by Alex Catalano
Crystal-ball gazers wishing to predict the effects or London’s Big Bang tend to look towards New York, where the stock exchange was deregulated a decade ago. Since “Mayday” in 1975, when fixed commissions and dual capacity were phased out, the volume of shares traded on Wall Street has rocketed, from a daily average of 19m to 109m in 1985.
But, unlike London, where the mergers and expansions of financial firms in preparation for the Big Bang have led to an unprecedented demand for new offices, Wall Street’s deregulation has taken longer to show up in the property market.
In part, this is due to the differences in the economic climate between 1975 and 1985. In 1975 the US was still in the grip of a major recession, while the New York property market was struggling to absorb the surplus left by an unprecedented building boom in the early 1970s.
“The World Trade Center, 10m sq ft, was not let,” says John D White, managing director of real estate brokers Landauer Associates. “It cast a pall over the market, tending to keep Downtown oversupplied”. In contrast, London’s Big Bang is taking place during a bull market. And space in the City is at historically low levels and will get tighter.
But the real sea-change in the New York market has come since 1980, with the growth of new financial products and services. “The financial market has changed dramatically,” says James Mooney, managing director of Landauer, pointing to the development of mortgage-backed securities and an increase in mergers and acquisitions.
Aggressive investment banks like Drexel Burnham Lambert have pioneered new markets like the lucrative high-risk, high-yield “junk bonds”. The pace of growth can be breakneck: in only 18 months Drexel built up a mortgage-backed securities operation employing 280 people.
This change and growth in financial services has meant growing demand for Downtown property, but with its relatively relaxed planning regime, New York has not experienced the shortages of office space that currently bedevil the City of London. “Scarcity is not a problem,” says James Mooney. “The stabilising factor preventing oversupply has been the difficulty of making assemblies that make economic sense in the right areas.
“The Downtown market reached relative equilibrium around 1980,” argues John White. “That was when the World Trade Center was fully rented and the amount of new construction was not enough to depress the market. Rents firmed and rose, narrowing the gap with Midtown.”
The 1981-82 recession caused a small hiccup, but the last two years have seen activity pick up as financial services, insurance and law firms relocate into new buildings. This year’s blockbuster move is Drexel Burnham Lambert’s leasing of 2m sq ft at 7 World Trade Center. And this year also saw Merrill Lynch taking up their 4m sq ft in Olympia & York’s World Financial Center, joining American Express and Dow Jones.
“The relative health of Wall Street is directly related to the prosperity of financial services: stockbrokers, investment banking, insurance and related professions like law, accountancy and architecture,” says John White. “When in an expansive mood, firms tend to lease more than their initial needs. If growth doesn’t occur as planned they are left with unlettable space, but, correspondingly, if demand increases strongly, it is difficult for supply to respond.”
Morever, the emphasis in financial services has switched from investment to trading, boosted by the development of global markets and 24-hour trading. The big profits are no longer to be made on brokerage commissions but in a widening range of investment banking activities: trading and arbitrage, underwriting share issues, and mergers and acquisitions. In 1974 members of the New York stock exchange earned about half their income from stockbroking commissions; in 1985 this had fallen to 21%.
With the increase in trading activities has come the dealing floor — pioneered by Salomon Brothers — and new specifications for office buildings. “Small tower floors of 8,000 to 10,000 sq ft like the Chrysler building are becoming obsolete,” declares John White. Financial tenants — who take up about 60% of office space Downtown and 21% Midtown — are looking for large floorplates that can take the supporting equipment. Column-free areas of 36,000 sq ft to 50,000 sq ft are the rule for developers.
“Firms now have to place a premium on the efficiency of back office operations and trading rather than lending profits,” says Glenn Whitmore, vice-president of real estate brokers Coldwell Banker. With installation costs of $110 per sq ft compared with rents of $35 per sq ft, banks have very strict requirements for dealing floors.
Location change
The new emphasis on an electronic market-place has also changed firms’ perception of location. “In New York, there are an increasing number of securities firms who are no longer constrained to have offices in Wall Street,” says James Mooney. “There has been significant movement Midtown.”
With about 145m sq ft of office space, Midtown New York is the US’ largest central business district. Rents here are $40 per sq ft compared with $29 per sq ft in Wall Street. “Midtown is the heart of the corporate base,” says Stephen Anderson of Coldwell Banker.
“It also has amenities like hotels and transport. Major banks have always been Midtown, but since 1980 there has been a dramatic shift.” First Interstate, who operated out of 30,000 sq ft in three offices, with a 4,000-sq ft dealing floor, consolidated into 75,000 sq ft at 53rd and 3rd Avenue, and installed a 15,000-sq ft dealing floor. Swiss Bank Corporation and European American Bank have also taken space Midtown.
The shift has been accelerated by an influx of out-of-state banks who are coming to new York in expectation that interstate banking will be deregulated to permit retail banking. Recent arrivals include the First National Bank of Chicago, and Security Pacific.
The previously neglected western side of Midtown Manhattan is also attracting financial firms: Salomon are breaking new ground with their plans for a 2m-sq ft development on the Coliseum site at Columbus Circle.
The other significant trend has been for banks to decentralise their back office operations. Firms like stockbrokers Dean Witter are taking a close look at their operations, dividing them into money-spinning “hard” tenants like foreign exchange dealing, trading, capital markets and corporate finance, and back-up “soft” tenants like data processing. “Cost is very important,” says Glenn Whitmore. “The buzz word is asset management.
“The trend in the securities business is to move computers and back offices out of New York City,” comments James Mooney. Across the Hudson River, New Jersey offers not only lower rents and lower utilities costs — important for electricity-gobbling installations — but a cheaper and better-quality labour force. Merrill Lynch have offices here. And Paine Webber have taken 600,000 sq ft in upstate New York, while Morgan Stanley are building 300,000 sq ft in suburban Brooklyn Heights.
This decentralisation — much of which is yet to come — has unsettling implications for net demand in New York City. “The substantial question is whether demand will decline,” says John White. “Consolidation was a god that we worshipped for a long time.”
The migration of financial firms to new premises within Manhattan has meant rising vacancy rates as older, less suitable premises are left behind. But these are finding takers. “Professional firms do not have such rigid space requirements,” says Glenn Whitmore. “Floorplates of 20-25,000 sq ft with perimeter offices are OK. For example, lawyers Johnson Higgins Sullivan & Cromwell moved into Amex’s old building at 25 Broad Street.”
The big question for New York — and London — is whether financial services will keep growing and diversifying at the same rate in future. Here, unfortunately, the past provides few pointers. “What is adequate today and in five years may not be anywhere near needs after 10 years,” says James Mooney.
