Dave Sabey

Perhaps in the future, silver-legged secretaries will answer the phones, stainless-steel fingers will clack away at keyboards, and Manhattan’s workforce will have been completely supplanted by robotic counterparts who work faster, smarter, longer and cheaper than their human predecessors.

For now, though, most buildings are still stocked with actual flesh-and-blood employees who take long breaks, complain and sometimes confuse their assigned tasks with internet shopping.

The property at 375 Pearl Street, a towering skyscraper in Lower Manhattan at the foot of the Brooklyn Bridge, won’t be one of them. After buying the building out of foreclosure last year, its developer is taking a brave leap into the future.

The building is being overhauled. Soon it will be a giant data center, with an internal, artificial climate that is cool and dry, suited not for humans but machines. Power lines will serve up 40-megawatt loads for its fleet of servers.

“This will be the largest high-rise data center in the world,” Dave Sabey, the founder and chief executive of Sabey Corporation, which owns the building and is overseeing its conversion, told The Observer during a recent interview high in the 32-story tower. “This is the most complicated center of its kind in the world.”

As Manhattan has blossomed into an unlikely tech hub—drawing companies and institutions such as Google and Cornell’s planned applied-sciences school—375 Pearl Street is poised to be a key piece of infrastructure, essentially a 550-foot-tall supercomputer with vast numbers-crunching and storage capabilities, the most powerful data center of its kind.

But like any fable of humankind’s progress, the story of 375 Pearl Street’s development has a dark side. On September 22, The New York Times dropped a bomb on the data-farming industry—a Page One story on the sector’s profligate energy usage. The article painted a damning picture of data centers flagrantly burning through power to keep machines idling in case of a surge in online activity, zombie servers just gobbling electricity, and backup diesel generators keeping the whole thing running in case of a power blip while belching noxious fumes.

Mr. Sabey both defended the sector and distanced himself from his competitors. “They’re very good stewards,” he said. “The notion that any of us are not worried or don’t care about energy consumption, it’s the highest item. We are all over it.”

His company, he added, has located nearly half of its data facilities, nearly 2-million-square-feet’s worth, in Quincey, Washington, an area powered by hydroelectric dams on the nearby Columbia River.

“It has the lowest-cost compute cycles in the world, and it’s all green energy,” Mr. Sabey said.
The 375 Pearl Street data center will be linked to these operations out West, he noted. “It costs nothing to move photons through glass,” he said of the fiber lines that will transmit the data. In practice, however, experts say it’s unclear how much computing 375 Pearl Street would actually be able to offload.

What the Manhattan farm doesn’t outsource will be powered mainly from relatively clean sources: natural gas plants and the Indian Point nuclear facility produce most of the city’s electricity. Still, 375 Pearl will come online at a time of increased attention to energy consumption. In August, Mayor Bloomberg’s office released a benchmarking study that disclosed the energy use and efficiency of thousands of commercial buildings, and such disclosures will soon become annual. In this new era of transparency, buildings like 375 Pearl Street will stand out as conspicuous energy gluttons.

375 Pearl Street

“As resources become tighter and energy prices continue to rise, increased scrutiny could be directed at a building like 375 Pearl Street,” said Jared Rodriguez, an energy expert with the LeFrak organization, who worked on the city’s benchmarking study. “A building like that, because it consumes so much power, makes energy more expensive for everyone.”

Like so many contradictions in the fast-growing world of computing and technology, 375 Pearl Street makes both perfect sense and none at all. A colossus of a tower with an imposing concrete façade and sparse vertical lines of dark-tinted windows, the property hides in plain sight. Though it sits smack in the middle of the oft-photographed panorama of Lower Manhattan, its bland profile renders it all but invisible.

Most often, data centers are similarly faceless, but are typically located in the middle of nowhere—not on prime urban turf.

“Why do you need to be in Manhattan, where you have the world’s highest energy and real estate costs?” Barry Novick, a global data center manager for the financial company BlackRock, asked, echoing a sentiment voiced by several experts interviewed for this article who doubted the economics would add up.

Even a person with a role in the project acknowledged it was a gamble. Beneath the skepticism lies even a more fundamental question: Is New York’s tech boom really here to stay?

“There is definitely the sense that not all of the tech companies we see growing in the city are going to be around in a few years, and at some point there will be a shakeout,” said Andrew Roos, a landlord and top leasing broker who owns buildings with tech tenants and is familiar with analyzing their credit risk.

Even shoo-in tenants for 375 Pearl Street such as high-frequency trading firms, which depend on nanosecond connection speeds, have come under heavy fire from regulators in recent months, and some observers question the sector’s future.

For others, though, a facility like 375 Pearl Street seems long overdue.

Douglas Durst, one of the city’s most prominent real estate developers and landlords, planned to build a data center tower over a decade ago on a parcel of land he owns at 11th Avenue and 57th Street.

“We had the plans for it and had demolished the site; we spent $20 million designing and preparing to build it,” Mr. Durst said. “The idea was, you could have a cheaper data center in Wyoming, but if something went wrong in Wyoming, you were in big trouble.”

Mr. Durst was forced to abandon the project after 9/11, when suddenly companies became concerned about locating important infrastructure in a city many began to see as a vulnerable target of terrorism.

Those fears have largely subsided, and fortunately, 375 Pearl Street boasts an imposing bodyguard; the building sits at the rear of the massive police headquarters building, 1 Police Plaza.
Meanwhile, the notion that data has become so critical that its location in the city will be worth the added expense and risk has again come to outweigh the drawbacks. Even a skeptic like Mr. Novic said as much. “One of our core competencies at BlackRock is risk analytics,” he noted. “Those analytics are becoming more intense as the environment gets more sophisticated. It used to be acceptable to run a risk profile in 12 hours, whereas now clients want to know the risk profile of their portfolios in real time, minute by minute as the world’s markets are moving—12 hours is unacceptable. It adds up to a lot more compute cycles.”

A burly man in his 60s with thin gray hair, Mr. Sabey has ambitions for a star-studded roster of tenants and sees his facility at the vanguard of society’s push into the digital age. His first and only commitment so far is the New York Genome Center, a gene sequencing and research facility that will host a collaboration between Cornell, NYU, Columbia, Mt. Sinai and Cold Spring Harbor Laboratory, among others.

“They take your DNA and bust it into thousands of pieces,” Mr. Sabey said. “And they will hold up these sets of genes using our facilities and our vast storage and run algorithms to identify why one person gets a disease and the genetic basis for it. This is the kind of thing that could be a game-changer for medicine.”

It’s this sort of technological potential that most seems to animate Mr. Sabey, the notion that every situation and transaction generates an array of data points that can be collected, sorted and analyzed for human benefit (or at least the benefit of his clients). In this regard, Facebook and its much maligned habit of collecting our personal information are just a warm-up.

“By taking big data sets and teasing out data,” Mr. Sabey said, “you can have face recognition on the streets. There are sensors in this city as part of Homeland Security, and you could analyze that and get expressions and you could tease that and say, ‘Oops, we recognize that face or this behavior set.’

“We’re going to find ways to use data in ways we haven’t before,” he went on. “Your drugstore knows your wife is pregnant before you do, by her buying habits. There is a sufficient database that knows those things and could say ‘We better send her some of this stuff.’ Those are actionable things that can be monetized. There’s a gazillion things coming.”

When Mr. Sabey gets going, he brings an evangelical fervor to his sales pitch that his tenants seem to appreciate.

“Dave Sabey is passionate about our mission, and seems to view us as far more than just another customer,” Chris Dwan, a computer specialist for the Genome Center told us. “He’s a fascinating guy.”

If Mr. Sabey’s sunny demeanor wasn’t enough of a clue, it’s easy to tell he’s from out of town by the way he often refers to Manhattan simply as “the island.” He grew up in Washington State and attended the University of Washington on a football scholarship. When he met with The Observer, he walked with a cane and a heavy limp, the result of a recent hip replacement—a relic, he said, of his days playing on the defensive line.

“I look at those guys beating each other up, and I look at my hip and I think, God what was I thinking?”

Starting with modest real estate investments beginning in the 1970s, he eventually switched his focus to building and managing data centers, growing his firm, Sabey Corporation, into a $400 million company. He lives in Seattle and has a ranch in Montana where he tends prize cattle.

“We have the best Black Angus cattle in the world,” he said. He proudly states that he buys his genetically engineered alfalfa seed from the agricultural giant Monsanto.

“I believe in science,” Mr. Sabey explained.

Whatever the energy costs, then, he insists that his data center will be a net positive.

“Take the pulp and paper industry: it’s the third-largest polluter of air and water and the fifth-largest consumer of energy,” he noted. “Data permits us to get our print media on a Kindle or an iPad. The distribution of physical paper uses an incredible amount of energy compared to getting things online. Think of all the energy online shopping saves rather than everyone getting in their car and driving to the mall. I was raised in a family that didn’t have any money; we learned early on, if you left the light on, you were in trouble.”

More problems: Barclays underlying profit before tax, which strips away the firm's $451 million settlement with U.S. and U.K. regulators, increased 13 percent in the first half of the year. The bank revealed that it is under investigation by British regulators over disclosures it made during a 2008 capital raise.

Tax haven? When Eddie Lambert said he was moving $10.5 billion hedge fund ESL Investments to Florida from Connecticut last month, he really meant that he was moving. Mr. Lambert's staff stayed behind in Connecticut, The New York Post reports, where they now work for a company run by ESL's former chief financial officer—and continue to provide research to ESL. Mr. Lambert, meanwhile, is avoiding partnership and other taxes.

Whither Europe: Caixabank, Spain's third-largest lender, and two smaller banks reported lower earnings today as more real-estate loans went bad.

Faceplant: Facebook shares dropped more than 10 percent in trading after the close of markets after the company released quarterly results for the first time since its May IPO. The stock fell even thought the company hit analyst estimates for revenue and earnings-per-share; daily and mobile use of the social networking site continued their downward trends.

Who needs profit? Amazon reported profit fell 96 percent in the second-quarter, and investors didn't seem to mind.

Mirror, mirror: Goldman's vaunted new P.R. strategy continues to pay off with stories about Goldman's vaunted new P.R. strategy.

Dealbreaker...has an app for bank employees whose firm's have blocked access to the site.

• When people say they're mad at all the banks for not lending to businesses and getting the economy going again, you can tell them they're crazy, because commercial and industrial lending rose by a whopping 0.2 percent in the fourth quarter. [WSJ]
• Aggressive cost-cutting by the airline industry worked out okay until a blizzard hit and carriers were reduced to helpless bleating over Twitter. [Bloomberg]
• The observation that Europe is facing a huge debt crisis has done little to make European policymakers reevaluate their decisions. [NYT]
• Allstate, the insurer, is suing credit-crisis posterchild Countrywide Financial (now part of Bank of America) and former Countrywide CEO Angelo Mozilo over some allegedly destruct-o-matic mortgage-backed securities. [AP]
• Private equity titan BlackRock plans to make a "world-class trading platform" that will be the envy of all other trading platforms throughout the land, according to a leaked memo. [FT]

mtaylor [at] observer.com | @mbrookstaylor

Eight Head-Shaking Horror Stories From the Foreclosure Crisis.>>

So is Bank of America CEO and rugby tough guy Brian Moynihan backing out of this particular schoolyard brawl? Not so, according to a BofA spokesperson:

Bank spokesman James Mahoney said the decision to engage in talks with the investor group isn't inconsistent with Mr. Moynihan's previous approach.

"Our strategy hasn't changed," he said. "For both Bank of America and the investors, resolving these issues quickly is in everybody's interest. Whether resolution comes through a protracted process or it can be expedited, time will tell."

Whether or not the strategy has changed, the tone of the posturing sure has -- from hand-to-hand combat to expedited resolution. Not exactly the blockbuster we were hoping for.

mtaylor [at] observer.com | @mbrookstaylor

• The Feds are wrapping up a three-year project aimed at cracking down on insider trading. Some of the biggest names in finance (Goldman Sachs, SAC, Janus) are being bandied about, as are the following phrases: Criminal and civil; three-year investigation; bankers; hedge funds; analysts. This should be a lot of fun to watch. [WSJ]
• Ireland has accepted a $100 billion - plus bailout. Greece has also been rescued; will Portugal and Spain be next? [NYT]
• The Federal Reserve should continue to pursue a goal of low unemployment, says Treasury Secretary Tim Geithner. Some Republicans had been saying that maybe the Fed should just stick to fighting inflation. [AP]
• Economists are not super excited about the economy's prospects in 2011; they expect the unemployment rate to drop to a still-discouraging 9.2 percent. [Bloomberg]
• When Bank of America and PNC sold shares of asset-management behemoth BlackRock, Mexican billionaire Carlos Slim and Norway's central bank were lining up to buy. [FT]

mtaylor [at] observer.com | @mbrookstaylor

• Gold set another record high today. That makes four records in four days, putting the yellow metal on pace to become the Jerry Rice of commodities. [Reuters]
• Bank of America and PNC Financial, who in addition to being some of the nation's most avid implementers of foreclosure moratoriums are shareholders in BlackRock, sold $8.3 billion worth of stock in the asset-management behemoth. [Bloomberg]
• Former Federal Reserve Chairman "Tall" Paul Volcker says that there really isn't much hope for a quick reduction in America's uncomfortably high unemployment rate. [AP]
• Fun fact about epically low interest rates: They are crippling affordable-housing projects across the country. [NYT]
• Remember when yield-chasers were piling into junk bonds like clowns into a Volkswagen Beetle? Well, now hedge funds are fleeing junk just as fast as they can, while Main Street types are buying like the dickens. Good luck, Main Street! [WSJ]

mtaylor [at] observer.com | @mbrookstaylor

By way of comparison, the New York Department of Labor says that the state lost 15,600 private-sector jobs from August to September.

"I am pleased to join BlackRock in announcing this expansion of good paying financial services jobs in New York City," Governor Paterson said in a statement.

BlackRock CEO Larry Fink, meanwhile, said, "BlackRock believes it is important to continue to strengthen our ties with the State."

Strengthening ties makes sense, we guess, when you manage trillions in assets related to Fannie Mae, Freddie Mac, AIG and other government-affiliated credit-crisis strategies. But still, this whole thing is kind of weird. Why would BlackRock publicly commit to hiring more people over the course of next year, why would the government single them out for doing so, and why would the addition of 200 jobs over the course of next year -- when the state unemployment rate sits at a sickly 8 percent? What's the game here?

We reached out to the governor's office and will update should we hear back.

mtaylor [at] observer.com | @mbrookstaylor

In an announcement, BlackRock said that BofA is selling 34.5 million shares, and PNC Financial is selling 7.5 million shares. The New York Times points out that the move aligns with CEO Brian Moynihan's desire to cut back on investments in noncore businesses. Should the sale go as planned, it will leave BofA with a 12.6 percent position in the company through preferred shares but will eliminate the bank's position in BlackRock common stock.

So why the sale now, when BlackRock is down 28 percent year-to-date? Among other things, it could have to do with that nasty letter a bunch of bond investors sent to BofA a few weeks ago. BlackRock was among the firms asking BofA to repurchase mortgages that may contain faulty underlying paperwork. Talk about a strain on investor relations! As The Wall Street Journal puts it:

BofA has pretty sternly said it will do no such thing. A recent Heard on the Street described BofA's stance in the foreclosure crisis as Churchillian and said it was ready for a "long war" with companies like BlackRock that want the bank to repurchase mortgages. Earlier this week, one influential bank analyst opined that BofA might even put the Countrywide unit into bankruptcy rather than buy back troubled mortgages.

Is Bank of America taking its capital and storming off in a huff? Maybe, but BlackRock CEO Larry Fink probably doesn't mind; if BofA and PNC are selling out, the bigshot CEO has two fewer major investors to answer to, says Shira Ovide.

[W]ith one headache out of the way, BlackRock can now aim the migraine medicine at its real problems: staunching the outflow of assets from its funds.

mtaylor [at] observer.com | @mbrookstaylor

Bond-market titan PIMCO ("the authority on bonds"), private-equity giant BlackRock and none other than the Federal Reserve Bank of New York are looking to force Bank of America to buy back $47 billion in mortgage-backed bonds assembled by Countrywide Financial, which BofA bought in 2008 amid bankrutpcy rumors.

Bloomberg says: "A bondholder group wrote to Bank of America and Bank of New York Mellon Corp., the debt's trustee, citing alleged failures by Countrywide to service the loans properly, their lawyer said yesterday in a statement that didn't name the firms." Citing unnamed sources, Bloomberg fingers insurance firm MetLife and asset manager TCW as joining PIMCO and BlackRock in the complaint.

Bank of America CEO Brian Moynihan earlier today said that his bank would "vigorously contest" putback claims. Just this morning, the company said that as of Sept. 30, mortgage buyback claims against the company stood at $13 billion. Management worked to downplay the risk these legal fights could pose to the company, but also warned that going forward, the size of costs related to putbacks was "going to be lumpy."

Looks like BofA is taking one of those lumps.

Update: Yves Smith at Naked Capitalism throws some cold water on this story:

Note several things before we go any further: first, this is NOT litigation, it's a mere nastygram. Second, this is almost certain to be a new strategy in a effort mounted by an investor group (presumably now identified to turn up the heat on BofA) which so far has gotten nowhere. An unidentified group tried pressuring the trustee of a similar amount of bonds to direct the repurchase of loans gone bad. The trustee said it wasn't going to do anything. So now the same line is being tried on the servicer, Countrywiide, this time alleging that it is Countrywide's responsibility to buy back the loans.

mtaylor [at] observer.com | @mbrookstaylor

Each shows a fresh, dismally depressed value for the property ($1.99 billion based on current income), and tells of the new low level of the reserve fund meant to cover debt payments ($24 million).

But within the numbers in the latest report, released this week by the firm Realpoint, is another tale that serves to illustrate how this deal was, in retrospect, doomed from the start, even beyond the inconvenient timing of buying at what turned out to be the market's sharp peak.

The report found that as of June 30, for every four deregulated market-rate apartments in the 11,000-unit complex, there are now six rent-stabilized apartments, a level far below the landlord's expectations.

This ratio-the proportion of deregulated apartments to stabilized apartments-had been a major component to making the deal work on paper when Tishman Speyer, controlled by co-CEOs Jerry and Rob Speyer, planned out the purchase three years ago. At the time of the sale, the vast majority of tenants (73 percent) had their rents restricted by the rent-stabilization program. These apartments are far more valuable when deregulated, which can generally only occur when they turn vacant or when their tenants are evicted for violating their leases.

But the Speyers saw this as territory with huge revenue potential, and they were determined to step up efforts to rout out stabilized tenants who had illegal subleases or second, primary homes.

At the time of the late 2006 sale, there were 8,038 stabilized apartments and 3,189 deregulated units. The latter had grown over time, and during the four years prior to the sale, the previous owners had deregulated an average of 6 percent of the stabilized stock annually, according to Realpoint.

The Speyers were far more ambitious. Based on statements in a 2007 document attached to debt on the property, they planned to deregulate an additional 3,000 apartments over the ensuing four years, a pace that comes out to more than 9 percent of the stabilized apartments annually. They hired a private detective to scour public records and find stabilized tenants who might not actually live in the complex; they tried to remove far more tenants for violations than the prior owners had.

The result of all their efforts: The pace of deregulation actually slowed.

According to the Realpoint figures, by the end of June, Tishman had a total of 4,440 deregulated apartments in the complex. At this rate, Stuy Town and Cooper Village should have about 5,000 deregulated apartments at the start of 2011, a checkpoint at which the Speyers had assumed 6,397. (Each deregulated unit in 2006 brought an average $1,500-plus per month more than a stabilized apartment.)

The inherent difficulties in tracking down tenants who are violating rules and illegally subletting their apartments can probably explain much of the slower rate. The easiest ones to find-through public records of a second home, for instance-would be removed quickly at the start, or by the prior owners.

There has also been strong resistance in public by the tenants, and the local councilman, Dan Garodnick, is always eager to hold a press conference decrying the latest efforts of what the tenants say is an overaggressive attempt to oust tenants.

Regardless of the reasons, the Speyers have clearly had trouble deregulating the apartments, one of the factors in the property's high-profile saga. (A pending lawsuit could actually bar deregulation, making the deal's finances that much more dire.)

Based on the Realpoint analysis, the property is now valued at $1.99 billion, based on numbers from the first half of 2009. That figure is down from an estimate last month of $2.13 billion, which, like the $1.99 billion figure, is based on current cash flows. (The deal assumed that by January 2011, the value by this measure would be $5.17 billion.)
As for the reserve fund, which was a proud $400 million back in November 2006: As of this month, it's $24.4 million, an amount that could last anywhere from days to three or four months, based on the amounts withdrawn from the fund in recent months.

"If they continue at the current rate, they'll be depleted right around December," said Steve Kuritz, author of the Realpoint report. "It could go earlier, it could go a little later."

ebrown@observer.com