Atlantis Arisen

September 11th, 2001 => the World Trade Center Remembered => Topic started by: Rachel Dearth on November 10, 2010, 03:48:28 pm

Title: In Skyscraper at Ground Zero, Sentiment Trumped Numbers
Post by: Rachel Dearth on November 10, 2010, 03:48:28 pm
In Skyscraper at Ground Zero, Sentiment Trumped Numbers

Published: September 17, 2010

Timing is everything.

I had originally planned to write this column last week, on the ninth anniversary of the terrorist attacks that brought down the World Trade Center, killing nearly 3,000 people who were working in the two buildings that awful morning. The topic is the economics of 1 World Trade Center — the building, formerly known as the Freedom Tower, with one of the most tortured construction histories in New York history — that is finally being erected at ground zero. When it is finished, it will stand 1,776 feet in the air, making it the tallest building in New York.

With an expected completion date of 2013, 1 World Trade Center is the most expensive skyscraper ever constructed in the United States, with a price tag currently estimated at $3.3 billion. By contrast, the spanking new Bank of America Tower in Midtown Manhattan cost about $2 billion. That is pretty much the going rate for building new skyscrapers in New York City. Just to break even, 1 World Trade Center will require rents far higher than the going rate in Midtown, much less downtown New York, where the building is located and where rents are considerably lower.

Since 1 World Trade Center is owned by the Port Authority of New York and New Jersey, it seems fair to assume that any shortfall between the building’s annual rental income and its carrying costs will most likely be borne by the people who pay the toll to cross the George Washington Bridge, or use the Lincoln Tunnel, or ride the PATH rail system, all of which the Port Authority controls. It also seems fair to say that no private developer in his right mind would build a $3.3 billion high-rise office building in a marketplace that tops out at $2 billion. Only a government entity would do such a thing. My plan was to question whether 1 World Trade Center really made sense for the city and its taxpayers.

But I blinked last week. Even nine years later, the events surrounding 9/11 remain so emotional that it seemed somehow sacrilegious to ask tough questions about 1 World Trade Center on the day of the anniversary. Although the Port Authority claims it changed the name from Freedom Tower precisely because it wanted the building to be viewed as a commercial office building and not a civic symbol, it is difficult to rid the building entirely of its symbolism.

It is, after all, going up on the same hallowed ground where the twin towers once stood. Part of the reason it costs so much is that its first 200 feet are reinforced concrete and steel — designed to deter future terrorist attacks. (Another reason is that it will have a 408-foot spire, allowing it to reach that 1,776 foot mark.)

But as I discovered this week, I’m not the only one who’s been blinking. It turns out that there are plenty of people, including former New York State officials and New York City developers, who believe that 1 World Trade Center is folly. “An emotionally induced misuse of money,” said one such person. “You can only understand this as a political statement,” said another. “It makes no sense as a commercial real estate endeavor.”

Not one of these people, however, would go on the record; there was simply no percentage in it. As a result, the notion that a government agency would spend $3.3 billion constructing an uneconomical high-rise in a depressed market has drawn far less scrutiny than it deserves. Better late than never.

When the twin towers went down, New York City lost 10 million square feet of office space. But the initial impetus to rebuild had less to do with reclaiming that lost office space and more to do with showing the terrorists that we wouldn’t be cowed. Over time, however, as the rebuilding got bogged down in disputes over design and financing, it gradually became clear that the city didn’t really need the 10 million square feet it had lost on 9/11. It had a glut of office space. Rents were falling. Especially after the bubble burst in 2007, commercial real estate developers struggled.

Yet there was never a moment when anyone in government was willing to question whether 1 World Trade Center — with its 2.6 million square feet of office space — still made sense. Former Gov. George Pataki pushed the Freedom Tower — a name he came up with — with every fiber of his being. Mayor Michael R. Bloomberg never wavered in his support. Former Gov. Eliot Spitzer came into office professing to be more skeptical of the project, but did nothing to stop it.

In those earlier years, the building’s economics were even worse than they are now. In 2006, with no potential tenants in sight, the Port Authority actually negotiated deals with federal and state agencies to occupy parts of the building at above-market rents. In other words, taxpayers were going to take a hit so that the building could have some occupants. Thankfully, those deals eventually disappeared.

Title: Re: In Skyscraper at Ground Zero, Sentiment Trumped Numbers
Post by: Rachel Dearth on November 10, 2010, 03:49:14 pm

Mark Lennihan/Associated Press
The site of 1 World Trade Center, on the ninth anniversary of the Sept. 11 terrorist attacks.

Title: Re: In Skyscraper at Ground Zero, Sentiment Trumped Numbers
Post by: Rachel Dearth on November 10, 2010, 03:50:00 pm
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Even so, the building’s economics are still nothing to write home about. One World Trade Center is going to cost somewhere on the order of $1,300 a square foot to build, more than double the cost of most new skyscrapers. And because it is what’s called Class A office space, meaning that everything is top of the line, maintaining the building is also going to be very expensive. My real estate sources say they believe that the Port Authority will need to charge $130 a square foot to break even on the building.

Times Topic: Freedom Tower (1 World Trade Center)But of course the Port Authority can’t possibly charge anything close to that — not in this real estate market or any market in the foreseeable future. The average rent for a downtown high-rise is $55 to $60 a square foot. Even if the Port Authority were able to charge higher, Midtown rents, it would still only be getting, at best, $80 a square foot.

A few weeks ago, the news leaked that the Port Authority was negotiating with Condé Nast to become a tenant in the building. Because Condé Nast is one of the most glamorous companies in New York, it would be a boost to the prospects of 1 World Trade Center to have it in the building. But it won’t be economical: the Port Authority told me that, assuming a deal goes through, Condé Nast would most likely be paying the current market rate for downtown space — that is, less than half what it needed to break even. It will also undoubtedly be locked into that rate for many years. Luring Condé Nast downtown is going to be expensive for the Port Authority.

Not surprisingly, the Port Authority disagrees with my analysis. It points to the fact that it has close to $1 billion in insurance proceeds that it is using to defray the cost of the building. And it says its break-even number is much lower than $130 a square foot.

“It is not going to get a typical developer’s rate of return,” conceded Rich Gladstone, the Port Authority’s point man on the project. “But it will be cash-flow positive.” He insisted that the commuters who pay their $8 a day to cross the George Washington Bridge would never have to support 1 World Trade Center. Of course that’s easy to say now, with the building still two years away from completion.

Still, the Port Authority made another recent move intended to ensure the success of the building. It sold a small piece of the equity in 1 World Trade Center — around 5 percent — to the Durst Organization, for a reported $100 million. It is a great deal for Durst, one of the biggest and savviest commercial developers in New York. (It built the Bank of America Tower, for instance.) Its investment values the building at $2 billion, far less than it cost to build, so if it rises in value, Durst gets the upside. And in return for its $100 million, Durst gets to manage the building for the Port Authority, an arrangement that will allow it to reap fees for everything from finding tenants to reconfiguring office space. It is also a deal filled with a certain, undeniable irony, which has not been lost on anybody in New York real estate circles.

You see, Douglas Durst, the company’s 65-year-old patriarch, has been one of the few people willing to criticize 1 World Trade Center on the record. When the Port Authority was negotiating with those government agencies back in 2006, Mr. Durst told The New York Times that saddling “already overburdened taxpayers of New York with the rent necessary to pay for it makes no sense at all.” He even took out advertisements opposing the project.

When I called Mr. Durst this week, he did not appear to be exactly embracing this newest addition to the New York skyline, even though it was going to put money in his company’s pockets. “I’ve always been against it,” he said. “I have always felt that the private sector should develop and build office buildings” — not government agencies. He pointed out that the original World Trade Center, which had also been built by the Port Authority, took several decades to become even modestly successful. But, he added, since 1 World Trade Center was a done deal, it made more sense to have a company like his operating the building instead of the Port Authority.

“There is a constant need for new office buildings,” he said, in defense of the new building. “The fact that Condé Nast is going to go down there shows that there is demand for it.” As it happens, Condé Nast is currently a tenant in another Durst building, in Times Square, but Mr. Durst insisted that was merely a coincidence. To make the building work, he’ll need a few more coincidences along those lines.

We talked for a while longer about the building and its finances. Mr. Durst said he expected it to become cash-flow positive “by 2018 or 2019,” which struck me as awfully optimistic. Then, before hanging up the phone, he said, “I want to reiterate that, as in the Times Square redevelopment” — another initiative he initially opposed before coming around and making a fortune — “I was against it before I was for it.”

Timing is everything.