The Sept. 11 destruction of most of lower
Manhattan's prime office space only hastened an exodus that has been going
on for years. Can downtown recover?
By Devin Leonard
Monday, October 29, 2001
Like most landlords, Mitchell Hersh loves to trumpet his buildings'
advantages. On this early October day, he gestures to the picture window in
Plaza 3 in Harborside, his office complex on the Jersey City waterfront.
Through the window, just across the Hudson River, a visitor can still see
smoke rising from the rubble of the World Trade Center. "Notwithstanding the
tragedy across the harbor," Hersh says, "there are world-class views."
Hersh, CEO of Mack-Cali Realty, a large New Jersey property owner, has been
showing off his views a lot lately. Since the terrorist attack, Hersh has
been negotiating leases with such displaced companies as Morgan Stanley and
Deutsche Bank. He has "handshake deals" to fill most of a 34-story office
tower under construction at Harborside that was only one-third leased before
the Trade Center fell. And the real estate brokers from Manhattan keep
calling. There's one waiting in the reception area to see Hersh now. "Ira,
are your clients here yet?" Hersh asks him. "If not, I'm just going to step
outside and give this guy a quick tour."
Hersh is playing a small but significant role in the remapping of Wall
Street. The Sept. 11 attack on the World Trade Center damaged or destroyed
29 million square feet--30%--of the office space in Manhattan's downtown
financial district. But as staggering as that number may sound, it tells
only part of the story. According to online real estate broker TenantWise,
the World Trade Center and the maimed buildings surrounding it represented
fully 60% of the financial district's Class A office space, a real estate
term for properties built after 1970 and outfitted with the latest
technology. As of Oct. 9, 8.2 million square feet of commercial space was
still available in the Wall Street area, but 80% of it is in pre-World War
II office buildings that lack amenities like the high-speed cable wiring and
room for expansive trading floors that today's financial firms require. That
leaves almost no place in lower Manhattan in which the displaced can quickly
get back to business
No surprise, then, that most of them are not planning to move back to lower
Manhattan anytime soon--if ever. Of the World Trade Center's 73 largest
nongovernment tenants, 60 have revealed their relocation plans; of that
number, 47 are moving most of their operations to midtown
Manhattan--including major Wall Street firms such as Morgan Stanley and
Credit Suisse First Boston. (A good portion of their employees will now be
working in New Jersey and Connecticut too.) What's more, less than half of
the 114 tenants in the 14 damaged buildings ringing the trade center have
announced plans to remain downtown--even though most of the properties,
including those in the World Financial Center, are expected to be fully
repaired in less than a year.
New York's politicians, major developers, and construction unions are all
talking about the need to rebuild the Wall Street area so that it doesn't
lose its claim to being the world's preeminent financial district. But the
truth is that downtown Manhattan has been gradually losing that claim since
the 1950s, when major companies began moving their headquarters to midtown,
followed in the 1970s by investment banks such as Morgan Stanley and Lazard
Freres. These days you see almost as many Wall Street firms on Park Avenue--J.P.
Morgan Chase, Bear Stearns, Citigroup--as you once did strolling through the
city's historic financial district some 60 blocks south. The question is,
How many of lower Manhattan's major financial firms will still be there when
the construction crews leave? Now that so many have been blasted out of
their offices, is this the end of Wall Street as a financial center?
Today when people say "Wall Street," they mean something larger than a
particular area of Manhattan. But, of course, Wall Street was once the place
you had to be if you wanted to transact financial business in New York City.
It was where Alexander Hamilton and Aaron Burr founded rival banks at the
latter part of the 18th century. It was where traders and speculators
gathered in the open air to trade stocks and government bonds. And on May
17, 1792, it was where 24 of them stood under a buttonwood tree and agreed
to fix rates for buying and selling securities. Thus did they create the
city's first organized stock market, the precursor of the New York Stock
Much of the area burned to the ground in 1835, but it was quickly rebuilt.
And as the country boomed, so did Wall Street. The city's financial district
became the address of choice for banks and insurance brokerages and many of
the companies they served. After World War I, the area surpassed London as
the world's financial capital. Real estate values soared. So did the lower
Manhattan skyline. Between the mid-1920s and 1932, just as the stock market
was crashing, 30 million square feet of office space went up in the
area--equivalent to nearly 30 Chrysler Buildings.
In truth, it was the beginning of the end for Wall Street. As the country
tumbled into the Depression, vacancy rates downtown climbed to 25%. And when
the economy picked up after D-Day, companies slowly but surely began looking
to midtown Manhattan instead. Unlike the financial district, midtown was
largely residential and easily cleared for classy new office buildings.
Indeed, in the decade following the war, more office space was constructed
in midtown than existed in the entire city of Chicago. Executives who
inhabited the new skyscrapers got used to walking to work from nearby Grand
Central Station and lunching in the city's finest restaurants--neither of
which you could do on the lower end of Manhattan Island.
By contrast, the financial district saw no new buildings for nearly two
decades. Rents soon dipped significantly below those of midtown, and Wall
Street became a seedy place isolated from the rest of the bustling city.
"New York's financial district has changed very little in the last
quarter-century--in appearance," FORTUNE wrote in 1956. "Its cacographic
towers; its peeling lunch joints; its meek little Morgan Bank looking like a
fairly respectable Indianapolis branch office; its ubiquitous hardware shops
glutted with sleazy pliers--all this familiar furniture looks almost exactly
the way it looked 30 years ago, down to the lapel cut of suits worn by
passing bankers." Indeed, that the financial district remained a banking
mecca at all was due largely to a New York Stock Exchange rule. Until 1980
the exchange required its members to have their offices in lower Manhattan
so that their runners wouldn't have to travel far to deliver paperwork to
David Rockefeller was one banker who saw the future of Wall Street, and he
didn't like it. To help spur development there, Rockefeller, who was Chase
Manhattan's executive vice president of development, persuaded the bank to
build its new headquarters in the financial district; it was completed in
1961. Along with his brother Nelson, then governor of New York, Rockefeller
also pushed for the construction of the World Trade Center in the 1960s by
the Port Authority of New York and New Jersey. The Trade Center would be the
world's largest building, and it would shore up lower Manhattan the way the
family's Rockefeller Center had anchored midtown.
The Rockefellers' initiatives revived the financial district, but it was a
temporary reprieve. As it turned out, the hulking Twin Towers didn't appeal
to Wall Street types, even though the Port Authority could offer cheap rents
because the buildings sat on government land. "Nobody wanted to be in
there," laughs John Whitehead, former co-chairman of Goldman Sachs. "Nobody
wanted to be the tenant on the 65th floor. We all wanted our own buildings
with our firms' names on them."
Goldman Sachs, which had had offices in lower Manhattan since the mid-1800s,
was too tradition-bound to leave the area. But others in the financial
community were not so sentimental. Investment banks were changing rapidly,
from stuffy 200-member firms whose partners managed money for wealthy
clients and underwrote the occasional stock offering to financial
supermarkets whose business increasingly revolved around mergers and
acquisitions and IPOs. They needed more space. More than that, they needed
to be closer to their clients. Morgan Stanley decamped to Sixth Avenue in
the 1970s. In the 1980s so did First Boston--after an internal analysis
showed that the firm was spending $2 million a year on cab fare uptown. "It
was a very big number," says a former First Boston executive. "It's just as
simple as that. Traders can actually operate anywhere. What you need is
client connectivity, and on the corporate finance side, 90% of our clients
were in midtown."
A final wave of downtown construction culminated in the completion in 1987
of the 8.5-million-square-foot World Financial Center, which also offered
cheap rents because it was built on government-owned land in Battery Park
City. (In fact, Battery Park City was built on landfill from the World Trade
Center.) Wall Street firms like Merrill Lynch, Lehman Brothers, and American
Express took up residence there, as did Dow Jones, publisher of the Wall
Street Journal. But the project turned out to be Wall Street's last hurrah.
The stock market crashed, and by 1994 vacancy rates in lower Manhattan stood
at a Depression-era level of 22%. On historic Broad Street, just south of
the New York Stock Exchange, nearly every building went into foreclosure.
"We had one of the few buildings that didn't go into bankruptcy," says Bill
Rudin, a major downtown property owner. "Those were dark days."
To hear financial-district boosters tell it, lower Manhattan experienced a
miraculous rebirth in the second half of the 1990s. "Downtown was probably
healthier just before Sept. 11 than it had been since World War II," insists
Carl Weisbrod, president of the Alliance for Downtown New York. Indeed, the
average rent in lower Manhattan had risen from $26 a square foot in 1996 to
$42 a square foot this year. The vacancy rate had declined to 6%. However,
those rosy numbers are somewhat misleading. One reason the vacancy rate
declined is that 40 of the financial district's older commercial structures
were converted into apartment buildings because businesses didn't want to be
there anymore. Ten more conversions are in the works.
More to the point, with the exception of a heavily subsidized trading
facility for the New York Mercantile Exchange, there has been no new-office
construction in lower Manhattan in almost 15 years. Meanwhile, cranes
clutter the sky all around midtown, a number of them putting up investment
banking headquarters. Bear Stearns and CIBC World Markets, for example, are
erecting towers there. Why isn't anyone building in lower Manhattan?
Because, developers say, it's not cost-effective. The problem is that the
cost of construction in Manhattan--roughly $500 a square foot--is the same
uptown or downtown. Developers, however, say you need to make $70 a square
foot to turn a profit. That's possible uptown, where the rents for a new
high-rise can run to $90 a square foot. It's a lot harder, if not
New Jersey developers are benefiting too. The average rent on the Jersey
waterfront is $37 a square foot--$5 less than in the financial district. But
land costs about $50 a square foot, half of what developers pay in lower
Manhattan. "In New Jersey all you do is take down an empty manufacturing
building, and you've got a vacant lot," says TenantWise CEO M. Meyers
Mermel. "Downtown there are existing buildings you have to buy out and
get rid of the tenants before you can build." That makes constructing an
office tower in Jersey City much easier--and much more profitable. According
to real estate broker Cushman & Wakefield, Jersey City's Class A inventory
more than tripled during the 1990s, to nearly 12 million square feet, and is
expected to grow another 50% by 2003. As a result Wall Street firms like
J.P. Morgan Chase, Lehman Brothers, and Merrill Lynch have been moving their
back-office operations out of lower Manhattan and across the Hudson.
The deals in New Jersey are so compelling that even the New York Stock
Exchange considered moving there in the late 1990s. Most people in the
Manhattan real estate community thought the exchange was just trying to
shake the city down for government subsidies. They're probably right: Mayor
Giuliani and Governor Pataki were so worried the NYSE might leave Wall
Street that in 1998 they agreed to build it a new $560 million trading
facility at Broad and Wall streets. But the project has stalled. The city
hoped to finance the deal by enticing a private developer to build an office
tower above the exchange's new headquarters. Guess what? So far, no
developer has bitten.
The destruction of the World Trade Center revealed how few of the financial
world's major players still had headquarters south of Chambers Street before
Sept. 11. Besides Goldman Sachs (whose primary offices are on Broad Street
near the New York Stock Exchange), the only biggies were Merrill Lynch,
Lehman Brothers, and American Express, all in the now damaged World
Financial Center. (One major player is bucking the trend: By the end of the
year Deutsche Bank plans to begin moving into the Wall Street tower that
J.P. Morgan Chase is leaving as it consolidates in midtown.) Ironically the
World Trade Center itself was a place where big midtown-based firms, such as
Morgan Stanley and Credit Suisse First Boston, parked mostly back-office
personnel, just like in New Jersey. The bulk of the Trade Center's clientele
were smaller firms like Cantor Fitzgerald and Keefe Bruyette & Woods, plus a
host of foreign banks.
To figure out how many of the big Wall Street firms will come back to lower
Manhattan once the rebuilding is done, look at their real estate portfolios.
Many of the companies have an abundance of vacant space in midtown and in
New Jersey because of cutbacks they made earlier this year as business
slowed. CSFB had enough square footage in its three other Manhattan
buildings to absorb all its 819 World Trade Center employees. Morgan Stanley
was sitting on 500,000 empty square feet in midtown and in New Jersey. When
they're carrying all that available real estate, why would any of the firms
return to the financial district?
Even the firms in the World Financial Center, most of whose buildings real
estate analysts expect to be repaired and reopened by the end of the year,
are far from unanimous about their desire to return. A spokesperson for
Merrill Lynch, which leases two buildings there, says the company hopes to
move back into its headquarters tower "within several weeks" and reoccupy
the second building in "six months to a year." But American Express, which
owns its World Financial Center digs, is being much coyer. It has signed new
leases in New Jersey and Connecticut, and a spokeswoman refuses to say
whether the company will return to the World Financial Center at all. "All I
can say is, we're committed to Manhattan," she says. And Lehman? After
moving displaced employees to midtown and to New Jersey, in early October it
bought a 32-story midtown building for an estimated $650 million that Morgan
Stanley had been in the process of completing for its own use. Lehman
intends to make the building its new headquarters. "We'd
love to get back downtown," says a spokesman, "but literally it's up in the
air what the status of our building is."
As you might expect, the possibility that some of the city's largest
financial firms could relocate much of their operations to New Jersey
terrifies New York politicians and landlords. Says Michael Carey, president
of Mayor Giuliani's Economic Development Corporation: "We want to keep these
businesses and jobs in Manhattan." The Real Estate Board of New York, the
industry trade association, has identified a number of development sites
that might be ready to build on immediately if tax-incentive deals can be
cut to lure corporate tenants back to the city. The problem is, most of the
sites under discussion are in midtown. That's where developers prefer to
build, isn't it? But if the plan succeeds, it makes the financial district's
chances of recovering dimmer still.
One developer has a site in lower Manhattan that could accommodate all the
companies whose offices were destroyed Sept. 11. He is Larry Silverstein,
the 70-year-old real estate mogul who in July had the misfortune of leasing
the World Trade Center from the Port Authority for 99 years. He claims that
the $7.2 billion insurance payout that he expects to pocket will give him
ample money to rebuild the space lost at the World Trade Center complex.
"Right now the lower Manhattan economy is going to be majorly affected until
we get those buildings back into income-producing mode," he says.
Silverstein is obligated to keep making his $116-million-a-year lease
payments to the Port Authority. So the sooner he rebuilds, the better. But
nothing will happen anytime soon. "There are many, many things that have to
be worked out in terms of our insurance coverage and in terms of our lease
agreement," says Charles Gargano, vice chairman of the Port Authority.
"There are a lot of people who are going to have a say in what happens
there. The Port Authority does have something to say about it. The city and
the state of New York will have something to say about it."
They surely will. Governor Pataki and Mayor Giuliani recently asked the
federal government for $54 billion in "disaster relief" for New York State,
including about $2 billion for grants, tax-exempt bonds and tax breaks for
developers who build downtown, and for displaced businesses that return
there. In a sign that the city isn't counting on Silverstein to rebuild, the
$54 billion request also includes $8.2 billion to reconstruct the entire
seven-building World Trade Center complex.
But Pataki and Giuliani's assumption--that if the area gets rebuilt, of
course the big Wall Street firms will come back--belies the current reality.
With companies signing leases wherever they can find room, whether on Park
Avenue or in Parsippany, N.J., it's difficult to see many of them moving
back to Wall Street, even with tax incentives. If they don't, city officials
may have to remove the banners in lower Manhattan boasting that the area is
the world's financial center and hang them in midtown instead.
Would that really be so terrible? There may be no new investment banking
headquarters under construction on Wall Street. But the area is changing in
ways that would have been inconceivable a decade or two ago. On an island
full of people desperate for a place to live, lower Manhattan is
gradually--and logically--becoming a residential neighborhood. The number of
people living in the area has increased by 60% in the past ten years, to
25,000, most of them in converted commercial buildings. Five years ago there
were four hotels there; now there are ten. Culture is arriving: The
Guggenheim Museum is preparing to build a Frank Gehry-designed outpost
downtown. The Sept. 11 attack may indeed precipitate the end of Wall Street
as we know it. But it may also hasten a long-awaited rebirth of lower
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