Future of 1 World Trade Center Up in the Air
Condé Nast’s attempt to back out of millions in rent underscores the pandemic-related challenges facing the 104-story Downtown Manhattan office tower.
As 1 World Trade Center approaches the 10-year anniversary of inking Condé Nast as its first major tenant, the publisher’s future at the landmark office tower is in limbo, highlighting challenges that the Downtown Manhattan property faces in planning for a post-pandemic world.
Condé Nast, which signed a 25-year lease with the Port Authority of New York and New Jersey for 1 World Trade Center space on May 17, 2011, withheld $2.4 million in rent in January and is seeking to reduce its square footage in the 104-story skyscraper, according to a bond document filed last month. The media giant’s rent dispute with 1 World Trade Center co-owners, the Port Authority and the Durst Organization, coincides with it exploring the possibility of shifting some of its operations across the Hudson River into New Jersey.
The uncertain future of Condé Nast could play out among other firms with office space at 1 World Trade as companies adjust to increasing work-from-home trends that were accelerated by the COVID-19 pandemic. Even prior to the pandemic, Condé Nast hired JLL in 2018 to put 350,000 square feet on the sublease market, and in 2019, it offloaded 50,000 square feet to Ambac Financial Group.
A spokesperson for Condé Nast’s parent company, Advance Publications, said there was no update on the rental dispute beyond a statement given to Commercial Observer on Feb. 10, stating that the publisher was in discussion with Durst to bring the lease “into line with current market conditions and its ongoing needs at that location.”
The publisher of Vogue, Vanity Fair and The New Yorker debuted as a much-needed and much-heralded anchor tenant at 1 World Trade in 2014, taking more than 1 million square feet spread out over 23 floors. Durst and the Port Authority hoped Condé Nast’s relocation from Times Square would lure more firms to its downtown asset.
One World Trade Center was 55 percent leased when its doors first opened in 2014, and filling the 3.1 million-square-foot tower proved to be a slow climb in the ensuing years. The bi-state agency marked a 93 percent leasing rate in February 2020 just before the pandemic caused office closures throughout the New York City region. The leasing rate is now 90 percent after a few leases expired over the past year, according to Durst.
“The march toward stabilization took a while,” said Thomas LaSalvia, a senior commercial real estate economist at the research firm Moody’s Analytics. “It’s important that they reached stabilization before the pandemic.”
Adding to the challenges at 1 World Trade Center is that one of the property’s main financial services tenants, Moody’s Corporation, is looking to sublease 75,312 square feet of space that it occupies on two floors, according to brokerage Savills. Moody’s first moved into 1 World Trade in 2015.
Eric Engelhardt, Durst’ senior managing director, commercial leasing, stressed that 1 World Trade Center is well situated for post-pandemic challenges since as a newer building it offers the most up to date filtration systems and lighting that could be a difference maker for attracting new tenants. He said Durst hosted several “sizable” tours in the past week for potential new tenants and existing 1 World Trade Center businesses looking to grow their footprints there when employees return to the office.
“One World Trade Center is significantly well positioned and the World Trade Center site as a whole is well positioned because we are newer product,” Engelhardt said. “In a cycle such as this, this is where the better product outperforms.”
Other companies throughout Lower Manhattan’s Financial District are also seeking subleasing opportunities for their office space, according to Savills, including 205,700 square feet from S&P Global Ratings at 55 Water Street; 107,000 square feet from MSCI at 7 World Trade Center; 104,500 square feet from Fitch Ratings at 33 Whitehall Street; and 80,050 square feet from Virtu Financial at 1 Liberty Plaza.
While 1 World Trade Center faces near-term risks in the current economic climate, LaSalvia said the property is still well positioned for the long term, given that most of its tenants are likely locked into leases through the mid- to late-2020s. He noted that the building benefits from having mostly “knowledge-based companies,” which haven’t been exposed to headwinds in other sectors suffering in the pandemic, like retail and hotels, and are achieving savings from less business travel during the past year.
“Even if some of the tenants are trying to sublease some of that space, they probably have stayed current with their rent,” LaSalvia said.
It’s also likely that companies at 1 World Trade, and in Downtown Manhattan in general, are looking to expand — and expand their office space — in the next few years as the economy grows, LaSalvia said. U.S. GDP growth is expected to rise to 5 percent in 2021 and 2022. Analysts have said that even if there is a big rise in employees working remotely, many will still return to offices multiple times a week in a hybrid model.
“While there is some subletting, and while there is some reduction in square footage here or there, there are a lot of firms over the next few years who are actually going to have to expand just because of the growth of their firms,” LaSalvia said. “We really aren’t feeling that there is going to be this huge pullback that might have been expected last May.”
In fact, the Durst Organization and the Port Authority announced their first deal of 2021 on March 1: Medical Knowledge Group (MKG) took 12,063 square feet on the 84th floor for eight years. The pharmaceuticals company is planning to move downtown from 750 Third Avenue after Durst completes a build out of the new MKG offices.
“They worked with us to create a space designed to our unique specifications that leverages the sustainability and user-efficiency benefits of 1 World Trade Center, resulting in a workspace where our employees will not only be healthy and productive but thrive,” MKG CEO Leon Behar said in a statement.
Durst spokesman Jordan Barowitz said MKG could fit in with 1 World Trade Center’s “talented roster” of tech, media and biotech firms. He noted that Durst is funding the tenant build out, and the landlord offered rent abatement that is “consistent with the market.”
When asked if Durst plans to change the layout of floors in an attempt to attract companies seeking non-traditional office space, Barowitz said that while there are some pre-built spaces ready for occupancy, most of the space is “raw,” as is often the standard with commercial real estate properties.
The Port Authority and the Durst Organization touted MKG’s lease as a sign of hope for economic recovery for Downtown Manhattan’s real estate industry. MKG was the first company to receive an in-person tour from Durst’s leasing team after the pandemic took hold last March.
“One World Trade Center remains an address that companies can be proud to call their own because it is a symbol of hope and resolve,” Port Authority Chairman Kevin O’Toole said in a statement. “We are excited that MKG will be its newest tenant and commend the Durst Organization on their efforts to contribute toward the growth of Lower Manhattan and the region.”
The Port Authority and Durst are focused on firming up occupancy in the seven-year-old skyscraper — the tallest building in the Western Hemisphere — as the nation gets set to commemorate the 20th anniversary of the 9/11 terrorist attacks on the original World Trade Center complex. Four-and-a-half years after the Twin Towers fell to the ground, construction on 1 World Trade Center (then-known as Freedom Tower) commenced on April 27, 2006, on the site of the original 6 World Trade Center, which was also destroyed on Sept. 11, 2001.
The 53-floor, 7 World Trade Center debuted in May 2006; and the 72-story, 4 World Trade Center opened in 2013. The 80-story, 3 World Trade Center opened in 2018, and was around 80 percent leased pre-pandemic after private equity firm Blue Wolf Capital Partners signed a 10-year lease.
The 16-acre World Trade campus will also soon feature 2 World Trade Center, an 82-story tower under construction that has encountered a series of delays as developer Silverstein Properties has sought to sign an anchor tenant.
The Port Authority’s board of commissioners voted on Feb. 11 to select Brookfield Properties and Silverstein for the build-out of 5 World Trade Center, with construction slated to commence in 2023. The property will be mainly residential, but Port Authority Executive Director Rick Cotton said the decision is not a reflection of office demand around the World Trade Center.
“I would not bet against Manhattan real estate,” Cotton said in a press conference after the February meeting. “This is a long-term development time horizon, and the private sector is looking past the immediate impact of COVID [and] onto a recovery.”
Moody’s projects that Downtown Manhattan office rents this year will drop 6.9 percent, and 6.3 percent in the New York region in general, due to short-term structural changes facing the sector, such as high subleasing volume during the pandemic. But LaSalvia said 2021 will prove to be the low point, and by the middle of the decade, rents should bounce back to pre-pandemic levels with occupancy levels also rebounding.
The current downtown office vacancy rate of 10.9 percent is only slightly higher than the 10.7 percent level it was at in late 2019, which reflects a lag common in commercial real estate outcomes. Moody’s is forecasting the vacancy rate to rise to 11.5 percent in 2021, and 12 percent in 2022, before beginning to recover.
LaSalvia noted that another positive indicator for the viability of 1 World Trade Center, and New York City as a whole, is large technology companies like Facebook, Amazon, and Apple investing in office space in NYC, attracted, in part, because of the region’s skilled workforce. Large tech companies and startups might ultimately add more of a presence in Manhattan in the next couple of years, while discount deals are available for Class A office space.
“These knowledge-based companies are giving us an indication of the longer-term prospects of New York, where they believe that the skill set and the density required to have the labor pool that they want is still there,” LaSalvia said. “The subleasing activity is going to tell the short-term story of some of the structural change and some of the pain that these firms have felt, and that is a little bit in contrast with the longer-term story of all of the benefits, and the tremendous potential and tremendous value in the locations within New York.”
Update: This post has been updated with additional background and quotes from the Durst Organization