Bailout

The economics of One World Trade Center

By Felix Salmon

Many thanks to Joe Nocera for raising the issue of One World Trade Center’s finances. It’s by far the tallest and most expensive building that New York has ever seen, and it’s no thing of beauty, either. Plus, there’s not nearly enough demand for new top-grade office space to justify building so much of it at this location and at this time. So what exactly is the Port Authority thinking?

All that said, the issue is much more complicated than Nocera makes out. For one thing, the 1,776-foot tower is really the last vestige of the once-lauded Daniel Libeskind master plan for the World Trade Center site; for another, the deal that gave it to the Port Authority was a highly complex one, done with developer Larry Silverstein, and so it’s a little bit simplistic to try to view One World Trade in a vacuum, as Nocera does.

Plus, Nocera’s very vague about sourcing his numbers: he says only that “my real estate sources say they believe that the Port Authority will need to charge $130 a square foot to break even on the building”, and then adds a pro-forma Port Authority denial.

It would be very useful to learn where that number comes from. Looking at the figures in the piece, the cost of the building is $3.3 billion, with $1 billion of that coming from insurance proceeds. I’m not sure exactly what Nocera means by “break even”, but he does talk earlier on in the piece about “any shortfall between the building?s annual rental income and its carrying costs”, so let’s think about it that way.

The building will end up with 2.6 million square feet; if the breakeven rate is $130 a square foot, then that implies its carrying costs will be $338 million a year. But it doesn’t cost anything like that for the Port Authority to borrow $2.3 billion. After all, the last time the Port Authority issued bonds, it paid an average interest rate of less than 4.5%. And 4.5% of $2.3 billion is barely more than $100 million a year — less than a third of the number implied by Nocera.

Or think about it in terms of a standard residential mortgage. Let’s say you wanted to take out a 30-year fixed-rate loan on a $3.3 billion home, putting $1 billion down. Right now, mortgage rates are 4.5%, which implies a monthly repayment of $11.65 million per month, or $140 million a year. OK, you’re not going to be able to borrow that kind of money from your local credit union, and I’m pretty sure that the note would be non-conforming in the eyes of Fannie and Freddie. But still, if you want to get $140 million a year from renting out a 2.6 million square foot building, then you only need to charge $54 a square foot: a far cry from Nocera’s $130 figure.

Yes, there will be high maintenance costs, especially given all the extra security. But at the same time, the Port Authority owns the land underneath the building outright, so there are no costs associated with that. And in the early years of the project, when the building isn’t fully rented out, the Port Authority will have to carry some of the costs of the empty space.

On the other hand, there are less quantifiable costs to having empty space in that part of the New York skyline which used to be home to the Twin Towers. One World Trade Center might never be as iconic as they were, but it will still be an instant landmark, and a vast improvement on the gaping hole that we’ve been living with these past nine years. If Nocera wants to make the case that its costs will end up being borne by commuters crossing the George Washington Bridge, he’s going to have to be a lot more specific about exactly how he’s calculating them.

Full post as published by Macroprudential on September 19, 2010 (boomark / email).