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In Skyscraper at Ground Zero, Sentiment Trumped Numbers

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Rachel Dearth
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« 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.

Related
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.

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