The View From 1776

A recent Bloomberg News article reports, “ ‘The Freedom Tower isn’t economically feasible under present circumstances,’ said Douglas Durst, a third-generation New York developer whose company is building Bank of America’s new offices in midtown Manhattan.”

New York City, the nation’s most socialistically ingrained municipality, in the nation’s premier socialist state, has a long history of public works boon-doggles, of which the Freedom Tower is just the latest. 

One of the earliest was the city’s efforts in the 1920s to compete with, and to destroy economically, the privately-owned IRT West Side subway lines.  The chosen vehicle was Mayor Jimmy Walker’s IND subway system (famous, if nothing else, for Duke Ellington’s theme song, “Take the A Train").  In the end, both lines were economically unsustainable without city subsidies. 

This set in motion the city’s take-over of all of the privately owned subway lines and ushered in the era of cronyism between the city’s socialistically-inclined politicians and the Transport Workers Union (TWU), founded and led by Mike Quill, an open and proud member of the Communist Party.

The World Trade Towers (WTC) destroyed by Al Queda on 9/11 were themselves the product of a collectivist government-planning project, this time under the impetus of New York State.  Predictably they were an economic disaster for most of their first ten years.

Originally, as the name suggested, only tenants engaged in international trade were to be eligible to rent space in the WTC.  By the end of the extraordinarily lengthy development process that characterizes most government works, WTC space couldn’t be given away at any price.  There simply weren’t enough potential tenants, a fact that the city’s private owners and developers of commercial office space had loudly trumpeted from the beginning.  Especially rankling had been the plan to offer subsidized rents on buildings exempt from most real estate taxes.  The WTC’s announced rents were so low that they would undercut the commercial rents required by privately-owned office buildings to pay taxes, operating expenses, and mortgage debt service.

Why then were the WTC towers built?  The answer appears to lie at the doorstep of liberal-socialist-progressive Republican, and New York Governor, Nelson Rockefeller.

Rocky’s brother David Rockefeller was high up in the management ranks of the Chase Manhattan Bank, which in 1957 began construction of its new headquarters, the large Pine Street office tower near the WTC site.  In 1959 Citibank announced plans to build a new office tower at 399 Park Avenue, several miles north of the Wall Street area, in midtown.  Citibank’s headquarters were to be moved from 55 Wall Street, a block away from the new Chase headquarters.

Street gossip has it that David Rockefeller appealed to his brother, Governor Nelson Rockefeller, to do something to anchor tenants in lower Manhattan around Wall Street in order to protect Chase’s huge investment in its new building.  In any case, with Governor Rockefeller as the driving force, the New York State Urban Development Corporation (UDC) came into existence in 1968, with the announced aim of revitalizing parts of New York City, the Wall Street area being its first target.

Note that in its privately planned and financed development, Citibank announced its intentions and completed its new headquarters on Park Avenue within three years.  399 Park Avenue opened for business in 1961.  An additional nine years would pass before the socialistically-planned UDC was able to complete the first WTC tower in 1970.

The WTC ultimately was a commercial success, but not because of the UDC and public-planning.  Wall Street’s financial community enjoyed a booming revival in the mid-1970s, along with the advent of desktop computers that brought thousands of young traders and investment bankers to firms to service the sophisticated needs of a market coming to be dominated by institutional investors – the pension funds, mutual funds, and life insurance companies.  Not only was the WTC a success, but gleaming new office towers replaced the 19th century warehouses along Water Street and Front Street.  By that time, the WTC had abandoned its tenancy eligibility restrictions and leased space to all comers, at market rents.

Since 9/11/01, we have witnessed a repeat of the socialist state-planning that characterized the original WTC development process.  Every part of the process takes far too long, every special interest group demands a voice in the planning, and the whole thing has been handled completely backwards.

New York Governor George Pataki, another Eastern-establishment liberal masquerading as a conservative, first staged a competition among architects, in effect, to produce the most outlandish designs imaginable.  From those architectural plans, all else was to follow.

In the real world of successful commercial office building development, that is upside down.  The process runs something like this: first, a developer becomes aware of the possible availability of a development site and estimates the costs to acquire control of the site; second, based on his experience and knowledge of local construction trades, materials costs, etc., he estimates the cost per square foot to build the office building. 

A critical part of the estimate is the area of leasable square feet that he can build on the site.  Given Manhattan’s extraordinary land costs, the developer is always pushed toward building the tallest possible structure, with the most regularly shaped (therefore useable and leasable) floors.  A trade off is the increasing amount of unleasable core area needed for elevators, which increases as the building height rises, necessitating more elevator shafts.  In a very strong office market, building owners can get away with allocating such space proportionally to tenants and charging rent thereon, but in a competitive office market period of the business cycle, tenants will be influenced by the area of actually usable office space in ratio to their total rent bills.

In the current Freedom Tower fiasco, architects seemed to ignore such rudimentary requirements and fantasized twisting and angular floors that would increase the need for elevator core space while reducing the useable space in the upper floors.

Third, again using his experience, the developer estimates the likely rents per square foot obtainable in that market, which of course, is importantly influenced by the expected level of demand for office space at that location.

Fourth, the developer pulls all the numbers together to estimate the total development and construction costs per square foot, the likely taxes and operating expenses per square foot, and the expected average rents per square foot.  From this he estimates the cash flow per square foot that will be available for mortgage debt service.  That cash flow per square foot must be sufficient to cover mortgage debt service, at whatever interest rates are estimated to prevail at the time, and to provide an acceptable rate of return on the amount of equity capital that will be needed to cover the gap between mortgage debt and total development and building costs.

Only then does he bring in architects to design the structure, and those he employs are specialists in making esthetics conform to economic reality.

New York’s collectivist state-planners took no cognizance of any of that and focused from the get-go on creating something that Manhattan’s liberal esthetes would declare art-worthy.  Worse, the process has dragged on for six years already, with no starting date in sight.  Meanwhile, private developers have already built competitive office structures around the site, reducing the potential demand for office space, when and if the Freedom Tower project ever takes off.

But this is just the sort of thing that liberal-progressives love.  After all, the focus of state-planning is not to produce economically feasible results, but to redistribute wealth in accord with materialistic social justice.

The standard government-planning way to do this is to spend the maximum possible amount of public funds, for the longest possible time, and employ the maximum possible number of unionized workers at the highest imaginable wages.  This promotes full employment for voters and life-time tenure for politicians holding the benefits slop buckets at the public pig-feeding trough.

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