Where have all the anchors gone?
In the 90′s, companies like Reuters, Condé Nast, Bear Stearns and Ernst & Young, wooed by big tax breaks from the city, moved into a new generation of skyscrapers, anchoring the buildings that bear their names and helping to make a handful of developers very rich.
But now, as the next crop of office towers waits its turn, the pool of top-notch, bank-approvable, multifloor tenants looks surprisingly shallow. There aren’t many obvious prospects down on the farm. Even though the office market is as tight as ever, nobody is actually building anything-in large part because they can’t find the right tenant to build it for .
Developers eager to forge ahead with new gleaming towers face a quandary: How do they attract a Grade A tenant not especially desperate to move to a building that doesn’t exist and that won’t be finished for at least three years?
“If I had a building built, I could fill it in the time it takes for you to type what you’re typing,” insisted Jules Demchick, president of J.D. Carlisle Development Corporation, who is gambling that companies will want to move way, way west-over to his new 17-story building at 42nd Street and 12th Avenue. He said he has a tenant-whose identity he won’t disclose-to take 150,000 of the building’s 575,000 square feet. He has finished demolition, and is negotiating with the banks for the loans he needs. “The real issue,” he said, “is finding a tenant who’s got the luxury of waiting for the building to be built.”
Mr. Demchick’s is one of about half a dozen projects in various stages of development in Manhattan right now. Last week, Steven Roth’s Vornado Realty Trust finally filed plans with the city to go ahead with a 75-story tower on the old Alexander’s site at 59th Street and Lexington Avenue, even though he has not completed negotiation with his prospective office tenant, Bloomberg L.P.
Brookfield Financial Properties has a tenant-the Canadian Imperial Bank of Commerce-for its building at 42nd Street and Madison Avenue, but the project is tied up in a court dispute with developer Harry Macklowe, who once owned the property.
But there are many more builders still desperately seeking that special someone. The Durst family would like to build on two properties, one on 42nd Street near Bryant Park, another on 57th Street. Vornado and the Lawrence Ruben Company are trying to build a tower over the Port Authority Bus Terminal. Mort Zuckerman’s Boston Properties, which is developing Ernst & Young’s new Times Square headquarters, is looking to build on another 42nd Street site. And earlier this year, Howard Milstein was looking for a tenant in order to build on a parking lot his family owns at 42nd Street and Eighth Avenue. The property is tied up in a larger legal dispute among family members, and it’s now likely to be sold to another developer.
Every one of them “could put a shovel in the ground with a commitment,” said Cushman & Wakefield executive vice president Bruce Mosler, who is heading the effort to find a tenant for the Port Authority project. Meanwhile, though, the list of likely relocators has shortened dramatically in recent months, for a variety of reasons. There are dozens of decent tenants out there, but there are suddenly precious few anchor tenants. As developers woo the ones that remain, the stench of missed opportunity has started to fill the air.
What You Can’t See
Three prime prospects are no longer in the market. Pricewaterhouse Coopers, the accounting and consulting giant that was rumored to be looking for space last year, has put its search on hold while the company reorganizes. German giant Deutsche Bank stopped looking after its merger with Dresdner Bank fell through in April. Chase Manhattan Bank, which was looking for more than 1 million square feet, decided to move its back-office operations to New Jersey instead, into a big new office complex that Samuel LeFrak is building in Jersey City.
Those who remain publicly in the hunt include a number of law firms, chief among them Rogers & Wells, which recently merged with the British firm Clifford Chance and a German firm to become the world’s largest legal outfit.
“But these guys, they’re not the players to watch,” Mr. Mosler said. “The folks to watch are the players you can’t see.”
Take the case of Condé Nast. No one seemed to suspect the company might want to move out of its elegantly appointed home at 350 Madison Avenue-until it did a deal with Douglas Durst. It was Condé Nast’s commitment that allowed Mr. Durst to erect his new tower in Times Square.
“There’s no question that the power of the anchor tenant-even at the top of the market-is as strong, if not stronger, than it’s ever been,” said Insignia-ESG’s Mary Ann Tighe, who brokered the Times Square deal for Condé Nast.
The inducements that dazzled big corporations in the 1990′s-a nice city tax package, an equity stake in the building-now seem commonplace, although the city isn’t throwing around tax abatements the way it did in the mid-90′s, another factor in the lack of development.
Robert Selsam, senior vice president and manager of the New York office of Boston Properties, said finding that special tenant is often just a matter of timing one’s overture.
“The old lease is what really drives things,” Mr. Selsam said. Leases expire in bunches. “Let’s say that 1982 was a big leasing year: If people signed a lot of 20-year leases, they’re going to hit in 2002.”
Boston Properties set off a mini-tempest earlier this year when it sent a lease proposal to Rogers & Wells. A spokesman for the law firm told Crain’s New York Business it was an “unsolicited proposal” and that the firm was happy where it was in the Met Life building.
More recently, Mr. Selsam said he couldn’t confirm or deny negotiations with any particular client. But his overtures seemed to have an effect-Rogers & Wells is now looking for new space.
A New Tower, Just For You
Until recently, whenever rumors got out that a company was looking to relocate, it could count on a call from Howard Milstein. Mr. Milstein, industry sources said, would woo them with letters and pretty architectural renderings, done up by the firm Fox & Fowle, of a tower tailored to the company’s needs. Never mind that Mr. Milstein never owned the site outright, and that it didn’t have the necessary clearances to build a building as large as he was advertising. (A Milstein executive did not return phone calls.)
Later on, the sources wryly noted, anonymously sourced articles tended to appear in newspapers-announcing that Mr. Milstein was in negotiations with a tenant for the site.
Often, the appearance of negotiations is enough to impress the bankers. Lately, large companies have been receiving long letters from one developer beginning with a phrase to the effect of “As we discussed….” These discussions are news to the companies, who haven’t even been talking about moving. The letters seem tailored to lead a bank to believe that the assiduous developer is close to a deal.
The banks hold the real power. They decide what gets built and by whom.
The biggest difference between today’s real estate market and the bull market of the 1980′s is the lack of speculative building. In 1986, Congress closed a loophole that effectively allowed developers to finance buildings as a tax write-off. It was no longer sensible to build it and hope that they’d come. New York City, meanwhile, taxes new real estate at a higher rate than it does existing buildings. Jersey City, whose tax code is friendlier to developers, is finally reaching a “critical mass” of big corporate residents, said Robert L. Freedman, vice chairman of the board of the GVA Williams real estate brokerage.
Most important, though, has been a consolidation in the number of construction lenders, all of whom demand that 30 to 60 percent of the building be leased before going ahead with a deal. The bankers still remember what happened at the end of the last market, when about a half dozen speculative Manhattan skyscrapers went on the market just as the economic tide was going out. Landlords had trouble giving away office space.
“We’re still in the short-term memory cycle of the last real estate debacle,” Mr. Freedman said.
There are some signs, though, that speculative building, of a sort, may be making a comeback. Call it speculative digging. Mr. Roth’s building at 59th Street and Lexington Avenue is a fine example. Vornado began excavating the site in advance of potential new zoning regulations that might limit its height. Mr. Roth’s plans for the Cesar Pelli–designed tower, which Vornado’s annual report called “a little adventurous, but very calculated,” calls for a mix of retail and commercial space on the lower floors, with most of the space taken up by a luxury hotel and condominiums, according to the buildings department. The fact that Mr. Roth is apparently forging ahead without a signed tenant strengthens his hand in negotiating with Bloomberg-people familiar with the talks said the deal is down to the minutiae-but it also suggests that he lacks confidence in his ability to attract high-paying commercial tenants before the market turns down again. Otherwise, real estate industry sources asked, why would he sell off condos instead of renting those spaces himself?
A spokesman for Vornado said the company had no comment, except to say that it did have a tenant and was going ahead with the project.
Then there’s Jerry Speyer, the only developer who has seriously tried to build spec in recent years. In November 1999, he announced that he was putting up a modest building-25 stories, 375,000 square feet-at 222 East 41st Street, near Grand Central Terminal, without a tenant. In May, though, he announced he had a tenant, the high-tech consulting company Scient Corporation-no Exxon, but perhaps a bankable start.
Mr. Demchick said that in Manhattan’s current real estate market, sometimes all it takes is a little sincere effort. Since he announced his plans at 42nd Street and 12th Avenue, tenants have been soliciting him .
“I’ve been getting inquiries-ten every day,” he said. That is what the banks like to hear.