With their balance sheets covered in red ink, the major financial firms in the city are scuttling plans for new real estate projects — a move that could have broad implications for vacancy rates and leasing costs.
In the last few months, several major banks have called off plans to build new towers in Manhattan, providing yet another sign that the days of Wall Street’s flush expansion are over. The most high-profile examples involve Morgan Stanley, Merrill Lynch and JPMorgan Chase.
Morgan Stanley backed out of its commitment to move its headquarters to the Hudson Yards site just weeks before its partner, Tishman Speyer Properties, won the right to develop the site last month.
Officials at Morgan cited the projected completion date of 2013 as its primary
concern. Yet the credit crisis and the recent Wall Street losses — Morgan Stanley had a $2.3 billion quarterly write-down, which was actually the best quarter of all the big banks — make 2008 a tough time to commit to a lavish new building.
Just months ago, Merrill Lynch was reportedly in talks with Vornado Realty Trust to move its headquarters from the World Financial Center to a new 3 million-square-foot tower on Seventh Avenue, across from Pennsylvania Station. The New York Sun reported in August that Merrill and Vornado were “trading paper” to finalize the deal.
Since then, the brokerage has suffered $25 billion in investment write-downs. It is now mum on plans for its offices.
“Our lease in the World Financial Center expires in 2013, and we have renewal rights for five years,” a company spokesperson said. “Beyond that, we do not have
any comment.”
Most recently, the demise of Bear Stearns and its announced acquisition by JPMorgan Chase has left the future of two buildings — Bear Stearns’ headquarters and JPMorgan’s planned tower at the World Trade Center site — uncertain. The assumption at press time was that JPMorgan Chase would take over at least large parts of Bear Stearns’ 1.2 million-square-foot building.
Even if the JPMorgan acquisition of Bear Stearns does not close, the merger agreement gives JPMorgan the right to buy the Bear Stearns building at 383 Madison Avenue, which is valued at about $1.4 billion. That’s slightly more than the purchase price of the entire company — even after JPMorgan raised its bid from $2 to $10 per share.
JPMorgan’s sudden acquisition of the Midtown headquarters means it is scrapping its plans to move its investment banking operations to the World Trade Center, where it was expected to be an important anchor tenant. The firm could still build a tower there, but its deal with the Port Authority, which owns the site, is up in the air.
Ken Siegel, managing director at Jones Lang LaSalle, said the decision by the banks to roll back their plans is not surprising.
“I think in economic cycles, where there is a lot of uncertainty, major capital decisions of all types are deferred, and real estate is not immune,” he said. “First it’s earnings reports, and then it’s people, and then it’s space. That’s kind of the way things typically go.”
Siegel said that if the commercial market here does add new stock and if demand soars again, the tight space constraints could drive up rents and restrict leasing activity. But he noted that with the Trade Center plans and other planned building, there is still a lot of new office space coming on the market around 2013.
While sources said that Citibank has put some of its space at 399 Park Avenue on
the market and that JPMorgan is making a deal to give back about 370,000 square feet to its landlord at 345 Park Avenue, so far, on the leasing front, there has been no significant pullback.
Louis Taylor, a real estate analyst for Deutsche Bank, noted that there has not yet been a substantial headcount reduction in the city. “It’s hard to know what the effect will be without knowing the number of layoffs,” he said.
The consensus view is that there will be job cuts at investment banks in the range of 5 to 10 percent.
Taylor noted that when banks reduce headcount, they typically consolidate in buildings they already own or lease in.
Robert Shapiro, an executive managing director of Grubb & Ellis, said that rents have held firm, but he characterized the market as uncertain. “Tenants are hesitating,” he said. “Decline is a possibility, but there haven’t been any declines yet.” One factor that may be preventing that decline is the tight space sitution. As Siegel put it, “We are not starting from a 10 or 12 or 15 percent [vacancy] spot.”
As for Bear Stearns, in addition to its headquarters, it has 500,000 square feet of space in Manhattan, most of it at three buildings on Park Avenue in the 40s. JPMorgan controls 2.5 million square feet on Park Avenue, including its headquarters building. It also has 1.7 million square feet Downtown. The firm says it is continuing with a renovation of 270 Park Avenue; it will move its investment banking operations to the Bear Stearns building.
Job cuts at Bear Stearns, which saw
residential brokers gather at its offices
hoping to pick up listings from doomed bankers (see story on page 87), are expected to be worse than the industry-projected 5 to 10 percent.
But even investment banks that are in stronger shape have scaled back their ambitions without abandoning space.
Goldman Sachs, one of the few Wall Street firms that has come through the mortgage debacle relatively unscathed, is going ahead with plans to build a 43-story tower in Battery Park City. That building is slated to be ready for occupancy in 2009.
Across the river in Jersey City, though, Goldman is slowing down. The bank received approvals to build a second tower; no construction, however, is currently planned, according to a company spokesperson.
Bank of America, meanwhile, is almost done building its new 55-story tower near Bryant Park.
While the tumult in the financial world will no doubt have ripple effects in the New York real estate market, it does not bode worse than a typical down cycle, Scott Singer, executive vice president of the Singer & Bassuk Organization, said.
“We’re far more than a one-industry town, so there’s a lot of remaining strength in the market,” he said. “We were in a period of total disequilibrium in favor of demand; the first sign of softening would simply put us into a more balanced equilibrium.”
In addition, there’s a silver lining to the big bank troubles. The kind of space consolidation that may result from their losses could provide some rent relief to tenants, especially those in the market for larger spaces, said Shapiro. “Every time you have something bad, there is an opportunity for someone else.”