Surf & Turf: The New Landscape.

Call 1999 the year that the surf hit the turf. No longer confined to Downtown's Silicon Alley, web-based companies have broken through Wall Street and taken places on Main Streets.

As these companies have grown exponentially and are leasing up a greater percentage of the available total square feet, both brokers and owners who took chances on baby Bells and early Amazons have prospered along with them.

But the demand for all sized spaces exceeds the supply; companies are too big for their space before the ink is dry on new leases; short-term office suites are often full to the rafters; pre-builts are hot because companies can easily trotto the next size or fold, so owners want large security deposits and letters of credit to prevent the shakier ones from evaporating on their watch; and there are real worries the best of the bunch will flee.

As Senator Chuck Schumer said last week after speaking with many companies, "...they are panicked about space.

Schumer announced the formation of the Group of Thirty, a "blue ribbon" task force of city business and political leaders who will seek solutions.

He is not alone. Already Mayor Rudolph Giuliani has his own task force working on the problem. In an apparent bid to act senatorially, and not, as he is wont, as a singular sensation, the Mayor did not throw a hissy fit when Schumer advised him of his plans.

"I spoke to the Mayor yesterday about our task force and he was both gracious and enthusiastic about the mission of the task force, and is eager to read our findings," Schumer said in a speech to business leaders last week. "We agreed that both Michael Carey of the EDC and the Deputy Mayor for Economic Development will serve on our task force."

[The mayor, at deadline, had not announced a replacement for Deputy Mayor Randy Levine, who is headed back to a baseball post. Among those up for the spot are Housing Preservation & Development Commissioner Richard Roberts, and Tony Coles from the Mayor's office. Sources said Planning Commissioner Joseph Rose has already declined the position.]

"Chuck has assembled a panel with considerable horse power," said Robert Yaro, president of the Regional Plan Association, who was among those asked to serve on the panel.

The Senator has drawn representatives from the fields of real estate, high-tech, biotech, corporate powerhouses, finance, academia and labor. Members include Robert Kiley, president of the New York City Partnership; Steven Spinola, president the Real Estate Board of New York (REBNY); Jane Thompson, president Thompson & Associates; Tommy McGuire of the Operating Engineers; Brian McLaughlin, Central Labor Council; Dennis Rivera, president of Local 1199; Mitchell Moss, director of Taub Urban Research Center, Wagner School, NYU; Hank Paulson, chairman of Goldman Sachs; Kenneth Chenault, president and COO of Amex; Bill Harrison, president and CEO of Chase; Deborah Wright, president and CEO of Carver Bank; Ivan Seidenberg, president Bell Atlantic; CitiGroup's Robert E. Rubin; Chan Suh, CEO Agency.com; Jay Walker, vice chair of Priceline.com; Fernando Espuelas, president of Starmedia.com; William Steere, chairman of Pfizer; Jim Tripp, general counsel, Environmental Defense Fund; and several other.

Among those on both task forces is William C. Rudin, president of Rudin Management, whose work o the original Downtown Plan, the Plug 'N' Go program, and the success of the company's Technology Center at 55 Broad Street, created an incubator for the city's current technology boom.

"It goes beyond space," said Rudin. "We need to create the right environment to help these companies grow and create more jobs, and help them pay taxes, and the other things that occur when they grow."

But he agrees there are location issues because these young companies want to experience street synergies with their brethren in cutting-edge neighborhoods.

One question the task forces will need to answer, Rudin said, is "How do we spread this out to the rest of the city, and find affordable wired space to help these companies grow?"

Yaro agreed, "We have to show them new choices for places that are just as funky."

Attorney Lawrence J. Lipson, a partner with Proskauer Rose and chair of its real estate department, said "As the demand for space gets tighter, the buildings that are otherwise unattractive will become more attractive to tenants because they don't have any alternatives."

While Mayor Giuliani and his Task Force have suggested expanding such wired neighborhoods to Long Island City, Downtown Brooklyn and The Bronx's Fordham Road, so-called Downtown tax incentives and other benefits are available in those locations now in certain zoning districts, a fact that has not been promoted whatsoever.

What Guiliani has proposed now is to expand the successful Plug 'N' Go program that marketed Downtown's pre-wired pre-builts and guaranteed low market rents with the cooperation of self-selected building owners. That program has been promoted using city and private contributions by the Alliance for Downtown New York, the area's Business Improvement District; and by the city's Economic Development Corp.

And by everyone's estimation, it has been wildly successful in capturing the fancy of the web companies and filling Downtown and beyond. "We had to work very hard in Lower Manhattan," recalled Rudin.

Downtown's vacancy rates have dropped from more than 12 percent in 1997 to just over 9 percent at the end of the third quarter, by Cushman & Wakefield's estimation. The Class A vacancy rate stood at 5.8 percent at the end of the third quarter of 1999.

More than 200 firms have signed leases through the Plug 'N' Go program in 14 buildings, many of which were either nearly or completely vacant in 1997.

Schumer is hoping his Group of Thirty goes further than Plug 'N' Go to identify areas with lots of space; good transportation; restaurants, shops and amenities; and provide financing for building owners so they can renovate or develop buildings with broadband wiring, create research laboratories and make other tenant improvements.

"My guess is that if it were left to the market alone, the type of space we need would eventually develop," said Schumer, "but long after many of our growing businesses left and our more established but growing businesses chose to expand elsewhere."

According to Cushman & Wakefield, in 1996's emerging leasing market, high-tech firms accounted for 4 percent of the total square footage leased in Manhattan, with these firms comprising a little over a million square feet.

In 1999, where the tenant could be identified, these firms accounted for 11 percent of the total square footage leased, comprising more than 2 million square feet.

Telecom companies alone took 1.9 percent of the space in 1996 and took 2.5 percent in 1999.

These firms also added jobs. Yaro says the new media companies have provided a way for the city to diversify from the financial services job sector. Rather than computers causing a decrease in the need for office space, as was feared by earlier forecasters, they have instead made people more productive and created new businesses that have fueled steady job growth.

Out of more than 78,800 jobs added in New York City from the end of the third quarter of 1998 to the end of the third quarter of 1999, 24,000 jobs were added by business service firms that include many Internet companies.

The figures look good, but not good enough to Yaro. "This town hasn't added a net new job in half a century," he warns. "We get up to 2.5 million jobs in the Manhattan business district, and then we run out of space. It happens in each big boom. Unless we start planning now to create new opportunities for growth, the dot-com industry will expand elsewhere."

So far, these web-based corporate cultures are merely pursuing edge neighborhoods for lower prices and loft-style large spaces, and have not begun to cross rivers or state lines.

But their expansion is also contributing to the rise in net effective rents everywhere, as other established businesses are priced out of long-time spaces. That's because building owners are finally making money after the early Nineties recession, while those with new investments need higher returns to pay for their expensive purchases.

Joseph Moinian's Mazel Group came into the market at the right time and paid just about $7 million for the 408,945 square-foot 90 John Street in 1995 (approximately $17 a foot), converting much of it to residential use. The remaining 165,000 square-foot base was left as commercial office space and primarily rented to web tenants through the Plug 'N' Go program at beginning rents of $16 a foot.

Today, $100 to $200 or more a foot purchase prices for buildings are typical, and new leases are predicated on getting more money - a lot more money.

Space that rented for $20 in the beginning of the 1990's is now garnering $30 to $40; with the $30 and $40 spaces pulling in $40 to $50 or even $60.

Downtown, Donald J. Trump purchased the 1.3 million 40 Wall Street for $1 million and invested countless millions to renovate it into a first class office building. It's rented now to a slew of financial services tenants including American Express and CNA. Rents started in the mid-$20s in 1997; deals are now in the $40 range.

Uptown, at the high end of the market, Trump and Conseco bought the General Motors Building at 767 Fifth Avenue for $800 million based on a pro forma of $60 rents. New tenants are signing leases anywhere from $90 to $100 a foot.

At the same time, buildings are getting "bigger" and usable square footage is dropping.

Tenant rep broker Dale F. Schalather of Cushman Realty reports the current square footage on a client's space is 60,000 square feet over three floors.

"We're renegotiating for the same three floors, but now it's measured as 72,000 square feet," he complained. "Their rent, even if it remained the same, has increased 20 percent. But the rent will increase almost by 100 percent, as the square footage will go up.

Even as building services are improved by new ownership with fast Internet services, nicer lobbies and speedier elevators, the combination of higher rents and bigger yardsticks is driving other tenants away.

"I sit by the phone and grieve every day for old friends who say, 'I've been in the X Building for 45 years and we just got our renewal lease and I'll have to move,'" observed Eugene A. Hegy, president of Eugene A. Hegy & Associates, who consults on and brokers real estate projects.

"They've contributed to the feeding frenzy," said Ruth Colp-Haber, president of Wharton Property Advisors of the Internet firms. "They are growing quickly and gobbling space."

Colp-Haber worked with Corporate Micros for its first, under 2,000 square-foot space at 90 John that was initially renting to tenants for $16 a foot in 1997. "Now they are doubling and tripling their space." Rents in that building are approaching $27, other brokers report.

Other firms are quickly outgrowing Plug 'N' Go buildings or moving to the newly added ones such as 20 Exchange Place, where Agency.com recently rented 102,100 square feet.

Last year Downtown, Sun Microsystems signed on for 89,162 square feet at Two World Trade Center; TheStreet.com leased 69,790 square feet at 14 Wall; and in a Flatiron deal, US Web/CKS will move into 122,732 square feet at 105 East 17th Street in May.

In December alone, Colliers ABR reports, three large dot-com deals were announced. Organic.com is relocating and expanding from 71 West 23rd Street to 139,115 square feet at 233 Broadway. US Interactive is relocating and expanding from 28 West 23rd Street; and e-Steel is moving to 51,600 square feet at 1250 Broadway.

One of the most dramatic growth successes is DoubleClick, the Internet advertising firm that started in 12,100 square feet at 41 Madison Avenue in 1996. It is now consolidating offices at the edge of the Garment District at 450 West 33rd Street, where it will occupy 222,407 square feet by February, and has already signed a lease that will bring it to 250,039 square feet by 2003.

Former industrial monoliths like 111 Eighth Avenue, 450 West 15th Street and 601 West 26th Street are filling with an eclectic mix of telecom and new media companies. Nearby, the 559,000 square-foot 85 Tenth' Avenue was purchased by Level 3 to merely house its computers. That company has approximately 130,000 square feet of office space in three other city buildings.

Jason Spicer, manager of New York research for Cushman & Wakefield, said one of the problems in tracking the numbers is that the so-called "high-tech" firms can be tracked under many different industry codes, ranging from computer related to advertising to other Federal government Labor Department designations.

Worse for the byte counters, and with an eye on the AOL Time Warner merger, he observed, "Eventually, every company will be a dot-com and the lines will change as to these companies are accounted for."

Today, Spicer said, more than a dozen new media firms are looking for more than 60,000 square feet in New York City. Worse, there are probably dozens seeking 5,000 square feet, all in the same neighborhood - and it's not Downtown.

"Not a week goes by that I don't get a phone call from a friend or associate for a 5,000 to 10,000 square-foot Internet company which wants to be in the 14th Street to 34th Street Flatiron corridor, and I work on some and I don't work on others because there is no space," said Schalather.

Colp-Haber is working with several that have "very tricky space requirements." The smaller companies need short-term space because they don't want to commit for five years. But, she observes, there are no sublets. "They are being recaptured by the owners."

"I had one company call, and he's going to stop looking for space and is going to hire a night shift," Colp-Haber reported. "This is the down-side of this incredibly vibrant market. The entrepreneurs who started five years ago and got short-term space and adaptive space, couldn't do it now."

As rents go up in areas desirable to these firms, it becomes more likely that eventually they will get courted out of town.

And even if they don't go, other, more established firms have already begun the exodus to New Jersey and Westchester, where Class A new to nearly new or modernized space can be had for the mid- to high-$20s a foot.

The Leukemia Society of America just signed a deal to relocate its headquarters from Midtown's 600 Third Avenue and double its space to 40,000 square feet at the very wired, former IBM building known as the Parker Corporate Center on the Mamaroneck/White Plains border.

One company advised Senator Schumer they had 300 employees and negotiated with New York City for a year to find space for a projected 600-strong workforce. "By the time they moved in they had already outgrown the space and have begun to look at New Jersey," Schumer said.

In March 1998, Real Estate Weekly described the growing need for new Class A office space Downtown and the call by the Alliance for Downtown New York for the incentives to help spur its construction. To date, only the New York Stock Exchange Building is being planned, which will supply some space for other office tenants, but is it too little, too late?

Goldman Sachs has already crossed the river to add a one million square-foot ground-up development to its inventory in New Jersey. They didn't go to Brooklyn, where Forest City Ratner is finally planning a new office tower at MetroTech. The incentives, job credits and financial packages are still better in New Jersey than Brooklyn, and New York City is just not competing hard and fast enough, some industry observers say.

New media firms need flexible space that they can expand in as rapidly as they grow. Schumer says they need complicated infrastructure" such as broadband wiring and laboratories for bio-tech firms.

The wiring is not an issue in core Manhattan, said Schalather, who notes that most of the buildings have it or are getting it:

"The key for these companies is not spending a lot on capital expenditures up-front because they grow and move," he said. "They can't see 12 months from now because the industry is moving too fast."

The companies typically want an open plan and buy modular furniture that they can move around and take with them as they expand. They will also seek space for sublease that's been built-out for another firm. "They make their foot fit someone else's shoe," Schalather said.

But owners are wary of tenants that could be out of business as rapidly as they went into it. Both Colp-Haber and Schalather say building owners are demanding and getting a year or more worth of security deposit or a letter of credit. The venture capital funding goes quickly, and volatile stock prices don't ensure that the CEO will sell in time to pay the rent.

Even if the owner has a security deposit in hand, if the tenant goes out, there are still out of pocket expenses for the owner, advised attorney Lipson. "You have to pay the brokers, you have to pay the lawyers, and there are still upfront costs," he said. "If the tenant defaults, he may be stuck with a tenant in the space that doesn't have the money and the owner is just one of the creditors."

Lipson added, "The bigger the tenant, and bigger the space, the bigger the risk and the larger the security deposit the owner wants to seek."

Any Task Force will also have to listen to other dot-com and business complaints: They can't hire good-people fast enough; City dwellers coming out of public schools aren't looked on as management level employees the way they look at those moving in from elsewhere each May.

If the city is able to wrestle its education the way it has corralled crime, employers can boost productivity, too. An emphasis on keyboarding, spelling, math and science, along with social and business skills, will make many children more employable.

Luckily, the dot-com world is a great leveler, as it rewards those with unique ideas and thinking.

"You basically have to have chutzpah and creativity," said Yaro of those who succeed in creating great Internet companies. "You can come out of Stuyvesant High School or Bedford Stuyvesant."

The lack of affordable housing for employees is a complaint Senator Schumer did not mention either, but is on the minds of the Internet set, as they have to pay to get people to stay.

Yaro says, if properly educated, local high school and community college students "will have a leg up" for these jobs because they already have a place to live. "There will be a loud sucking sound as the industry sucks in these employees," he predicted.

Schumer hopes his Group of Thirty will study the issues and present a report in six months. He hopes these business leaders will come up with some form of public-private partnership whereby the city will provide land, even by condemnation; create the transportation infrastructure with help from Washington; agree to zone for uses that include street retail amenities; and then re-sell to developers, who will build with or without the tenants.

He used as an example San Francisco's $4 billion commitment to the Mission Bay project, a 5 million square-foot commercial and university, complex.

Here, Schumer suggested sites such as the Brooklyn Army Terminal, the Brooklyn Navy Yard, Sunnyside Yards in Queens, portions of Long Island City, the South Bronx and north of 96th Street in Manhattan.

After speaking with Schumer, Samuel LeFrak has dusted off-plans and feasibility studies he commissioned for Sunnyside Yards back in the 1960's.

"This is a natural for the development of what I call the new science ad communications, bookkeeping financial and info-gathering businesses," he said. "We ended up programming 7 million square feet of office, and 3.5 million square feet of industrial space that would be space for uses like Internet and heavy fiber, and 1.5 million square feet of retail and 17,000 apartments and 21,000 spaces for parking. We estimated it would create over 35,000 jobs."

Among the infrastructure changes needed was an extension of I-678 (the Van Wyck Expressway), a third tube for the Midtown Tunnel, and platforming and staging over the railroad. yards.

"It was thrown out of the water by [Mayor John] Lindsay, who wanted the money to go to other areas, and the city is now out of space and the growth is here," LeFrak asserted. "I will revitalize and recycle the area. We're the pioneers - we've always pioneered and opened up new areas, and this is an area crying for development."

Senator Schumer calls the lack of city office space a "troubling storm cloud" that could cause New York City "to stagnate or even decline," and blames it for limiting New York City's growth.

From 1988 to 1997, he says, the nation's economy grew faster than the city's economy each year, and in 1998, the city's gross product grew the same as the nation's at 3.9 percent.

Yes, space was to blame in the late 1980's and early Nineties, but then, the Big Apple had too much and not too little. New York City's double digit vacancies were partially caused by the 1986 changes in the nation's tax code that affected investors in city real estate like cement shoes.

When Congress changed the rules of real estate investment without providing a fair exit strategy for then current investors, they took the lenders down with them.

There are good reasons lenders and developers haven't created too much space this time around, and real estate leaders say the Group of Thirty will have to balance past experiences and current progress into their long-range planning.

Yaro believes there are no simple solutions, but-there are "a lot of lateral thinkers" on the panel who can all provide access to solutions. "He won't attempt to solve all of New York City's problems," Yaro predicted of Senator Schumer.