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The Implications of September 11, 2001 and Terrorism on

International Urban Form and Various Classes of Real Estate

By John S. Baen, Ph.D.

Abstract

Terrorism has been a fact of life in various international urban centers for the last twenty - (20) years. The September 11, 2001 event in New York City, NY and Washington, DC will have lasting effects on corporate and family real estate locational decision making. The paper discusses both the broad and specific evidence of changes in urban form and projects, the possible changes in real estate demand for retail centers, office buildings, residential and other types of property. The long-term decision-making and nature of real estate as a fixed investment as places for businesses to function may have changed forever along with future urban form.

Contact

John S. Baen, Ph.D.

Professor of Real Estate

University of North Texas

FIREL Department

PO Box 310410

Denton, TX 76203-0410

Office Phone: 940-565-3071

Cell Phone: 940-507-0312

Residence Phone: 940-567-3120

http://www.coba.unt.edu/firel/baen/

This paper will be presented for the American Real Estate Society (ARES) Meeting, Monterey, California April 3 - 5, 2003. Please do not publish or reproduce any part of this DRAFT without contacting author. Comments and suggestions welcome.

The Implications of September 11, 2001 and Terrorism on

International Urban Form and Various Classes of Real Estate

By John S. Baen, Ph.D.

University of North Texas

Introduction

While the world watched two (2) hijacked airplanes crash into the World Trade Center in Manhattan, New York and another crash-site at the Pentagon outside of Washington, DC, the U.S. joined the rest of the world in fully realizing terrorists’ attacks as a fact of life. Except for the bombing of the Federal Building in Oklahoma City in 1995, Americans had the misconception that terrorism would not and could not occur to the extent of the New York human losses, property losses, disruption of business and national economic shock.

Webster’s Dictionary defines terrorism and terrorist as:

Terrorism, n. Act of terrorizing, or state of being terrorized; specif., a mode of governing, or of opposing government, by intimidation.

Terrorist, n. One who favors or practices terrorism; specif. [often cap.]: An agent or partisan of the revolutionary tribunal during the Reign of Terror in France.

It is important to note that this research paper makes no distinction between foreign or domestic terror and assumes that the implications on the economics of various types of property and trends are the same. U.S. President Bush pronounced on page one September 12, 2001 that the tragedies were an “Act of War” with lead stories in major newspapers entitled “Carnage in New York” “Horror, Disbelief and Thousands of Victims” “Pentagon In Flames” “Tragedy Redefines America’s Priorities” (USA Today 2001).

A tendency to blame any and all present and future negative occurrences in business and the world economy on the 9-11 tragedy is unfortunately an oversimplification by the popular press and politicians. Prior to September 11, 2001 there was every indication that the U.S. was headed into a significant slowdown or recession. The terrorist attack accelerated that trend and added another dimension to property investment risk in America. Serious future value and net operating income (NOI) implications to institutional, investment-grade, real estate in the form of higher operating costs and lower demand for office world-wide space are deeply embedded in the New York and Washington, DC attacks.

The immediate and short-term effects to New York City and the U.S. were horrendous in regard to loss of life, property, disruption of financial markets, disruption of people’s lives and businesses. The objective of this paper is to consider the long-term implications to various classes of real estate investments, and changes in urban form as a result of “9-11” beyond the natural real estate and business cycles that are always in motion. As the U.S. has unfortunately joined the international community as a recent victim of urban terrorism, it is time that investors, business, urban planners, and city governments consider policy changes and a fresh look at the urban landscape and property investments of the future.

Types of Terrorism and Property Threats

It is important that the general population and policy-makers not to over-react, become paranoid, or overstate the possibility or likelihood of the various types of terrorist threats that could effect other locations. These threats, however, are real and the next occurrence is more a question of where, when and what type or extent of damage may result.

Table 1: Types of Terrorism and Property Threats

(The Implications of Terrorism on International Urban Form and Property Investment by John S. Baen, Ph.D., 01/12/2002; University of North Texas; baen@unt.edu)

TYPES OF THREATS / TERRORISM

LIKELY TARGET

REAL ESTATE EFFECTS

OCCURRENCES

I. Bombs

Car Bombs

Truck Bombs

Boat / Ship Bombs

Human Bombs

Placed Bombs

Crowded Urban Center, Tunnels Bridges

Below Ground Parking / Gov’t Buildings

Shipping Port and Nearby Urban Center

Bus, Subway, Sporting Events

Large Buildings

Destruction

Common in Middle East

World Trade Center 1993; Oklahoma City Federal Building 1995; Various embassies and military targets

USS Cole 2000

Common in Middle East

None Verified

II. Aircraft

On-board Explosions

Guided Attacks

Aerosol Sprays (Biological /

Chemical)

Stolen Military Aircraft /

Armaments

Random Urban / Rural Areas

High-rise Office Buildings

Urban Center / Sporting Events

Various

Random

Disruption

Human Casualties

Destruction

Pan Am Lockerbie, Scotland

World Trade Center, Pentagon 2001; Bank of America/Florida 2002

Tokyo, Japan 2000 / Ebola Outbreak in Africa 2002

None Verified

III. Missiles

Hand-held / Stolen Military

Aircraft

Random

None Verified in Urban Areas

IV. Airborne Chemical / Biological

Mail Contaminates (Anthrax)

**HVAC Contaminates (Anthrax,

Legionnaire’s Disease, Black

Mold, etc.)

“Dirty” Bomb (Anthrax)

Animal Infections

Crop Infections

Infected Human Carrier

Water Supply Contamination

Postal Centers / Anywhere

Office Buildings

Urban Centers / via dust

Feedlots / Farms / Ranches

Seed Companies / Farms

Central Business Districts or Sporting Events

Metropolitan Areas

Long-term contamination

Long-term/large area contamination

Loss of Land Use

Human Casualties

U.S. Postal Service 2001(New Zealand Rabbit Virus 2000)

US Senate Office Building (via mail)

(NY Asbestos Dust 9-11 example)***

UK 2001 (terrorism not verified)

None Verified (wheat rust suspected)

None Verified

V. Nuclear

****Nuclear Bomb Detonation

Nuclear Dust or “Dirty

Bombs” (in combination

with any I-IV above)

Central Business Districts

Central Business Districts or Nuclear Power Plants

Destruction

Long-term/large area contamination 100+ years

None During Peace Time

VI. Electronic

Financial Markets

Communications

Transportation System

Disruptions

Vehicle, Machinery,

Aircraft Disabling Energy Pulse

Power, Water, Gas

Disruptions

Data and Hardware

Destruction

Banks, Stock Markets

General Population

Public Transportation / Flight Control Towers/Tunnels/Bridges

Aircraft/Auto Traffic

Metropolitan Areas

Corporate Offices

Business Disruption

None Verified

VII. Low Tech Urban Terrorism

Freeway Nails, Oil, Grease

Major Freeway Interchanges

Business & Urban Disruptions

None Verified

VIII. Hoaxes (many of those listed above)

Bomb Threats, etc.

General Business Disruption

Business Disruption

Commonplace

*Ebola reported in 4 African Countries with current outbreak in Mekambo, Gabon, Africa. (Zavis 2001)

** HVAC = Heating Ventilation and Air Conditioning Systems

*** 700 New York Firefighters have filed legal claims for asbestos, chemical, PCB lung-related elements including spitting blood, asthma and cancer risks . (Ritter¹ 2002)(Ritter² 2002)(Ruiz and Gittrich 2002)

**** Suitcase Nuclear Devices, or low-tech delivery via briefcase carrying person or on boats, trains, commercial aircraft, etc. “The United States is more likely to suffer a nuclear, chemical, or biological attack from terrorists using ships, trucks, or airplanes than one by a country using long-range missiles, according to a new U.S. intelligence estimate.” Dallas Morning News, January 11, 2002. Stopping Porta-Nukes or briefcase-sized bombs is a national U.S. priority (Helman 2001).

Unfortunately, however, there is an increasing possibility that isolated incidents of some of these terrorist threats will occur in the future. As real estate and urban infrastructures are long-term investments due to their fixity or investment permanence (Jacobus 1999), the questions become - Should companies, property investors and cities outside New York City:

1) continue as usual in pre 9-11-2001 investments, corporate locational and lease renewal decision-making and urban policies? (The risk of terrorism is low and insignificant at any one location and even lower in suburban / rural areas.)

2) consider decentralization of corporate, business and governmental functions to various locations? Examples: IBM, GE, etc. (Also known conceptionally as diversification to reduce risk in the finance literature.)

3) adopt a long-term strategic plan to move to a single suburban or semi-rural corporate campus with high security fencing, complete controlled gated access, landscaping / buffer zones and zero fear of a tenant mix that may include a higher risk target tenant? Examples: Sprint, Fidelity Investments, Microsoft, Merrill Lynch, etc.

4) globally expand corporate locations to have fully integrated business data duplications and functions in different countries? Example: ExxonMobil, Shell, International Banks, etc. (decentralization on a global scale)

Existing ownership and long-term lease commitments by companies will soften or delay property decisions of corporations and city governments that will not require them to consider these questions simultaneously in the near future. However, over time, urban growth and increased security measures in regard to design, structural requirements, emergency planning, and property management will add a great deal of cost to traditional high density urban development. Will cities, investors, insurance companies and users of space be able to afford the additional costs of future Central Business District (CBD) development or redevelopment?

Size and Scope of New York 9-11

Beyond the sadness of human suffering and loss of life, it has been estimated that direct property losses were $20-$30 billion and 300 businesses were directly affected by the attack. Over 31 commercial / office tenants formerly occupied over 100,000 square feet of space according to Insignia / ESG Insurance Company (McMorrow 2001). Buildings that were destroyed, structurally damaged and non-structurally damaged buildings or buildings requiring expensive cleaning for asbestos dust, totaled between 27-29 million square feet, however, comprise less than four percent (<4%) of the Manhattan, New York office market. (Grubb & Ellis, Cushman & Wakefield and Insignia / ESG) When viewed only from the loss of office space from a national and international standpoint, in absolute terms, the loss was even less significant. Available vacant and subleaseable space in the area roughly equaled the amount of space destroyed or damaged, with many companies choosing to relocate in the same office market.

On September 11, 2001, the local vacancy rate in Manhattan was approximately 25.5 million square feet with additional sublease space expected to be available as subleaseable / available space due to dot.com underutilized space.

Original tenant locations, previous square footages and replacement space size and location are presented in Table 2 and indicate an initial drop of emergency replacement office space collectively of approximately 30%.

Table 2: Tenant Grid Relocations and Spider Map Relocations

TENANT*	PREVIOUS ADDRESS(ES)*	PREVIOUS SQUARE FOOTAGE*	NEW ADDRESS(ES)	DISTANCE IN CITY BLOCKS / MILES¹	NEW SQUARE FOOTAGE*	TOTAL % NET CHANGE
Lehman Brothers	3 World Financial Center	1,100,000	399 Park Avenue		400,000	+44%
	1 World Trade Center	461,000	180 Water Street		464,000^p
			Sheraton Hotel 790 Seventh Avenue		665 rooms
			70 Hudson Street Jersey City, NJ		150,000
			745 Seventh Avenue		1,100,000
Securities & Exchange Commission	7 World Trade Center	106,000	233 Broadway		140,000	+32%
New York Stock Exchange	2 World Trade Center	48,000	14 Wall Street		100,000^p	+200%
American Express	3 World Trade Center	1,040,000	400 Atlantic Street Stamford, CT		175,000	<-24%>
	7 World Trade Center	106,000	1185 Avenue of the Americas		120,000
			101 JFK Parkway Short Hills, NJ		195,000
			5 Woodhollow Road Parsippany, NJ		317,040
Empire Blue Cross	1 World Trade Center	461,000	450 West 33^rd Street		400,000	+64%
			9 Metrotech Brooklyn, NY		250,000^p
			11 West 42^nd Street		105,429^p
Bank of New York	101 Barclay Street	1,200,000	620 Avenue of the Americas		75,000	<-50%>
	100 Church Street	350,000	330 West 34^th Street		128,000
	1 Wall Street	670,000	1290 Avenue of the Americas		90,000
			63 Madison Avenue		98,000