UPDATED, Jan. 21, 5:30 p.m.: Right about now, Larry Silverstein must be feeling the anxiety of a debutante at cotillion.
One by one, potential leasing suitors for his planned 2 World Trade Center have stepped forward, only to pick someone else. Skadden Arps? Though the law firm issued a request for proposals to Silverstein Properties, it ended up signing at Brookfield’s Manhattan West. Time Inc.? Moved in 2 WTC’s direction only to pick nearby Brookfield Place. But the snub that hurt the most was News Corp. and 21st Century Fox.
Rupert Murdoch’s media conglomerate signed a non-binding letter of intent for a 1.3 million square-foot lease to anchor 2 WTC, only to back out last week and instead stay at its existing homes, 1185 and 1211 Sixth Avenue. The setback exposes some of the challenges Silverstein Properties faces in its search for an anchor tenant – which it likely needs to secure construction financing and start work at the 2.8 million-square-foot tower.
The cost conundrum
In a memo sent to employees last week, News Corp.’s management wrote that it concluded “given the scale of investment in a relocation of this size, that our resources would be better directed elsewhere.”
This gets to the heart of Silverstein’s problem. For a prospective tenant, moving to 2 WTC requires a major capital expenditure to uproot an entire company and build out the new space. But many public companies are now less willing to spend that kind of money than they were just half a year ago, according to Greg Kraut, a principal at Avison Young. The reason: increased pressure from shareholders to keep down costs amid an unstable economic environment.
“The stock markets are really unstable,” Kraut said. “We’re a real global economy now, so you know a lot of people watch the stock market and people don’t want to hear companies putting up a lot of money for capital expenditures.”
Since 21st Century Fox signed the letter of intent last summer, its stock has taken a beating amid broader fears over the health of the cable television industry.
Kraut cautioned that this reluctance to spend big on new digs could be short-lived, as it often has been in the past. But for now, he said, Silverstein’s best bet may be landing a large private company such as a law firm or to become “creative” in helping a tenant finance its move.
Silverstein appears to have tried the latter in its move to land Murdoch as a tenant. In December, the Port Authority of New York and New Jersey, which owns the land under 2 WTC, approved $9 million in subsidies to finance News Corp. and Fox’s move. This cash gift reportedly came on top of $19 million in subsidies from Silverstein and a $15 million tax credit from Empire State Development, but evidently still wasn’t enough to offset the cost of moving.
The company declined to comment for this article beyond a statement issued by Larry Silverstein last week after news of the Murdoch snub broke: “Make no mistake: It won’t be long before we find a great company to anchor 2 World Trade Center. Downtown’s momentum is palpable and unstoppable.”
Tale of the TAMI
Tenants’ reluctance to pay for a move is a challenge for all office developers, regardless of location. But World Trade Center landlords face the added hurdle of convincing tenants to give up Midtown.
“People want to focus on new, but if you give me a new house in the wrong part of town, that won’t do anything for me,” said Scott Panzer, a vice chairman at JLL who has represented media tenants such as NBCUniversal.
Silverstein’s most convincing pitch to Midtown tenants has always been the ability to move to a state-of-the-art office building and still pay equal or lower rents than they do in an aging skyscraper on Park Avenue. But the vast majority of these white-collar firms still prefer to pay a premium to be closer to Midtown, Panzer said, with its easy access to the Upper East Side, Long Island, Westchester and Connecticut.
But for tech and media companies, Downtown’s proximity to Brooklyn, where many of its employees tend to live, makes it an attractive office destination. Larry Silverstein himself has trumpeted the neighborhood’s appeal to tech and media companies, calling it the emerging “new media capital of America.”
The problem: There are very few tech companies large enough to anchor 2 WTC — Facebook and Google are already out of contention — and there are very few media companies who’d be willing to shell out the kind of money needed for a big move.
“I think all major news companies and those companies dealing with the internet are looking at the rental rates for new prospective buildings, and it’s a lot cheaper not to move,” said Robert von Ancken, who runs Landauer Valuation & Advisory at Newmark Grubb Knight Frank.
So this, in a nutshell, is Silverstein’s dilemma: the tenants most likely to want to move to 2 WTC are also the tenants least likely to be able to afford such a move.
Quo vadis, centrum commercii mundi?
None of this means 2 WTC is set up for failure. The tower could still beat the odds and land a major media tenant. After all, media advertising firm Group M will anchor neighboring 3 WTC and publishing house Conde Nast is the anchor tenant at 1 WTC (albeit with a heavy cocktail of discounts and subsidies). And while most major corporations may prefer Midtown, Silverstein could still well convince one of them to move Downtown. But it does mean that 2 WTC’s pool of potential anchor tenants is limited, arguably more so than in the past.
“A lot of the really big potential tenants are off the market,” said Panzer, pointing to firms like Paul Hastings, Sony and Credit Suisse that recently signed long-term leases. “This doesn’t mean there’s not going to be new ones. But a lot of them are kind of done.”
Avison Young’s Kraut believes that the tower will land an anchor tenant despite the challenges. “To get a beautiful 21st century building at an attractive price point with all the incentives is pretty attractive,” he said. Von Ancken is also optimistic, and Larry Silverstein last week said “it won’t be long” before the firm lands an anchor tenant. But for now the tower’s future remains uncertain. One thing, to use von Ancken’s words, is clear: “It’s going to be a struggle.”
Correction: an earlier version of this post misquoted Scott Panzer.
Source: The Real Deal