"My concern is that [Silverstein's] insurance proceeds could provide a price advantage over two different types of product," says a source who works the Downtown market. "Those products are new buildings that are proposed and, depending the degree price advantage, existing class A buildings."
Woody Heller, executive managing director, Capital Advisors Group at Insignia/ESG, agrees. "These buildings could be constructed at a cost structure that would give them an advantage over existing buildings," Heller tells GlobeSt.com. "The new properties would have a low break-even point, which would suggest that in a down market, or maybe not even in a down market, they could lease for lower rents than class A buildings traditionally demand, which could put downward pressure on the market overall."
Silverstein has been battling his 22 insurers since Sept. 11 over whether the destruction of the World Trade Center towers constituted one act of terrorism or two. Under the later scenario, the Silverstein group would collect two $3.6-billion payments.
Another source close to the market estimates the cost to construct 5 million sf--roughly half the amount of office space removed from the market on Sept. 11--at $1.5 billion to $2 billion, and between $3 billion $3.5 billion for 10 million feet. Given that basis, he offers some alternatives, each of which impacts the market in a different way:
One occurrence and redevelopment of 5 million sf, Silverstein's break-even rent could be $34 per sf.
Two occurrences and redevelopment of 10 million sf, Silverstein's break-even rent could be $22 per sf.
One occurrence and redevelopment of 10 million sf, Silverstein's break-even rent could be $29 per sf, including construction loans at 7%, necessary to pay for a portion of construction in this example.
The source explains that the above scenarios factor in Silverstein's existing debts and outstanding finance obligations with regards to previous development on the site, and extrapolate operating, transportation, infrastructure and retail costs from the equation. Similarly, they take in to account ground and operating rents and property taxes. Total construction cost for class A office space was placed by the source at $300 to 350 per sf, although other sources say $400 might be a more "realistic" number.
Bruce Mosler, president of US operations for Cushman & Wakefield, predicts Downtown leasing to pick up by the time World Trade Center replacement space begins to come online and indicates that a strong demand would cushion the impact Silverstein's new low-cost rents would have on the market. "There will be an increase in demand in the downtown market by then," he tells GlobeSt.com. "I think there will be a national shift back to the West Side as Lower Manhattan returns as both a tourist attraction and a source of prime office space."
Still, Silverstein stands to apply his insurers' dollars to push up to 10 million sf of prime class A office space onto a soft market at rates his competitors can't hope to match, what sort of a counterbalance can the market expect?
Federal incentives, it appears, will be used to bridge the gap between what Silverstein can charge and the asking prices his competitors must realistically ask. A spokesman for Larry Silverstein commented, "Incentives are always put in place to attract tenants to an area that needs that kind of stimulus." Another source placed subsidized class A office rents at around $24 per sf, in harmony with what Silverstein could charge based on the figures above.
Dirk W. Hrobsky, vice president of Trammel Crow Co. New York City, is optimistic that the federal business incentives Downtown will allow the market to correct itself, but only as long as they remain in place. "Even given the federal subsidies [for Silverstein], he's still not going to be able to undercut." However, "that would be the case if the other product in the area didn't have those incentives."
Hrobsky estimates subsidized class A office deals "in the low $30's right now, even high $20's." Additional GlobeSt.com sources place unincentivized rents in the $40-to-$50 range, offering a snapshot of the vast impact this federal package has on the market's stability.
Hrobsky tells GlobeSt.com that class A rents on Sept. 10 hovered near $45, a far cry above current net prices. Similar to Mosler, he says the drop-off in demand, coupled with the prominence of World Trade Center space will drive tenants back to the area.
"People will move back to the WTC site because it's going to be the best product in the area," Hrobsky tells GlobeSt.com. "That absorption is also going to increase downtown as superior product comes online at significantly discounted prices, compared to Midtown class A space."
"Silverstein has to source dollars, so he's not really buying futures on America," says Hrobsky. "People who are buying futures will be the frontiersmen who move from Midtown class A product to Downtown class A product. Those frontiersmen will be the most rewarded."
It appears, then, that President George Bush's 10-year, $5-billion federal "Job Creation and Worker Assistance Act of 2002," designed to attract and retain businesses downtown through federal employee and leasing subsidies, should allow the market to remain stable as the new World Trade Center space comes online. However, as vacancy hits comfortable levels Downtown, Hrobsky expects those incentives to disappear. "Once you reach critical mass in that area, you will begin seeing a falloff in incentives pretty quickly," he says.
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