The Rebuilding of Ground Zero, Part 96

The New York Observer has a report today criticizing the financial deal that appears in the works between Silverstein Properties and the Port Authority because it puts taxpayer money into the mix. Considering that this was an unprecedented situation, the criticism that taxpayer funds and other public money might go to reconstruction makes little sense, particularly since the construction will itself create jobs for the next few years at a time when the local economy remains in the dumps.

Taken with the $3.1 billion, Port Authority–owned One World Trade Center (formerly the Freedom Tower) currently rising, the Silverstein deal, should it indeed mature, would mean nearly 7 million square feet, or two and a half Empire State Buildings, constructed within the span of a few years on one site—all with only a single private tenant in place, China-based Beijing Vantone, for a relatively trivial 190,000 square feet, or six floors.

This comes on top of prior pacts in which the federal, state and city governments agreed to numerous other incentives, including agreeing to lease more then 2 million square feet at the site and offering more than $2 billion in tax-free bonds to bring financing costs down.

The path to this point—to be on the verge of additional public subsidy of two World Trade Center towers—was a tortuous and hard-fought one, and backers of the Silverstein deal-in-progress insist that an overly complex design for the site and a financial structure carved during the boom make the government bailout the best of many bad options.

But questions of rationale aside, the total financial risk to the public at the site as a whole, particularly in the government-owned One World Trade Center, is tremendous. A recovery could lag, the recession could linger; tenants could eschew Lower Manhattan or the new Silverstein towers, as at least two banks—Goldman Sachs and JPMorgan Chase—have, thereby leading to a default. (The bulk of any loss would fall on the Port Authority and would likely crimp transportation spending.)

This, of course, is not how office towers typically get built. Developers, particularly in a recession, traditionally must have a large private tenant in hand to get anything but a laugh from lenders, and speculative office space very rarely flies on such a large scale.

This has sparked concerns that the office towers could be slow to lease up, potentially languishing for years without enough rent to even cover the mortgage payments. “Just building office buildings doesn’t mean you’re creating jobs,” said Barry Gosin, CEO of brokerage Newmark Knight Frank. “It’s not like the field of dreams. We’ve learned that lesson before.”

This is particularly a worrisome concept in Lower Manhattan. Dark clouds are gathering over the neighborhood, as it is expected to soon see a tremendous amount of office space go vacant, with no clear answer as to who will fill it. Brokerage Jones Lang LaSalle has projected downtown vacancy rates will soar to more than 20 percent by 2014, led by major financial firms with expiring leases that cover more than 7 million square feet.

The difference is that the space being built at Ground Zero will be prime class A space that can command better prices and offer more amenities than other space in the City. It also rebuilds about 70-80% of the office space that was destroyed on 9/11, a not insignificant amount of space that needs to be rebuilt to fill future demand. The additional space may also lead to pressure to moderate pricing for office space and make New York more attractive for companies to do business there. That's not a bad thing either.

One doesn't build just for current demand, but for future demand.

Meanwhile, the Port Authority has restarted a live camera for the construction of the Freedom Tower. It's taken from the roof of the entrance to the temporary PATH terminal adjacent to the Freedom Tower and 7WTC.