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Steven Malanga
Relocation Blues
New York City’s shortage of office space hampers its economic future.
17 October 2006

In the immediate aftermath of 9/11, New York endured an unprecedented wave of corporate relocations, as companies left homeless by the terrorist attack moved tens of thousands of jobs out of the city. Today, Gotham faces another wave of relocations, prompted this time by the tortuous five-year effort to replace offices lost at Ground Zero and by the city’s inability to create alternative commercial districts for businesses that can’t afford to pay premium prices for existing Manhattan office space.

Over the summer, two big financial-services firms, Citigroup and Deutsche Bank, decided to shift some 2,200 jobs to Jersey City. For Citigroup, it’s the second major relocation to New Jersey in just 24 months. Smaller firms like UBS, Royal Bank of Scotland, and Morrow & Co. have also fled the city over the last two years, to Westchester and Connecticut. The relocations have spurred suburban developers to ramp up office projects. The LeFrak organization, for example, is now eyeing its eighth office tower in Newport City in New Jersey to accommodate new demand from Manhattan.

It’s easy to see what’s behind such moves. The terrorist strike destroyed some 11 million square feet of Gotham office space, enough to house nearly 50,000 jobs. Since then, there’s been little commercial office building in the city, apart from several projects that were already on the drawing boards, like developer Douglas Durst’s 42nd Street tower. That dearth of new building is a key reason that office vacancy rates have shrunk to pre-9/11 levels, even though the city still has some 50,000 fewer jobs than it did before the attack.

The city and state bear some responsibility for the space shortage. A nearly ten-year effort to rezone Manhattan’s Far West Side for commercial development wound up getting bogged down in Mayor Bloomberg’s plans to build a stadium there and lure the Olympics to New York. Potential construction of office towers in the area is thus still years away. The city has now missed two real-estate expansions, going back to the late 1990s, in trying to rezone the Far West Side.

Meanwhile, state and city officials haggled for years over the plan to redevelop Ground Zero, with some observers, including Mayor Bloomberg, pessimistically calling for a reduction in the office space planned for the site, assuming that it would be unneeded. As a result of the delays, only one building, 7 World Trade, is nearing completion—developer Larry Silverstein could rebuild it quickly because it wasn’t part of the site that the government controlled. Other Ground Zero towers won’t be ready for years.

Gotham has also failed to draw businesses to outer-borough office districts. Part of the problem is New York’s bureaucratic approach to development. The city, state, and Port Authority of New York and New Jersey have spent 25 years trying to develop land on the Queens waterfront, with little to show for it, due to government agency squabbling. By contrast, the LeFraks and their Newport City partners have built 20 residential and commercial towers on the Jersey City waterfront in less time.

When commercial buildings do rise in the outer boroughs, they are still too costly to be competitive. Consider Metrotech, a massive, heavily subsidized suburban-style office campus in downtown Brooklyn, intended to be the place where financial-services jobs would move when they left Manhattan. But after a few successful leases in its early years, the 20-year-old initiative has mostly drawn tenants already located in Brooklyn. Undeterred by that floppy performance, the city is now promoting another Brooklyn top-down mega-project by Metrotech’s developer, Forest City Ratner—the controversial Atlantic Yards, which, even if approved, will take years to realize and will have little impact on the city’s current commercial-space crunch.

What New York lacks is an entrepreneurial environment, where developers can quickly put up commercial space that responds to market demand. The city’s byzantine zoning code makes it impossible to build office towers even in underused outer-borough locations without lengthy hearings and zoning variances. New York’s inflated real-estate taxes render rents uncompetitive without special subsidies, even in the outer boroughs. In Brooklyn and Queens, real-estate taxes average a heady $10 per square foot, compared with just $3 per square foot in Jersey City. New York’s outdated building code, which the City Council refuses to change because unions like it, adds millions to the cost of major projects, as do stringent union work rules. When the LeFraks left New York to develop Newport in the mid-1980s, they pointed to onerous union rules as a big reason they left, and they touted Jersey’s 30 percent lower overall construction costs.

As New York’s economic engine has shifted over the last 40 years from manufacturing to financial services, the geography of employment has changed radically in the city. The 1 million manufacturing jobs once spread throughout the five boroughs are today largely gone. The office employment that replaced them concentrates increasingly in Manhattan’s two office districts, where there’s little room for growth. Without tens of millions of square feet of new office space, New York’s expanding firms won’t have room to grow in the city, and will go elsewhere.

They’re already going.

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More by Steven Malanga:
Borrowing Trouble
Why the State and Local Pension Problem Will Get Worse
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