Friday, December 7, 2007

Morty and Moishe are on the hunt for land

How Trading Floor Availability Creates Financial Districts

John Gapper says that "something about financial centres seems to make them split into different districts" – citing West Kowloon in Hong Kong and Canary Wharf in London as financial districts which have sprung up as alternatives to the historic financial districts. In New York, he adds, the pendulum has started swinging back: while banks seemed to be increasingly moving to midtown in the 1990s, they now seem more attracted by lower Manhattan than they have in a long time.

Gapper thinks this all has something to do with cheap rents. I think that there's a much more important factor: trading floors.

Canary Wharf was (eventually) a success for one big reason: the City simply didn't have enough supply of building sites with big floorplates to meet the demand for big trading floors. I suspect the impetus for moving to West Kowloon is the same. And I'm sure that the impetus for moving to lower Manhattan is the same.

Look where the banks are, in the area. When Goldman moves into its new headquarters, Deutsche Bank will be pretty much the only major investment bank east of Broadway. Everybody else – Goldman, Merrill, JP Morgan, Citigroup's investment bank, and probably another investment bank or two who will end up moving in to Larry Silverstein's new WTC towers – will be in the much more wide-open area west of Broadway, centered on the 16-acre WTC site. The old WTC only had one real trading floor, and even that was in Larry Silverstein's 7WTC rather than in the Port Authority'sWTC proper. The new WTC site, by contrast, will have well over a dozen, all told, if you include Goldman's tower.

Ceteris paribus, banks, like anybody else, prefer lower rents. But they're also rich, and the likes of JP Morgan, Citigroup, Bear Stearns, and UBS can certainly afford big and grand towers within easy walking distance of Grand Central. The problem is that those towers don't lend themselves to the kind of trading floors which investment banks increasingly need, and they certainly weren't constructed with SEC regulations in mind which mandate separate entrances and elevators for the trading floors. (Well, maybe Bear's new tower was. But the rest weren't.)

The construction boom in Times Square is coming to an end, and I don't think there's any chance that Morgan Stanley, Lehman Brothers, or Bank of America are going to leave their shiny new buildings in the tourist-infested neighborhood anytime soon. But for anybody else, the acreage available downtown simply isn't available in midtown.

Hedge funds, of course, can happily set up shop on a backstreet somewhere in Mayfair, or in a small suite of offices in midtown. Banks are another thing entirely, and I have a feeling that they're going to end up where the space is, rather than where the money is.

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