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Tenants Seek Big Cuts, Government Incentives;

Empty Offices Abound.

Crain's New York Business

By Lore Croghan

November 12, 2001

Downtown renter’s revolt

Government incentives to resuscitate downtown will not be enough. Businesses are demanding hefty rent cuts as well.

First indications show prospective office tenants seeking rent reductions of 25%.

That is exactly what has happened at 1 Liberty Plaza. There, a prospective tenant has offered to pay $40 per square foot for sublet space, sources say. Asking rents are $52 to $55 per square foot at the Class A skyscraper, which recently reopened after sustaining damages in the Sept. 11 attack on the World Trade Center.

“All the buildings downtown are going to have to be very responsive on the price side to conclude transactions,” says Barrett Stern, an executive managing director at Murray Hill Properties/TCN.

Traditionally, tenants have looked to downtown as a lower-rent alternative to midtown. Now they want even steeper discounts versus midtown prices to compensate for the distress and inconvenience of working near a disaster site where reconstruction won’t be completed for years.

Those rent cuts would come on top of city, sate and federal incentives that are expected to lower occupancy costs by $10 to $20 per square foot. The combination of rent cuts plus incentives would knock the cost of an office that had been $40 per square foot before the disaster to $20 per square foot or less.

Mr. Stern predicts that buildings surrounding the trade center site as well as Class B properties on downtown’s east side will be compelled to accept rents that are 10% to 20% lower than pre-Sept. 11 asking rents.

At 22 Cortlandt St., a disaster-zone building that’s a scheduled to re-open between Dec. 15 and Jan. 1, a prospective tenant slashed its offering rent to the mid-$20’s per square foot after the terrorist attack. The asking rent is $33 per square foot. Mr. Stern is trying to negotiate the price back up to $29, which would be 12% below the asking rent.

On the other side of downtown at 83 Maiden Lane, he thinks, he’ll have to drop starting rents to the mid-$20’s per square foot to get deals done-reductions of 25% to 35%. He had anticipated rents in the mid- to high $30’s per square foot.

The outlook is not helped by the fact that downtown is now awash in empty space. Five million square feet of sublets have surged onto the downtown market since Sept. 11. Even though 13 million square feet of offices were destroyed in the trade center’s collapse, 25 blocks of 100,000 square feet or more are available through sublets or direct leases, according to brokerage TenantWise.com Inc. Before the disaster, tenants were complaining about a dearth of big spaces throughout Manhattan.

Initially, companies offering sublets are expected to resist rent slashing. Many secured space in recent years and owe high rents to the landlords they are leaving behind. Building owners, however, have more leeway to cut prices on direct leases, unless their loan covenants restrict how low they can drop their rents.

A handful of big companies are seeking space downtown, including Morgan Stanley, Aon Corp., Sidley Austin Brown & Wood and Oppenheimer Funds. Oppenheimer came close to clinching a lease in Jersey City, then changed course.

Hot prospects

Meanwhile, five to seven prospects per week have visited Gruntal & Co’s 180,000-square-foot sublet at 1 Liberty Plaza for the last three weeks, says John Wheeler, a senior director at Cushman & Wakefield Inc. Several have toured Merrill Lynch’s 472,000-square-foot sublet at 2 World Financial Center, which could go for less than its asking price of $55 per square foot. “For the right tenants, we will figure out the right flexibility,” says Bob Flippin, an executive managing director at brokerage Colliers ABR Inc., who is marketing Merrill’s space.

At this point, though, there is a lot more looking than signing. Without finalized incentive packages, most companies are reluctant to commit to the neighborhood. “It worries me,” says Peter Sabesan, chief executive of The Hunter Realty Organization. “Every week that passes, we are going to lose tenants.”

In a single day recently, he met with three midsized companies that all wanted to rent offices downtown, after telling him just a few weeks before that they’d never return. But none was willing to go forward without knowing exactly how much money it would save through incentives.

At this point, only government agencies are moving swiftly to rent space downtown. “How could the city say to the federal government, ‘Help us,’ if they aren’t keeping their own offices downtown?” asks Brian Waterman, a principal at Newmark & Co. Real Estate Inc. and the building agent for 59 Maiden Lane, where the city just leased nearly 300,000 square feet.

One government tenant, the U.S. Attorney’s Office, was so eager to secure space that it exercised its power of eminent domain to take over three floors of 33 Whitehall Street.

Spaced Out

Another factor slowing the flow of tenants to downtown is the slumping economy, which is driving companies to lay off personnel and reduce rather than expand their space needs. Citigroup’s situation is an extreme example of that effect.

The company not only lost more than 1 million square feet in the trade center, it also shed space at 399 Park Ave. and recently put Salomon Smith Barney’s office at 125 Broad St. up for rent as well. All told, the financial services firm has slashed its Manhattan space by 1.9 million square feet.

Tenants that are in the market for space also have plenty of options in midtown, which many prefer, though it’s pricier. In the next three months, real estate executives say, more than 1 million square feet of additional sublets will open up as fresh rounds of layoffs begin.

With all those factors stacked against them, downtown buildings that don’t offer aggressive rent cuts to combine with incentives are in danger of having their spaces sit empty for years. That is precisely what happened during the recession of the early 1990s. Back then, the area’s vacancy rate rose to 25%.

It’s hard to postulate that tenants need all this space,” says M. Myers Mermel, the chief executive of TenantWise.com.

Copyright 2001 Crain Communications, Inc

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