NEW YORK — The risks of a speculative office building, particularly during a real estate crisis, are evident at the 11 Times Square skyscraper here. Just stand on the sidewalk and look up.
More than a year after opening, the 1.1 million square foot building is approximately 60% empty and unlet. Its retail space along 42nd Street is bare. Neighbors can see unfinished floors throughout the building.
The tower, built by a Prudential Financial Inc.
-run fund and New Jersey-based developer, SJP Properties, cost $950 million to build, with construction beginning in mid-2007. The first tenant arrived in January 2011, but the building suffered from bad timing and fierce competition.
Tenants who looked at the new skyscraper but decided not to include the National Basketball Association, law firm Morrison & Foerster LLP and even restaurant chain Buffalo Wild Wings. Inc.,
according to people familiar with the matter.
Prudential now faces the possibility of having to pump more money into 11 Times Square. Its $720 million construction loan, held by a group led by PNC Financial Services Group Inc.,
must be repaid in May.
Cathy Marcus, lead portfolio manager for the Prudential real estate fund that has invested in 11 Times Square, said officials at the Newark, NJ, company plan to extend or repay the current loan using the fund’s own capital. “We really believe in this asset and its performance for the long term,” she said.
Prudential valued 11 Times Square in September at $855 million, down $95 million from its development cost, according to documents Prudential provided to investors in its property fund. The Wall Street Journal reviewed a copy.
Real estate developers in Atlanta, Seattle and other US cities are also struggling as office buildings hit the market as it cooled. Some developers who started projects in 2006 and 2007 without any commitment from tenants were forced to reduce rents, restructure loans or even sell buildings to lenders.
Speculative office building debacles are less common today than in the early 1990s, in part because memories of that crisis have shrunk the number of developers and lenders willing to launch projects without substantial pre-letting. .
While Prudential is betting it can fill the tower with well-paying tenants who have so far gone elsewhere, it faces a faltering Manhattan office market. Bank of America Corp.
, UBS HER
and other financial companies are subletting or giving up hundreds of thousands of square feet as the industry shrinks.
After construction of 11 Times Square began in mid-2007, Prudential and SJP demanded over $120 per square foot for the upper floors of the building. Rents now range from $75 per square foot to over $100 per square foot, depending on the floor, according to commercial real estate brokerage Jones Lang LaSalle.
In December, the average asking rent for prime space in Midtown Manhattan, typically in older buildings, was $71 per square foot, according to Cushman & Wakefield.
In 2010, Prudential and SJP landed the largest tenant to date at 11 Times Square: law firm Proskauer Rose LLP leased about a third of the space. Rental since has been slow, although last year was the busiest in Manhattan since 2006.
A spokeswoman for the SJP declined to comment. Prudential society officials say they are happy with the rental outlook and do not want to cut rents and sign low-value long-term leases. “Lowering the rents of a new, state-of-the-art building to make them comparable to buildings in Midtown that are on average 75 years old does not reflect what we believe to be the immediate value of the space,” said Theresa Miller, spokeswoman for Prudential.
Rent increases don’t seem imminent. Midtown’s vacancy rate for prime properties is 10.3% compared to 5.4% in mid-2007, according to Cushman & Wakefield. “There’s always good activity in media and tech, but financial services is the only hotspot, and that’s a big part of what’s driving downtown,” said Robert Sammons, vice president. of research at Cassidy Turley, a commercial brokerage firm.
Mitchell Konsker, a broker with the Jones Lang LaSalle team that leases office space at 11 Times Square, said potential tenants were interested in 450,000 square feet. “It’s not that we’re under pressure to rent it within a specific timeframe,” Mr Konsker said.
Prudential has so far drawn about $579 million from its $720 million loan, the company said. It would likely take a large chunk of the balance to attract tenants, in part by helping them pay their expenses for new premises.
Given the building’s current value, experts estimate that Prudential would be able to refinance the construction loan for up to around $600 million, leaving a painful $120 million hole.
PNC declined to comment.
—Anton Troianovski contributed to this article.
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8