Cover Story
New York Mayor Rudy Giuliani says it could take a year or longer for downtown Manhattan to dig out from under the rubble created by the September 11 terrorist attack on the World Trade Center. Here’s our assessment of the tragedy’s impact on publicly traded office companies and tenants.

by Barry Vinocur
Photography © Steve Lopez/Logo Graphics

As New York digs out from the worst terrorist attack in U.S. history, companies with offices in the World Trade Center’s Twin Towers and the surrounding impacted buildings are scrambling to find office space.

By most accounts, the office vacancy rate in New York City was in the 5 to 7 percent range prior to September 11. The REIT Research Team at Banc of America Securities noted recently that though the stock of currently available office space in Manhattan exceeds the roughly 13 million square feet of space directly impacted by the tragic events (about 4 percent of Manhattan’s total supply of office space), there’s very little excess capacity. (Another roughly 10 million square feet has been rendered “temporarily” unusable, with estimates ranging from two to three months before that space is back online.)

More importantly, there’s a serious shortfall of large blocks of space, notes Lee Schalop, who heads the REIT research effort at Banc of America.

According to Cushman & Wakefield, one of the city’s large commercial brokers, there are 67 blocks of space of 50,000 square feet or more—a total of 8.1 million square feet—currently available in all of Manhattan. Thirty of the blocks, or 5.5 million square feet, are 100,000 square feet or larger. “That means the space available in large blocks equals just 35 percent of the space impacted by the events on September 11,” Schalop and his colleagues wrote.

Property owners are racing to help those displaced find alternative space, either on a temporary or permanent basis. At the same time, the Real Estate Board of New York (REBNY) has established a database of available office space on its website ( It is also urging its members not to take advantage of tenants displaced by the tragedy when negotiating lease rates, suggesting they use rental rates in place prior to September 11. REBNY also has asked brokers to waive their usual commissions and fees when assisting displaced tenants in their search for space with short-term (that is, six- to 12-month) leases. “Any member owner, firm, or broker found to be taking advantage of this terrible tragedy will be expelled from the Real Estate Board,” REBNY wrote its members.

A sizable chunk of Manhattan office space, as well as space in nearby areas, is owned by public companies, REITs, and non-REIT real estate operating companies. Following the stock market’s longest hiatus in 70 years (see table at the top of page 16), a number of those companies saw their share prices soar (see table at bottom of page 18) as investors tried to handicap which companies were likely to benefit from the rush to find replacement space.

Mike Kirby, co-founder and principal of Green Street Advisors, a research boutique in Newport Beach, California, that works with institutions, cautions that though companies may well see some increase in revenue as a result of the scramble for Manhattan office space, vacancy rates were so low prior to September 11 that it’s hard to imagine substantial increases in most companies’ earnings. Kirby also warns that once the immediate space rush is dealt with, investors will need to come to grips with the economy.

Chart Specifically, Kirby says the New York financial services business, which he cites as the major driver of the New York economy, is in for very rough sledding. He contrasts Manhattan with Boston, which also has a heavy reliance on financial services. “Boston is more asset management-based, so those fees are less susceptible to an economic slowdown or recession than New York, which relies heavily on deal-related fees.” He believes deal flow will slow to a trickle, if not dry up completely, in the near- to mid-term. “It is likely to be 12 to 18 months, or perhaps longer, before that gets going again.”

Shorter-term, he stresses, a handful of firms do stand to gain. For instance, Boston Properties, which is in the midst of leasing space in the second of two buildings it’s constructing in Times Square, won’t have any trouble filling that space, Kirby predicts. He believes Mack-Cali Realty Corp., which is developing a building at Harborside in Jersey City and has more land available for development, also stands to be a winner. “We’re in the midst of crunching numbers, but even after the recent run-up in Mack-Cali’s stock price, we think there’s still a bit more headroom.”

Banc of America’s Schalop also sees companies with development potential (see table at the bottom of page 16) as winners near-term, as those developments are brought online. “Boston Properties and Mack-Cali currently have the most development in progress in the New York region. In New York City, Boston Properties has 2.3 million square feet in the pipeline. Outside of New York City, Mack-Cali has 1.8 million square feet currently under development.” Other companies with developments in the works, Schalop says, are: Reckson Associates (just over 400,00 square feet); Brookfield Properties (1.2 million square feet); and Vornado Realty Trust (just shy of 1.7 million square feet).

Though it has a sizable development pipeline, Brookfield’s share price was hammered in the aftermath of September 11 because of widespread reports of severe damage at some of its properties. Toronto-based Brookfield owns Towers One, Two, and Four of the World Financial Center, and One Liberty Plaza, which is adjacent to the World Trade Center site. In a series of conference calls, Bruce Flatt, Brookfield’s president and CEO, has sought to correct misperceptions about the status of the company’s properties.

Jon Litt, who oversees the REIT research effort at Salomon Smith Barney, recently upgraded Brookfield’s shares to a Buy on price weakness. “Despite some early misinformation in the press, all of Brookfield’s assets survived the attack and have been cleared by New York City as structurally sound.” Litt added that during Brookfield’s September 17 conference call, Flatt reiterated his confidence in Brookfield’s ability to deliver upon its prior earnings guidance for this year as well as 2002.

The Salomon Smith Barney REIT Research Team reported Brookfield’s properties are insured against acts of terrorism, but not against acts of war. “However, according to management, the company’s insurance carriers have not made the argument that these were acts of war rather than terrorism, and management has been in contact with its insurance carriers and fully expects all damages will be covered.”

Brookfield believes the buildings with the least amount of damage (One Liberty Plaza and Four World Financial) could be ready for tenants to reoccupy in as little as four weeks, while the remaining buildings should take no more than 12 weeks to repair.

Downtown Manhattan After The Attack
As of Friday, September 21, it had been determined that only 4 percent (13.4 million square feet) of the Manhattan inventory was destroyed. The rest of the affected buildings downtown have some damage and can be repaired. Three buildings comprising 4.8 million square feet have suffered structural damage, but can be repaired. These buildings are: 3 World Financial Center; 140 West Street; and 130 Liberty Plaza (Bankers Trust Plaza). Repair time has been estimated at nine months. An additional seven buildings comprising 10.1 million square feet have some damage, and it is estimated it will take two to three months before they are habitable. These include: 1 and 2 World Financial Center; 1 Liberty Plaza; 101 Barclay Street; 90 and 100 Church Street; and 22 Cortlandt Street. Another building, 4 World Financial Center, is habitable but inaccessible at present because of debris and the collapse of the north pedestrian bridge.

Almost 1,300 businesses in the area were affected. Thirty-one tenants occupying 100,000 square feet or more were displaced to varying degrees by the disaster. The largest displacements included: American Express (1.2 million square feet); Merrill Lynch (3.1 million square feet); Morgan Stanley Dean Witter (1.4 million square feet); Salomon Smith Barney (1.4 million square feet); and Bank of New York (800,000 square feet).

While only a portion of Manhattan’s 25.8 million square feet of available space was built out, and much was not scheduled to come on line until later in the year, displaced tenants have still been able to find space to meet their immediate needs. Only a handful have gone outside of Manhattan, with the Jersey City/Hoboken waterfront, Northern and Central New Jersey, and Stamford, Connecticut, garnering the most interest. Large blocks of built-out space are also available in markets as far afield as Poughkeepsie and Albany, New York, and Wilmington, Delaware. However, few tenants are expected to take space this far from Manhattan. To date, 10 World Trade Center area tenants have consummated leases totaling in excess of 1.5 million square feet. Our sources indicate an additional 3.5 million square feet of leases are pending. Most of the major landlords and property agents in New York have held their rental rates at levels that were quoted prior to September 11.

Images of the attack on the World Trade Center have been seared indelibly into the mind of every New Yorker, and a major void has been created in the world’s most recognizable skyline. The healing and rebuilding process, however, can be expected to move forward with dispatch. Before January 1, 2002, we believe that dispossessed tenants will have returned to the buildings that sustained window and facade damage, and significant progress will have been made in repairing the three most severely damaged buildings—3 World Financial Center, 140 West Street and 130 Liberty Plaza. Downtown Manhattan will be a smaller office district, albeit one of the largest in the country, with aggregate office space in excess of 80 million square feet, at least 75 million of which will be occupied by long-term tenants.

—From a September 2001 Special Report by Insignia/ESG (

Litt and his fellow analysts noted there are two events that could delay the reoccupancy of the buildings. First, the rescue and recovery operation may require the buildings to remain shut. “The company has developed a plan to provide access which would circumvent ground zero of the rescue and recovery.” Second, if for some reason electricity cannot be restored, reoccupancy may be delayed. “The company also has plans for generating electricity to circumvent the necessity for city electricity.” Of course, the Salomon Smith Barney analysts added, “The actual ability of tenants to move back into the buildings will be a function of the tenants’ ability to complete any repair work within their space quickly.”

Chart Noting that Brookfield had announced an 8 million share repurchase program on the Monday prior to the attack, and had confirmed its plans to aggressively pursue the buyback on its September 17 conference call, Litt stressed that should not only support the stock, but also could improve the earnings picture at the margin. “We believe the current valuation represents a compelling entry point for investors and have upgraded our rating on the shares to Buy. We reiterate our $22 price target, which assumes a 9.5x multiple on our 2002 earnings, in line with the office sector average. This implies a potential 12-month total return of 24 percent.”

Vornado Realty Trust should benefit from the relocation story and from lower interest rates, according to the REIT Research Team at Morgan Stanley. In a recent note, Greg Whyte and his colleagues wrote, “In the wake of last week’s tragic events in New York City, we have reassessed our estimates for Vornado. We are raising our estimates for 2001 from $3.75 to $3.87 and our 2002 estimates from $4.09 to $4.35.” The Morgan Stanley analysts added their increase in estimates reflects a number of factors, including: increased demand for space in the New York metro area as displaced tenants relocate, the steady run rate established in the second half of this year, and the positive effect of a lower interest rate environment.

Whyte and his fellow Morgan Stanley analysts pointed out that according to Vornado’s second quarter 2001 SEC filing, 42 percent of the company’s outstanding debt was variable rate debt. “We estimate that could potentially translate into a $0.15 per share boost to annual net income for every 100 basis point reduction in rates.” The Morgan Stanley team reiterated its Outperform rating on the stock, while raising its target price to $43 from $40 per share. “Our target price is based on Vornado trading at a very slight 2 percent premium to our target CBD [central business district] office REIT multiple of 10.3x, or 10.5x our forward four quarters estimate of $4.14.”

Rising Insurance Costs a Wildcard?
In a recent note, the REIT Research Team at Credit Suisse First Boston took a first pass at the impact the attacks might have on insurance costs. Larry Raiman, who heads CSFB’s REIT research effort, and his colleagues noted insurers of office buildings face significant costs as lower Manhattan property owners file claims. “Current loss estimates range from $30 billion to $70 billion,” they wrote.

Chart “One result of the attacks will certainly be increased premiums charged to building owners. We recently spoke with several office REIT management teams as well as CSFB’s property-casualty insurance analyst to get a sense of how significant the changes facing property owners could be,” Raiman and his colleagues explained. Prior to September 11, they continued, commercial property-casualty premiums were generally expected to rise 15 percent in 2002. Stressing that CSFB’s property-casualty insurance analyst says it is absolutely too soon to accurately predict how much further rates will accelerate; they added, it would also be premature to estimate the impact on public companies that own office buildings.

In discussions with a handful of office REIT management teams, the CSFB analysts found expectations regarding premium increases vary widely, from 20 percent to 100 percent. In general, however, the management teams they spoke with did not expect the increased premiums to have a negative impact on their earnings. “Increased costs will ultimately be passed through to tenants; however, there will be a lag as rental rates cannot be increased to reflect higher premiums until current leases expire,” Raiman and his CSFB colleagues wrote.

The CSFB analysts also pointed out while the percentage increases are high, the absolute dollar increases are not expected to be as extreme. “We estimate insurance costs as a percentage of rent per square foot range from 25 to 100 basis points. Therefore, assuming a $40 average rent, a 33 percent rise in insurance premiums would increase payments by $0.03 to $0.13 per square foot.”

According to Raiman and his colleagues, falling interest rates should help cushion insurance increases. “A number of REIT managers pointed out that continued decreases in interest rates could help offset any potential impact on earnings from increased insurance costs next year.” The London interbank offered rate, or LIBOR, and long-term interest rates are at or near all-time lows, and the Fed is expected to maintain its easing bias in an effort to stimulate the economy, they added. The Fed has cut rates nine times this year; the Fed funds rate is at a nearly 40-year low; and many market watchers suggest the Fed might cut rates another 50 to 75 basis points this year.

The CSFB analysts concluded that until they can get a better handle on the magnitude of any insurance rate increases, they are leaving their earnings models as is. “We expect management teams to address this issue during their third quarter conference calls, but do not expect much clarity to be provided.” As investors ascribe value to office REITs by discounting future cash flows, the CSFB analysts wrote, they do not believe this issue is severe enough to take precedence over the impact of the softening economy, currently the primary valuation driver. “As such, we do not expect rising premiums should significantly impact office REIT valuations.”


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