Analysis: WTC Deal Ties Buildout to Market Conditions

Thursday’s landmark deal breaking the long deadlock over the financing of the World Trade Center redevelopment provides for flexibility in the face of Manhattan’s uncertain office market.

March 26, 2010
By Paul Rosta, Senior Editor

Courtesy Flickr Creative Commons user Beverly & Pack

Thursday’s landmark deal breaking the long deadlock over the financing of the World Trade Center redevelopment provides for flexibility in the face of Manhattan’s uncertain office market.

Only one of the three office towers being developed at Ground Zero by Silverstein Properties Inc. is guaranteed to go forward for the time being. Meanwhile, the development of two additional towers will hinge on improved market conditions and the availability of public and private financing. The new agreement is the latest acknowledgment it may take several more years to generate demand for all 6.7 million square feet of new office space contained in the three towers.

A decision reached in January by an arbitration panel laid the groundwork for the flexibility built into Thursday’s deal between Silverstein Properties and the Port Authority of New York and New Jersey. That ruling effectively allowed Silverstein to keep the rights to build all three towers even if the developer were to miss a deadline specified in the World Trade Center’s development agreement. The arbiters’ earlier decision also specifically opened the door to adjusting the completion schedule for the towers.

First, the sure bet: the 2.3 million-square-foot 150 Greenwich Street, usually referred to as Tower 4. Already under construction, the 64-story Tower 4 is the smallest of the World Trade Center’s four proposed office buildings, which also include One World Trade Center, formerly known as Freedom Tower. Scheduled for completion on 2013, Tower 4 is also the only one of the three as the advantage of already being 60 percent pre-leased to the Port Authority of New York and New Jersey and the City of New York.

The most complex conditions surround Tower 3, the 71-story tower that would offer 2.1 million square feet of office space plus five trading floors. In light of scarce public financing, Silverstein had asked the Port Authority to provide financing for two towers instead of one. The Port Authority balked, arguing that it had too many other vital projects to put in all the money Silverstein had requested.

Thursday’s deal follows some of the provisions suggested New York City Mayor Michael Bloomberg and Sheldon Silver, speaker of the New York State Assembly. Under the compromise, construction of transit and retail space that forms the base of Tower 3 will go ahead immediately.

Building the office tower itself, however, will require an improvement in the capital markets and stepped-up demand for office space in Manhattan’s financial district. In particular, Silverstein will have to raise $300 million worth of private equity, prelease 400,000 square feet of office space and find private financing for the rest of the tower without a full public backstop. If Silverstein can jump through those hoops, the Port Authority, New York State and New York City will provide a public backstop of up to $390 million. Silverstein would not be eligible to take profits from Tower 3 as long as the backstop remained in place.

At least in the short term, meeting those conditions may prove to be challenging. Although Manhattan has added office space at levels much lower than historic norms during the past decade, Downtown and the rest of the city appear likely to favor tenants for the next several years.

Downtown Manhattan’s office market softened further early this year as the departure of Goldman Sachs Group from 1 World Financial Center returned 733,000 square feet to the market. That brought Downtown’s availability rate to 12.5 percent, according to CB Richard Ellis Inc. Leasing activity Downtown for the first two months of the year reached 460,000 square feet, a 10 percent uptick compared to 2009; however, last month’s 210,000 square feet of leasing activity was down 46 percent from the five-year monthly average.

The tallest of the three Silverstein buildings, Tower 2, may be in for the longest wait of all. Also called 200 Greenwich Street, the 79-story project, which calls for 2.3 million square feet of office space, five 66,000-square-foot trading floors and 138,000-square feet of retail, will be built out to ground level. However, the project will stay on the back burner until market demand dictates otherwise.