Changes in 42nd St. plan no surprise to industry.

The decision by New York State to downsize and postpone the long-awaited Times Square redevelopment came as no surprise to the real estate industry, which has been battered by an oversupply of office space and an undersupply of corporate users.

At this time, the construction of four office towers will be put off for at least several years to give the market a chance to recover and the plan will focus instead on bringing a lively tourist and retail environment to the area.

Office tower developers Park Tower Realty and The Prudential released a statement commending the city on facing economic reality while preserving a long-term plan.

George Klein, chairman of the Park Tower Group, added, "No one wants to see this project abandoned."

While condemnation of those sites will continue, a spokesperson for the New York State Urban Development Corporation said they are still exploring ways to fund the condemnation of the sites on the Eighth Avenue end where Larry Silverstein is the designated developer for a hotel and retail space, and Tishman Speyer the developer for more retail and the merchandise mart, which has never found a solid tenant. Neither returned calls for comment.

The project's proponents insist that the major goal -- to clean up the area -- will be reached by changing the focus to liven the streetscape and ensure an invigorating retail climate.

Rebecca Robertson, a president of the 42nd Street Development Corp., said: "The fact that offices aren't going to be built also cleans up the street. Cleaning up the street has always been what we were trying to do."

Steven Spinola, president of the Real Estate Board of New York, called the decision a realistic approach at the moment. Still, he said, it is disappointing to see a project that on which so much money and so much time was spent now being shifted to a much smaller concept.

Spinola said that while hotel occupancy rates are too low at this time to support another hotel, it does not mean in three or four years things would not be better.

"We've gone from the Disneyland-type atmosphere to an entertainment concept," he said. "Now, if we only could figure out how to make them legitimate movie theaters and off-Broadway theaters and nice retailing without going to the extreme."

Developer Douglas Durst, who has proposed an interactive entertainment complex for the area, said, "It's wonderful that they are embracing the concept of tourism and entertainment in Times Square because that's what Times Square is. It was clear to me a long time ago that the office towers would not be built."

Areas with potential for retail have been identified by the architects John Burgee, while Garrick-Aug Associates Store Leasing Inc. has been retained to explore retailing opportunities.

Charles Aug, president of Garrick-Aug, said "Times Square is going to be re=merchandised and cleaned up. It's going to be an environment that appeals to entertainment and tourists."

George Stonbely, president of Spectracolor, and who recently proposed a World's Fair type exposition building for 5th Avenue and 42nd Street, said Times Square has a tremendous retail potential and all the ingredients for retail success.

Stonbely represents the Madame Tussaud's Wax Museum, which has been seeking to locate in Times Square for several years.

"We think this is a wonderful development for Tussaud because they will have immediate space to look at," he said.

Gretchen Dykstra, president of the Times Square Business Improvement District said, "I think there is a silver lining in this and the alternative plan is quite exciting."

Dykstra pointed to the new focus on the sidewalk level and to the shops as well as the plan's concentration on attractions for tourists. "I question the notion that development only comes through bricks and mortar, she said.

Dykstra hopes that superstores and plans from Disney and Madame Tussaud's Wax museum could be resuscitated.

A spokesperson said Billy Rose's Diamond Horseshoe nightclub at the Paramount Hotel is expected to open for the end-of-year holidays and another restaurant, the Brassiere Theatre will open by the end of this month.

"We get 20 million tourists and there are lots of attractions that will work to draw tourists there," Dykstra said. "My emphasis is, |how we can make the sidewalks as vibrant as possible?,' so when activity is paid to the storefronts I see that as good news."

Both Dykstra and Stonbely pointed to success of The Gap store which opened recently and has already expanded. "Who would know that a store on corner of 42nd Street has the potential to lead a chain?" Stonbely said.

A spokesperson for The Gap declined to comment on sales but did confirm the store recently expanded to 13,000 square feet and now includes retail space in its basement.

Chris Alpers, senior vice president of Bertlesmann Inc., which is purchasing the vacant 1540 Broadway from the bankruptcy court, said they were not concerned about moving into the area without the other office towers being built soon. "It was not a big surprise because everyone is aware of the market," he noted.

Alpers said while there are existing office buildings and some are vacant.

"One way or another they won't be vacant for long," Alpers said. "The transformation [of Times Square] has already taken place."

Sources said the Bertlesmann closing will take place by Dec. 21 since it could take that long to have its IDA funding in place.

So far, 33 properties have been condemned and valuation litigation is continuing. Any occupants will still be subject to eviction proceedings.

Condemnation and certiorari expert, Ivan Strong, who represents several of the buildings slated for removal, said, "To build an office building right now is folly," he said. "There are two or three office buildings right in Times Square standing empty now." Strong said, theoretically, if the state ever decides not to go through with the project, the buildings would be revalued and the former owner would have "first crack" to rebuy at the state-set price before the building could be offered to others.

John Van Der Tuin, an attorney who represents the Coalition Against Columbus Center which has successfully stalled that Boston Properties project for several years, said the redevelopment of Times Square is facing the same kinds of problems as the Coliseum proposal. "You have exactly the same dynamics going on," he said, particularly the state of the office market. Van Der Tuin observed there were no tenants for the Times Square tower nor for the Columbus Center.

Additionally, he believes a substantially delayed project would trigger the land used and environmental review cess all over again. One real estate workout specialist, who asked not to be identified, said the decision not to go forward with the office towers was a "non event" and entirely expected.

"You start something in a good market and by the time the city gets to it the market has gone down the tubes," the person.