By Kara Wetzel on January 07, 2015.
(Bloomberg) -- When lower Manhattan’s new World Trade Center was conceived a decade ago, nobody had in mind a Silicon Valley in the sky.
Financial companies, which dominated the original twin towers, are scarce among tenants who have committed to space at the complex’s glass-and-steel skyscrapers. Instead, the majority of deals done since magazine publisher Conde Nast agreed to anchor 1 World Trade Center in 2011 have come from technology, media and advertising.
“People were expecting financial companies to be a substantial portion of the leased space” in the new towers, said Christopher Jones, vice president of research at New York’s Regional Plan Association. “I don’t think many people would have thought that it would be virtually nothing.”
The November opening of 1 World Trade Center, the 1,776-foot (541-meter) skyscraper built at the site of Sept. 11, 2001, terrorist attacks, marked a milestone in a lower Manhattan renaissance that’s been fueled by a changing mix of inhabitants beyond the area’s finance-industry roots. That shift is presenting a challenge: The creative companies dominating New York’s office market tend to be comparatively small, leaving landlords to fill their monumental buildings floor-by-floor.
Almost 2 million square feet (186,000 square meters) are unrented at 1 and 4 World Trade Center, the first buildings to open at Ground Zero. Agreements were signed for about 340,000 square feet in 2014, with no single lease larger than the 106,000 square feet that digital-advertising company MediaMath Inc. took in July at tower 4, according to CoStar Group Inc., a Washington-based research firm that tracks office leasing.
At that pace, the towers wouldn’t reach 95 percent occupancy until 2019, almost two decades after the 9/11 attacks leveled the first twin towers.
Few people in the real estate industry doubt that the towers will be filled. The newness of the buildings and the market-leading rents they’re seeking have contributed to the slow pace of leasing, said Mary Ann Tighe, chief executive officer of CBRE Group Inc.’s New York/tri-state region.
“It takes a while to fill these buildings,” said Tighe, who is co-head of the leasing team at Larry Silverstein’s 4 World Trade Center and 3 World Trade Center, which is still under construction. “I actually feel we’ve begun to develop momentum, and momentum is always the secret to leasing.”
So far, about 3.3 million square feet have been rented at 1 and 4 World Trade Center, including Conde Nast’s 1.2 million square feet, according to CoStar. The banking and insurance industries, which occupied almost 80 percent of the old World Trade Center’s leased space, make up 1.3 percent of current tenants, according to CoStar.
Media, advertising, computer-technology and communications companies have taken almost 33 percent of the space rented so far, compared with only about 3 percent at the old World Trade Center, the research firm’s data show. About 40 percent is from government tenants that agreed to lease space in the middle of the last decade to help jumpstart construction of the towers. The remainder came from business services, real estate and other fields.
For High 5 Games, a developer of casino and social media games, 1 World Trade Center was “complementary to Silicon Valley on the West Coast,” said Patrick Benson, vice president of marketing. The firm, currently based at 770 Broadway in the East Village, took 87,663 square feet on floors 58 and 59.
“It provided everything that we needed,” including state-of-the-art technology, a “blank slate” of column-free offices, and room for expansion, Benson said.
Interest from tenants like High 5, which usually have younger workers, is a reflection of how downtown has become “a much hipper area,” said Marc Shapses, executive managing director with Savills Studley Inc.
The days of financial companies being dominant downtown “are gone” after many moved to Midtown, he said. “And it’s a more conservative move now for those companies to just stay put, to renew their leases” at their current headquarters as a cost-saving move.
Banks including Citigroup Inc., JPMorgan Chase & Co. and UBS Group AG have considered and rejected going to the trade center site.
The few financial tenants at the new skyscrapers have come from outside the industry’s mainstream. The biggest is investment-research company Morningstar Inc., which took a 30,000-square-foot floor at 4 World Trade Center in September. IEX Group, the stock-selling startup that was the subject of Michael Lewis’s book “Flash Boys,” agreed to lease 13,000 square feet in that building in November.
At 1 World Trade Center, BMB Group, C12 Capital Management and Incandescent Technologies each took spaces smaller than 3,500 square feet.
That 3 million-square-foot tower, the tallest in the Western Hemisphere, is 62 percent rented, up from 58 percent in early November, when the first Conde Nast employees started working there, said Eric Engelhardt, director of leasing for co-developer Durst Organization’s trade center operation. It cost $3.95 billion to construct, making it the world’s most expensive skyscraper, according to property-information website Emporis.com.
One World Trade Center’s observatory, encompassing floors 100 through 102, is scheduled to open by the end of June.
The building -- still known to many by its former name, the Freedom Tower -- has faced criticism in recent months, including a negative architecture review in the New York Times by Michael Kimmelman, who wrote that the skyscraper “looks as if it could be anywhere, which New York isn’t.” Comedian Chris Rock, in a Saturday Night Live opening monologue, called it the “never-going-in-there-tower, ’cause I’m never going in there.”
That fear of terrorism, or mere discomfort at being surrounded by the memorial in the footprints of the twin towers honoring those killed on 9/11, was something potential tenants had to confront.
“That’s absolutely one of the conversations that you have to talk to your employees about,” said Dipanshu Sharma, CEO of xAd Inc., a mobile-advertising technology company. The company in November took the entire 44,000-square-foot 60th floor at 1 World Trade Center.
“Ultimately, we decided it was the safest space on the planet now, because of the past history,” Sharma said. “You could take it as a space that could be under attack in the future, because it has been a target, or you could think of it as a matter of national pride that you’re part of the resurgence.”
Engelhardt said leasing will pick up in the coming year.
“We’ve certainly seen an uptick in both people kicking tires as well as incoming proposals,” he said. “The Manhattan market is significantly deeper in the small-size tenants, so that’s why, by nature of the market, we will see activity in the smaller-scale size range.”
In addition to additional smaller agreements, Engelhardt said he expects to complete one or two larger leases of 100,000 square feet or more this year. He wouldn’t name any potential tenants.
One World Trade Center is on track to meet the developers’ goal of 92.5 percent occupancy in 2019, with net operating income of $144 million, said Erica Dumas, a spokeswoman for the Port Authority of New York and New Jersey, co-owner of the tower.
At least one company has decided to scale back its commitment. Advertising firm KiDS Creative, which in May agreed to the first private commercial lease at the skyscraper in three years, last week reduced its space to about 2,400 square feet from 34,775 square feet, and moved from the 87th floor to one in the 40s, said Steve Vitoff, a building spokesman.
Also vying for tenants at the site are Silverstein’s 3 World Trade Center, which has about 2 million unrented square feet, and his planned 3.1 million-square-foot tower at No. 2, which needs lease agreements to kick-start development.
The presence of xAd, High 5 and MediaMath shows the Trade Center can lure technology and other creative companies away from such neighborhoods as Chelsea, Soho and the Flatiron District. Demand in those areas, part of a district known as midtown south, has pushed office vacancies to the lowest in the U.S.
“Attracting some of the tech users this year was something we thought might have taken a little longer to develop,” Tara Stacom, the Cushman and Wakefield Inc. broker working with Durst to fill 1 World Trade Center, said in an interview last month. “They realized the value of new construction was something they weren’t getting in midtown south.”
XAd and High 5 Games are paying about $55 to $60 a square foot at 1 World Trade, minus any incentives such as government subsidies and free-rent periods, according to Compstak, a New York-based commercial-property data provider. That’s more than the average effective rent of $44 a square foot for the best-quality space in lower Manhattan.
Durst in May reduced rents for the tower’s middle floors by about 10 percent, saying the reductions were made after initial talks with potential tenants.
One World Trade Center was at the top of the list when Servcorp Ltd. shopped for a fourth New York location, said Chief Operating Officer Marcus Moufarrige. The Sydney-based firm provides temporary high-end offices to global companies, targeting the most famous and opulent properties in the markets it serves, such as London’s “Cheesegrater.”
“We’ve been working on this deal for three years,” said Moufarrige, whose company rented about 35,000 square feet at 1 World Trade, the entire 85th floor. “It’s going to be the most iconic building in the world. There was no hesitation in us wanting to be there.”
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