The City Council's vote this week on a new skyscraper in Midtown won't just change the views of and from the Empire State Building. It could also have impacts further downtown, where two office towers at the redeveloped World Trade Center will only reach their planned height if there's sufficient commercial demand.
The Port Authority Thursday finalized its agreement, first announced in March, with World Trade Center developer Larry Silverstein.
The agreement calls for the government agency to devote up to $1.3 billion to the project through a combination of loan guarantees and rent reductions. Officials say the arrangement means that Silverstein will almost certainly finish one building by 2013. But unless Silverstein can pre-lease about a fifth of the second building, it will end up as a four-story shopping mall instead of a 71-story skyscraper. The Port Authority has refused to subsidize a third tower at all—which means that unless Silverstein can get companies to lease space there, it will only be built to street level.
Ryan Severino, an economist at Reis, a real estate consulting firm, says 15 Penn could end up luring away the companies that would go to the World Trade Center—and one of those towers may never end up getting built as a result.
“It certainly increases the possibility that there will be competition between sites like the World Trade Center and 15 Penn, where they're going to be the newest game in town,” he said.
The three towers in question are all about 2 million square feet in size and are all designed by world class architects; Rafael Pelli is doing 15 Penn, while Norman Foster and Richard Rogers are designing the two most vulnerable office towers at World Trade Center.
Chris Ward, the Port Authority’s executive director, says it’s impossible to determine whether 15 Penn will poach tenants from the World Trade Center.
“You will never be able to discern through some magic crystal ball whether, is this building competing with that building, or is this project competing with that project,” he said.
Right now, no tenants have committed to any of the three towers. Vornado Realty Trust was trying to lure Merrill Lynch to anchor 15 Penn long before it sought the City Council’s approval for the skyscraper. Merrill was also considering one of Silverstein’s buildings. Then Merrill reportedly decided to stay where it was at the World Financial Center—except the financial industry collapsed first and Merrill became subsumed by Bank of America. That episode shows how Midtown and Downtown office markets—once very distinct, with Midtown considerably more attractive and expensive—have become increasingly fluid.
Across Manhattan, Class A office space—the type of modern structure that Vornado and Silverstein are proposing to build—is suffering from a 12 percent vacancy rate, according to brokerages. That is historically high: Severino, the economist, says the vacancy rate has averaged about 9 percent over the past 20 years. That rate comes out to about 30 million square feet of vacant office space across the city.
Severino says the economic rebound could be so strong, and the job market so hot, that all three towers get leased and get built. "But I haven’t seen anybody forecasting tremendously strong economic growth in the next five to 10 years,” he adds.
Other real estate analysts are more optimistic. Dan Fasulo, managing director of research at Real Capital Analytics, sees the recent news that Conde Nast is interested in moving to 1 World Trade Center, the tallest skyscraper at Ground Zero, due to open in 2013, as a harbinger of things to come.
“There’s still a vast shortage of modern office space that corporations are now looking to occupy,” Fasulo said. “Unless there is a significant economic shock from where we are today, I do believe you will continue to see vacancy rates drop, which will only drive developers to dust off some of the proposed projects from the shelf and look at building again.”