New York City's Freedom Tower may be a financial disaster in the making.
That's the opinion of a handful of Manhattan's best-known real estate executives now that the $2.88-billion (U.S.), 2.6-million-square-foot office skyscraper has been approved to replace the World Trade Center. By the time the 90-storey landmark is scheduled to open in 2012, about 40 per cent of the space will be leased at a rate that won't cover construction costs.
"The Freedom Tower isn't economically feasible under the present circumstances," said Douglas Durst, a third-generation New York developer whose company is building Bank of America Corp.'s new offices in midtown Manhattan.
The symbol of the city's recovery from the terrorist attacks of Sept. 11, 2001, was supposed to be former New York governor George Pataki's legacy. Eliot Spitzer, his successor, is supporting development of the 16-acre Ground Zero site, which is owned by the Port Authority of New York and New Jersey and overseen by Mr. Spitzer and New Jersey Governor Jon Corzine.
Mr. Durst and Anthony Malkin, who owns the Empire State Building, have formed the Continuing Committee for a Reasonable World Trade Center to pressure the Port Authority to change the design of the Freedom Tower to make it more desirable to renters from the private sector. "Competitive products will be coming on the market at the same time," said Mr. Malkin, president of Wien & Malkin, a New York-based real estate investment firm. "They'll be able to get higher rents right across the street."
Three office buildings are scheduled to open at the World Trade Center site at about the same time as the Freedom Tower. Two of the three buildings will offer open plans that financial services firms favour for trading floors. The Port Authority's development won't.
These buildings, combined with a multitude of others scheduled for the area, will bring the total of new Manhattan office space coming on the market from 2008 to 2013 to at least 15.8 million square feet.
The Freedom Tower has tenant commitments so far from federal and state government agencies for about 40 per cent of the building. Those tenants will pay $59 a square foot. At a cost of $1,100 a square foot, the Freedom Tower would have to command rents between $70 and $80 a square foot to yield a 5-per-cent return, said Barry Gosin, chief executive officer of Newmark Knight Frank, the third-largest real estate brokerage in New York City.
"The tower is hard to justify on an economic basis," Mr. Gosin said. "From New York City's perspective, why do the economics of the building matter? At the end of the day, it will be good for the city."
In addition to the tower project, New York's Metropolitan Transportation Authority and the Port Authority are investing more than $3-billion to improve the downtown rail network. At the same time, the residential population in the area is growing, up to 37,000 at the end of September from about 23,000 before the 2001 attacks. Deputy Mayor Daniel Doctoroff predicts 70,000 people will live in the neighbourhood by 2011.
Henry Elghanayan, chief executive officer of Rockrose Development Corp., said the Ground Zero site should consider adding housing to the mix. "The office market is much different from the residential market," he said. "It goes up very dramatically and it comes down very dramatically."
The Port Authority, which occupied 724,000 square feet in the World Trade Center's north tower, doesn't plan to take space in the Freedom Tower. It has a tentative agreement to lease the same amount of space in 4 World Trade Center, the smallest of the four skyscrapers planned for the site.
If the landlord refuses to occupy the Freedom Tower, it shows the difficulty that the Port Authority may have in signing up tenants, said Guy Nordenson, a structural engineer who worked on the first design of the Freedom Tower with architect David Childs.