Big Developers Covet Piece of Ground Zero

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The New York Sun

With the real estate market soaring in Lower Manhattan, experts say the time is right for some of the city’s biggest developers to take a stake in the future of ground zero.

The chairman of the publicly traded Vornado Realty Trust, billionaire Steven Roth, an aggressive real estate player who controls 19 office buildings in New York, met with developer Larry Silverstein late last year, according to a source involved with downtown development. The source said the preliminary discussion surrounded the acquisition of part, or all, of the buildings known as Towers 2, 3, and 4, large commercial office buildings that would be built along the eastern side of the site on Church Street.

Real estate analysts say the three towers, comprising 6.2 million square feet, are worth billions of dollars, and because of their prime location and large office floor plans are the financial prize of the planned development. Silverstein Properties is scheduled to begin construction in January 2008 on towers 3 and 4, and in July 2008 on Tower 2. The buildings are scheduled to be completed by 2013.

The New York real estate market has been flooded with capital recently, as hedge funds, large pension funds, foreign investors, and private equity companies seek to tap into the profitable asset class, shifting funds from other traditional investments such as the debt and equity markets.

Vornado, which recently lost out in the bidding for Equity Office Properties Trust, which had more than 500 office buildings across the country and sold to Blackstone for about $39 billion, seemingly has access to an unlimited amount of capital for acquisition. The company is heavily invested in the area around Madison Square Garden, where it has plans with the Related Companies to develop millions of square feet of office space.

Several real estate analysts say it would be tempting for Mr. Silverstein, 75, to tap into rapidly rising values in Lower Manhattan, which are being driven skyward by increasing office rents and greater certainty surrounding the future development of the 16-acre former World Trade Center site. Mr. Silverstein’s new office building, known as 7 World Trade Center, is filling up with tenants and he is said to be charging about $70 a square foot for the top floor, though many experts predicted at one point that he would be stretching to get $40 a square foot.

It has been almost a year since the Port Authority, which owns the 16-acre site, and Silverstein Properties, which controls a 99-year lease, reached an agreement about the future development of up to 10 million square feet of new office space.

The president of the Real Estate Board of New York, Steven Spinola, said there has been a “tremendous” increase in value to Mr. Silverstein’s ground zero assets during that span.

“It must close to double in value,” Mr. Spinola said.

He said it would be “surprising” but not “impossible” for Mr. Roth to seek to acquire part or all of Mr. Silverstein’s development rights.
“Roth has not shown any interest in Lower Manhattan. But if he is going to do something, he is going to do something big,” Mr. Spinola said.

A spokesman for Mr. Roth, Howard Rubenstein, said Mr. Roth has “no intention” of purchasing development rights at the former World Trade Center site, and that no meeting with Mr. Silverstein took place. “It is absolutely not true,” Mr. Rubenstein said yesterday.

An executive of Silverstein Properties, John Lieber, said the notion that the company is seeking to sell its development rights is “nonsense.” Mr. Silverstein has indicated his intention to hold onto the assets indefinitely.

Mr. Silverstein would not be alone in trying to cash in on Lower Manhattan’s miraculous increase in real estate values. The Port Authority is said to be shopping to private sector developers a stake in the Freedom Tower and another tower to be built nearby called Tower 5.

The Port Authority also recently reached out to some private developers to build out 600,000 square feet of planned retail space along the eastern side of ground zero. According to sources familiar with downtown development, one of the city’s most active firms, the Related Companies, is one the developers that has been contacted. Another developer, Westfield, controls the right to first offer on the retail site and could be a partner in any development.

A director for Real Capital Analytics, Daniel Fasulo, said an unbuilt development site at ground zero could fetch about $275 million, based on recent sales of development sites in Midtown. It would be worth as much as $1,000 a square foot, or about $1 billion for an office building of 1 million square feet after it is built and rented out.

Thus, Mr. Silverstein’s 6.2 million square feet could be worth more than $6 billion.

“That is such a humongous project that it would not surprise me if Silverstein brought in another developer to assist with the building process,” he said. “But I cannot foresee a situation where they would sell the entire interest in the site.”

He said Silverstein Properties is a “merchant builder” that makes its money from constructing new towers, but it could seek to take on an additional partner.

“Merchant builders usually don’t give up the right to build. It’s how they make money,” Mr. Fasulo said. “Once he adds his value, it makes sense for him to realize that value.”

Mr. Fasulo said Silverstein Properties could do a “pre-sale” on part of the future development where the company could enter into a contract with another developer to control it once the building is finished.

“It helps the bank out and it helps the builder. The buyer usually gets a market discount for getting in so early,” he said.

Any sale, according to sources familiar with downtown development, would face several hurdles about the division of insurance proceeds stemming from the terrorist attacks of September 11, 2001, and would require approvals from the Port Authority.

The New York Sun

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