IT was the 11th hour and the decision on the largest downtown lease in years hung in the balance. Harold McGraw 3d placed a call. He talked briefly to David G. Bronner, who runs the pension fund that owns the building, about rent.
The agreement reached in that conversation has given the slowly recovering office market in the downtown financial district a shot of adrenalin -- a 20-year lease for 15 huge floors at 55 Water Street. The occupant will be the Standard & Poor's divisions of the McGraw-Hill Companies. The owner is the New Water Street Corporation, an affiliate of the Retirement Systems of Alabama, which Dr. Bronner runs.
On those 62,400-square-foot floors -- the 33d through the 47th -- there is a total of 936,000 square feet of space, about the same amount of space as there is in Donald Trump's 40 Wall Street wedding-cake skyscraper a few blocks away, which rises 66 stories high.
The deal completes the leasing comeback of a nationally prominent building that was relinquished by Olympia & York Properties, the Canadian development company headed by the Reichmann family of Toronto, to its creditor-bondholders in the early 90's. The vacancy rate has gone from 40 percent to under 2 percent.
The deal also calls attention to the fact that there has been an upsurge of large space commitments downtown in recent months. These, combined with the removal of mostly obsolete space through residential conversions, have considerably tightened the market this year.
''There has been a flight to quality, which happens whenever there's been a real-estate recession,'' said John F. Powers, an Insignia/Edward S. Gordon Company broker who led the team that advised McGraw-Hill.
The flight so far has tended to benefit principally the newest, highest-quality buildings. The question still open is how the second tier of office buildings will fare. Many of them are from the postwar era but were completed before 1980.
Moreover, many of the moves so far are internal to downtown. Standard & Poor's, for example, will be giving up downtown about half as much space as it is leasing. Most of it is in two buildings that face each other at Bowling Green -- 337,000 square feet at 25 Broadway on the west side of Broadway, and 135,000 square feet at 26 Broadway on the east side.
Moves into downtown from midtown -- by no means improbable inasmuch as the rents for large-scale tenants are effectively about 30 percent below rents for comparable space in midtown -- would increase the net effect of leasing activity on office occupancy and employment growth.
But for now, there is mainly a feeling of pleasure and relief that 55 Water Street has been spoken for. Once that happened, in fact, Goldman Sachs & Company, which had long been considered the leading candidate to take at least part of the space that ultimately went to Standard & Poor's, agreed to lease the entire building at 10 Hanover Square, brokers report.
That 1971 property has half a million square feet of space, and its future had seemed to lie in residential conversion when Steven Witkoff, principal in the Witkoff Group, bought it vacant last year.
There have been other big deals of late: In June Merrill Lynch bought 222 Broadway, the former Western Electric Building between Ann and Fulton Streets, to house support functions forced out by business growth at its headquarters location in the World Financial Center, at Battery Park City. The seller was Swiss Bank, which is moving to Stamford, Conn.
Merrill will take over the bank's 409,000 square feet, and over time will probably occupy additional space in the 750,000-square-foot 1964 building, said Peter G. Riguardi of Colliers ABR, Merrill Lynch's real estate consultant, and use it for expansion.
''It's really a 1990's interior,'' said Colleen Sheridan, the Insignia/ESG broker who represented Swiss Bank. The bank put $45 million into the building in 1990, she said.
And also in June, 130 John Street came off the market with a lease that will return all its empty 490,000 square feet of space to office use. The city's Human Resources Administration took the entire building for its headquarters, leaving nine other downtown buildings. It will be renamed 180 Water Street, said Robert F. R. Ballard of Cushman & Wakefield, who represented the city in the transaction.
Seven of the 10 largest recent leasing deals have been in the so-called Financial East district on or near Water Street, brokerage reports show. With the help of such deals, the overall downtown vacancy rate in the first six months of this year declined to 15.2 percent from 20.1 percent in the first six months of last year, according to Cushman & Wakefield Research Services.
Real estate firms usually break down the inventory by classes -- A for the newest and highest quality, most of them built after 1980, B for the second tier, usually earlier postwar buildings that have not undertaken the kind of renewal program that is bringing 55 Water Street to Class A status, and Class C for older, lower-cost space. Using this categorization, Cushman & Wakefield says that the vacancy rate among Class A downtown buildings fell to 12.2 percent in the first six months this year from 15.3 percent in those months last year.
THE Class A buildings account for about 50 percent of the 108 million square feet in the downtown office inventory, as Cushman & Wakefield measures it. The vacancy rate was 18.2 percent in Class B buildings, down from 25.8 percent, and 18.9 percent in the Class C category, down from 25.8 percent, the firm says.
Some of the improvement in vacancy rates in Class B and Class C properties is the result of the withdrawal of buildings from the office leasing market as they move toward residential conversion. But the figures to date indicate that all the residential conversions completed, in construction or planned, will remove only about 3.37 million square feet of office space, or roughly 3 percent of the inventory, from office use.
Residential conversions notwithstanding, therefore, downtown's fate is linked to the success of its office buildings. The 55 Water Street saga is only the latest example of a comeback, building by building, of prime properties that took heavy blows from bankruptcies, contractions, restructuring and move-outs in the early 90's. Some buildings have been able to use the period, sometimes under changed ownership, to put themselves in position to compete for major tenants when the market improved.
An earlier example is the 400,000-square-foot 55 Broad Street, now the New York Information Technology Center, where the Rudin Organization poured $40 million into a building that was empty six years after Drexel Burnham Lambert went into bankruptcy. It is now 95 percent leased to 75 tenants, said William Rudin, all in the new-media or information technology fields.
In this building small companies can get wireless broadband access or hardwired fiber optics at the desktop, traditionally services that only large companies could afford and provide. Some tenants have already expanded, Mr. Rudin said. The company has begun to use a similar approach in another property, 110 Wall Street, a 1965 building with 300,000 square feet of space.
And still earlier, Chase Bank poured $150 million into improving public spaces and upgrading building systems at the 50-story 1968 building at One New York Plaza, with 2.1 million square feet of space. Chase, a lessee in the building, exercised its option to buy it when it was largely vacant, and then signed major leases with Prudential Securities and Goldman Sachs.
Despite the recent activity by large tenants, it is smaller tenants in the middle-tier buildings that are providing most of the current dynamism. Often these buildings are in the hands of new buyers who paid prices that permit aggressive dealmaking.
Mr. Witkoff, often making purchases with financing from Credit Suisse First Boston, has over the last two years acquired 2.5 million square feet of office buildings in the financial district alone -- 156 William Street, One Broadway, 100 Wall Street, 33 Maiden Lane and 10 Hanover Square.
Credit Suisse First Boston has financed a number of other acquisitions of its own or with developers in Manhattan over the last 15 months, taking advantage of a ''window of opportunity'' when prices have been favorable, said Andrew D. Stone, head of the firm's principal transaction group. The firm has put about $2 billion into New York City deals, Mr. Stone said.
The prices paid for buildings have ranged drastically -- from $10 to $125 a square foot, brokers and buyers say -- depending on such factors as current profitability and the amount of additional investment required to attract tenants. In one recent purchase at $38 a square foot, for example, Mr. Witkoff paid $18 million for the 475,000-square-foot 1969 building at 100 Wall Street, between Water and Front Streets. The owner, Hexalon, a Dutch pension fund, had bought the property in the 80's and upgraded it, increasing its value. Now Mr. Witkoff will ''work the building'' as corporate leases come due over the next three years. ''About 160,000 feet will roll over, creating an opportunity to consolidate occupancies into contiguous spaces,'' Mr. Witkoff said.
Among other buildings that have transferred in the downtown shake-out are 22 Cortlandt Street, 250 Broadway, 80 Maiden Lane, 222 Broadway, 50 Broadway, 111 Broadway, 71 Murray Street, 2 Rector Street, 100 Church Street and 17 Battery Place. Darcy Stacom, the Cushman & Wakefield broker in a few of the sales, noted that motivations of the purchasers vary. ''Some buyers are investors betting on the future of the office market, some are planning residential conversions, and one was to a user,'' she said. The user was Merrill Lynch.
At 50 Broadway, a 1927 office building a few steps north of Bowling Green, Charles Bendit, president of CBC Properties, bought a 340,000-square-foot property with partners in June from Cigna Corporation for $14.4 million when it was 65 percent occupied.
Since then about 20,000 square feet has been leased out, Mr. Bendit said. There are 45 tenants in the building, most of them in about 2,000 to 4,000 square feet, and three have renewed their leases and taken more space over the last six weeks, he said.
At 22 Cortlandt Street, Credit Suisse First Boston was the buyer last December. It is a 668,000-square-foot 1972 building between Broadway and Trinity Place that has the Century Department Store in the base but was entirely vacant in the 400,000 square feet of office space above. Norman Sterner, the general partner in Murray Hill Properties, which handles management and leasing, said 350,000 square feet had already been committed to seven tenants, three of them coming from midtown. The minimum lease size is a full floor of 17,000 square feet.
As for 55 Water Street, its saga began in the late 60's when builders were taking advantage of a widening of Water Street that the City Planning Commission initiated specifically to direct office growth in the financial district to the eastern rim of lower Manhattan. The Uris brothers -- Percy and Harold -- were the builders.
With a total of 3.6 million square feet of space, it is the second largest privately owned office building in the country, behind Sears Tower in Chicago, which has 3.8 million square feet. The building has a 53-story tower attached to a 14-story wing, with an open 40,000-square-foot plaza at the third level, reached from an open stairway between the wings and intended for public functions. The design, by the firm of Emery Roth & Sons, was strongly influenced by the city's downtown planning office.
Almost from the beginning the largest occupant has been the Chemical Bank -- now merged with Chase -- in 1.2 million square feet on the first 14 floors in both wings. The lease runs to 2003.
The vacancy rate climbed as high as 40 percent -- about 1.5 million square feet in 1993 -- with move-outs by big investment firms. Olympia & York, no longer in a position to get the financing to carry out the asbestos removal and other major improvement work necessary to attract or hold major tenants, relinquished the ownership to its bondholder-creditors. The largest one, the Retirement Systems of Alabama, bought out the other bondholders.
A key goal was to win a renewal lease in 1995 from the Depository Trust Company, a longterm tenant, said Edward J. Kulik Jr., director of the investment management division of Jones Lang Wootton U.S.A., who is in charge of leasing. Depository Trust renewed to the year 2018, taking an additional 180,000 square feet for a total of 500,000 square feet, Mr. Kulik said. In May, Chubb Insurance, currently in 100 William Street, leased 155,000 square feet on three floors.
''In the 80's we were considered a B building even though we were well-occupied, because we were being used mainly for trading and back offices,'' Mr. Kulik said. ''So the question was do we continue on that path or do we make it an A building. The retirement system decided to spend $140 million on the base building structure and become an A building.''
The future of Chase's occupancy in the building and beyond is of obvious importance. The Chase-Chemical operation uses 16 million square feet in office space and branches in the metropolitan area, and seven million square feet of pure office space in Manhattan alone, of which 4.5 million is downtown, said Cesar J. Chekijian, senior vice president of Chase Properties Group.
As a result of the merger, the bank is moving as much space as it can from midtown to downtown, where Chase formerly had its headquarters and still has a major presence. But it has also vacated two floors at 160 Water Street in a move to One New York Plaza. No further large moves are anticipated in the 90's, he said.
At McGraw-Hill, the company said that both the ratings group and the financial information services group of Standard & Poor's would move to 55 Water Street, with occupancy starting next July. If the deal had not worked out, said Mr. Powers of Insignia/ Edward S. Gordon, McGraw-Hill was prepared to build a new building in the Lefrak Organization's Newport development in Jersey City. A tax relief package from the state and city of New York, announced April 24, was critical, he said.
THE 55 Water deal will probably also assist efforts to lease up 2 Broadway, an almost vacant postwar building of 1.5 million square feet on 32 floors, acquired out of bankruptcy for $21 million in cash last year by Tom Sapir, the principal in Zar Realty. Mr. Sapir is a Russian-born investor in his 40's who made a fortune in the electronics distribution and oil export businesses, operating through a Manhattan-based company called Joy Lud International, according to Frederick Contini, his associate.
Mr. Sapir acquired and later sold 99 John Street and 80 John Street, but has kept and undertaken leasing campaigns at other acquired properties, including 260 and 261 Madison Avenue, between 38th and 39th Streets, Mr. Contini said. Two-thirds of the Zar portfolio of 5 million square feet is in lower Manhattan. Besides 2 Broadway, it includes 110-120 Church Street and 53 Park Place, Mr. Contini said. Williams Real Estate was given the leasing assignment at 2 Broadway in June. Expressing optimism, Brian Given, the broker in charge, said that as soon as Standard & Poor's signed at 55 Water Street, ''we became the only building in the state of New York that can offer a million-plus square feet under one roof.''
Helping these leasing efforts, all brokers say, is the apparent improvement in the financial district's physical environment as the result of the activity of the business improvement district, run by the Alliance for Downtown New York. And the residential conversions promoted by the alliance, with the help of substantial city tax incentives, have helped to lower the office vacancy rate even as it prospectively brings more round-the-clock activity to the district.
''Tenants big and small are looking,'' said Caleb Koeppel, the 40-year-old manager of the family-owned building at 26 Broadway, which Standard & Poor's is leaving. ''We'll get a 100,000-square-foot tenant from midtown.''