Bankers Cheer Delay in Times Square Renewal Project
Big banks are on a collision course with their former allies over New York's biggest urban renewal project.
Bankers were cheering last week at news of a delay in ground breaking at Times Square that had been scheduled for this fall. Developers, meanwhile, were insisting that the project still made sense.
The city-supported renewal project was aimed at creating 4.1 million square feet of office space, a 750-room hotel, a 20-story showroom building for the furniture industry, and some 36,000 new jobs.
"The stoppage of any further development or a delay of further development is a net positive," said an aide to Robert Laughlin, director of the real estate division at Citicorp.
Citicorp recently foreclosed on one empty Times Square office tower on which it led a $250 million note syndication. In addition, the giant money-center bank holds loans on several more troubled buildings in the neighborhood -- a stake amounting to hundreds of millions of dollars for Citicorp and other participants in the loans.
Developers have had preliminary talks about construction finance with Mitsui Trust USA, which has a long relationship with Prudential Life Insurance Co., a member of the group developing Times Square. But the talks reportedly are not to the stage of discussing a rate on the loan.
Other bankers said that breaking ground now -- or anytime soon -- clashed with their short-term interest in getting existing buildings leased.
That attitude represents a pronounced shift from less than two years ago, when vacant space totaled about three million square feet. Banks insisted then that the Times Square renewal would not interfere with the leasing of the buildings where they already had stakes.
Vacancies a Deterrent
But bankers have changed their tune now that nearly five million square feet in the Times Square area stands vacant.
Bankers and local brokers are hoping that the same reality is beginning to sink in at the development group, despite its public insistence that that nothing has changed.
With great fanfare, the developers and the city and state had announced an autumn startup. But they said last week that ground breaking would not occur this year after all, citing delays in relocating the tenants of buildings that have been condemned to make way for the new center.
The developers scoffed at talk that the project is being shelved indefinitely. But word that a key employee of the group had been fired prompted speculation that the group has decided to wait out the market.
Other Offices Built Quickly
The renewal project is meant to help rid the neighborhood of crime and a seamy image and establish it as a new center of office development. But since the project was approved in 1984, a glut of offices was built to take advantage of expiring zoning incentives, giving rise to the argument that the 42d Street offices are no longer needed, at least for the time being.
Real estate sources said that the recent firing of project manager Richard Rosan by Park Tower Realty signaled that the office portion of long-awaited project was on hold at least until the leasing market improves.
Mr. Rosan's salary depended on development fees the construction would generate, and one well-informed source said his dismissal meant the fees weren't expected to materialize anytime soon.
And several bankers asserted it would be very difficult for any bank to underwrite new construction in today's market, given regulatory pressures to reduce exposure.
"It is a major question whether a project that size in today's market would make sense," said one banker, who also has participated in loans on properties in the neighborhood.
A delay would mean the brokers of nearly 12 million square feet of vacant office space in the district stretching west from Rockefeller Center would have to guide potential tenants past boarded up buildings, peep palaces and three-card monte players for awhile longer.
A Breather for Brokers
But these brokers would get a respite from competition with the heavily subsidized space the 42d Street project would have to offer.
The Citicorp official contended new construction at Times Square has "enough critical mass" to convince tenants that a new office district is on the rise, so the benefits of less competition outweigh the delay in sprucing up the area.
Broker Eric W. Peniston, senior director of Cushman & Wakefield, agreed. "In this environment, the economics of the transaction are what people are interested in."
That is not to say that leasing the space will easy. Vacancies have remained above 26% on the West Side for the past year, and have increased to 17.1% from 14.8% in the broader midtown market, according to the latest figures form Edward S. Gordon Co. Although many large users are said to be shopping for space, only 351,000 square feet of net absorption have taken place in the year through September in midtown, off from 487,000 square feet the year before.
Tax Breaks Provide Edge
Competition with the 42d Street project would be doubly difficult because of city tax breaks that the developers can pass along to tenants for the first 15 years of operation. The tenants at the 42d Street project would pay about $3 a foot in property taxes initially and up to $6 a foot by the time the breaks expire, in a market where most buildings pay from $8 to $14 a foot in property tax.
Aside from Citicorp, banks leading loans on offices at Times Square included Manufacturers Hanover Corp., First Chicago Corp. and Bank of New York.
Representatives of the city Urban Development Corp., Park Tower and Prudential Life Insurance Co., who have teamed up in the venture, denied Mr. Rosan's firing signaled anything. But they acknowledged that the relocation by the city of tenants from condemned buildings has been slower than expected, meaning ground breaking has been postponed from the fall, 1991 target.
Relocation a Problem
"We're just waiting for delivery of the sites," a spokeswoman for Park Tower said. At UDC, a public affairs official said about six tenants remained to be relocated under a program in which the city picks up the cost of moving. She said ground breaking could occur "sometime after the new year."
Mr. Rosan's duties are being assumed by other executives as Park Tower adjusts to a reduction in overall business in a weak market, these sources said.
Still, Mr. Rosan himself, now working as a contractor for the Nederlander Organization, said the slow leasing market for the Times Square offices was a factor in the decision to let him go.
And the projections of ground breaking anytime soon are greeted with skepticism by many in the market, especially given the project's long track record of delays.
Douglas Durst, vice president of the Durst Organization, who has fought the plan from its inception as an owner of some of the properties that have been condemned to make way for it, said the dismissal of Mr. Rosan amounted to an admission by the developers that the project isn't viable.
"Our objective all along was to convince them that what they were doing wouldn't work," he said.
While clearly jubilant over what he sees as vindication of his position, Mr. Durst complained that the outcome now will be the proliferation of boarded-up buildings, making the neighborhood even less attractive.
Briant Strum, an executive vice president at the insurance company, acknowledged he has yet to sign up any tenants for the offices, but argued that that would change once he can tell them when the building will open.
Major Tenants Approached
Others familiar with the project say such companies as Price Waterhouse and Morgan Stanley & Co., which are looking for large blocks of space wired for modern computer and air-conditioning systems, have been approached.
Indeed, the developers have argued that with the exception of America's Tower, a Japanese-financed building with nearly a million square feet of space that is due to open next year, none of the new offices have the size or configuration of space being offered by their project.
But rough market conditions are one reason why many observers say additional delays in the 42d Street project are inevitable.
And with tax breaks that don't begin until the project actually opens, there is little incentive for the group to jump in before the time is right.
PHOTO : STILL SEEDY: Delay of renewal in Times Square-42d Street area has heartened banks that have vacant office buildings there.