deals at the height of the real estate boom. Goldman's lease runs out in 2015. The leases on Nasdaq's space and Lehman's space expire in 2021. So those tenants, he says, are on the hook for years to come. "If they had a lot of space coming due to be leased, I'd be concerned," says Greg Brooks, senior vice president of Cohen & Steers, a real estate fund company that is one of Brookfield's largest shareholders. Indeed, in early September, Brookfield's stock had recovered from a post-Sept. 11 swoon and climbed back to $19 a share--nearly the same price it was on the eve of the attack.
But there are a few things Wall Street doesn't appear to be taking into account. First, not all of Brookfield's space is on long-term leases. In the next four years Brookfield must fill two million square feet of space downtown--nearly 5% of the company's entire office portfolio. For example, Dow Jones, whose lease on 323,000 square feet in One World Financial Center lapses in 2005, is already shopping outside lower Manhattan. Even if the company stays at the World Financial Center, it may be unloading a good deal of its old space. When it moved back in August, Dow Jones reoccupied only three of its seven floors.
Though Clark says that Brookfield has plenty of time to renegotiate those shorter-term leases, the reality is that he needs to start doing it now: Large leases are usually negotiated three years before they begin. And the talks will be taking place in perhaps the worst possible climate. If all those offices become vacant and if Brookfield can't fill its existing vacancies, the company could lose as much as $100 million a year in rent. Clark insists he's in discussions with six companies and adds that Brookfield could sit on all the space if it doesn't get the right offer. But "investors wouldn't like it," he concedes. Probably not. The company has already lowered its net income growth target next year to 12%.
Then there's the fact that Brookfield is now competing with some of its own rent-paying tenants. Lehman and Nasdaq can't afford to sit on their empty space, so they are trying to cut their losses by subleasing it. And they're willing to do so for less than Brookfield. According to Julien J. Studley, a national real estate brokerage, the most recent average asking price for the best office space downtown was about $50 a square foot. Lehman recently leased 84,344 square feet to the law firm Richards Spears Kibbe & Orbe for only about $40.
Though Brookfield is betting that rents will rise in lower Manhattan, exactly when is anybody's guess. The city's last real estate recession ended in 1995 after eight years. Lower Manhattan rents didn't pick up for another two years. Now the situation is even more perplexing. Downtown lost 13.4 million square feet of prime office and retail space in the Sept. 11 attacks. Yet the amount of available space has nearly doubled in the first six months of the year, to 20%. "We've got our work cut out for us," Clark sighs.
No wonder Brookfield executives talk so much about the redevelop-ment of lower Manhattan. Brookfield's conference room is filled with architectural plans. There is a drawing of a "downtown Grand Central Station" beneath ground zero that would deliver millions of commuters each day to Brookfield's doorstep. There are models of a memorial for the victims of Sept. 11 that Brookfield believes will attract hordes of tourists, transforming the World Financial Center's restaurants and shops into gold mines. "We're going to have somewhere between six million and ten million people [a year] down here," says John Zuccotti, Brookfield's co-chairman.
What Clark doesn't want to see, obviously, is a bunch of new office towers going up at ground zero to replace all or part of the 13.4 million square feet of space lost on Sept. 11. A spokesman for Larry Silverstein, head of a group of investors that holds the lease of the complex, says the developer hopes to have the first of several towers ready for occupancy by 2008. That's the last thing Brookfield needs at the decade's end when it's courting Merrill Lynch, which occupies four million square feet in the World Financial Center. Clark disparages Silverstein's plans: "What's the hurry to build any more office buildings? From a practical standpoint, it's not going to happen for a long time anyway."
He's probably right. When it comes to mega-developments, nothing goes according to schedule in New York City. The World Trade Center, for example, took 11 years to build. Brookfield can't afford to wait that long for lower Manhattan to turn around. Ric Clark has some office space he'd like to show you now.
ęCopyright 2002 Time Inc. All rights reserved