March Issue: The Port Authority’s New Plan

By Gail Kalinoski, Contributing Editor
A report on the future of the Port Authority of New York and New Jersey couldn’t have been clearer about the agency’s massive real estate portfolio: It’s time to “phase out real estate ownership and development” and limit future investments to transportation-related projects.

But the recommendations released in late December leave crucial questions unanswered. For example, how much of the Port Authority’s 12,000 acres of land and 45 million square feet of office, industrial and retail space should be sold? Should the agency secure long-term ground leases for key assets?

“Keeping some assets and selling others could be prudent for the Port Authority,” said Obie Walli, CEO of New York City-based Coldwell Banker Commercial Alliance. “Core assets in the service of their mission should be retained, as control of their destiny is of course important.” He added: “Closing some select ground leases with committed parties seeking highest and best use could be smart from a cash flow and inflation hedge standpoint.”

Rick Lechtman, eastern U.S. director for Marcus & Millichap’s national office and industrial properties group, suggested that the agency should engage in ground leases.

Lechtman explained that transportation needs are often upredictable amd warned that the agency “may be handcuffing the region” if it disposes of assets that might someday be critical to a transit project.

New Jersey State Sen. Robert Gordon, who is among the state legislators seeking to reform the agency, said that real estate deals “should be in the light of day” and wants disposition guidelines. What isn’t divested should be monetized, the report stressed.

Gordon said he is unaware of any plans for the agency to sell its signature real estate asset: One World Trade Center, the 3 million-square-foot office tower that opened last year in Downtown Manhattan. The Port Authority owns 90 percent of the tower, while The Durst Organization owns the remaining 10 percent.

Nearby, the agency leases the sites of 2, 3 and 4 World Trade Center to developer Larry Silverstein. The Port Authority is expected to sell the site of 5 World Trade Center when ownership reverts to the agency. It made two deals worth $1.4 billion with Westfield Corp. to develop 350,000 square feet of retail, including more than 200,000 square feet at the Transportation Hub, which is scheduled to open this fall.

Selling Rights

In midtown Manhattan, the Port Authority is undertaking a $90 million makeover of its bus terminal at 42nd Street and Eighth Avenue. The report recommends replacing the 65-year-old facility, possibly through a public-private partnership. That may mean resurrecting a plan to sell the terminal’s air rights. A proposal led by Vornado Realty Trust for a 40-story tower collapsed in 2011. In the meantime, the agency recently selected Cushman & Wakefield Inc. as the agent for the terminal’s 163,000 square feet of retail.
The Port Authority is also making deals in the Hudson Yards district on Manhattan’s West Side, where several massive mixed-use projects are underway. In June, the agency’s commissioners agreed to sell development rights on the Lincoln Tunnel Expressway below 34th Street to The Dermot Co. for more than $100 million. That was followed in September by a $31 million deal to sell the air rights above two Dyer Avenue lots to Extell Acquisitions L.L.C. for a multi-family project.

“We will continue to take an aggressive approach to exploring options that offer significant value for non-core assets and recycle that revenue into our bus terminals, airports, bridges and port facilities,” Port Authority executive director Pat Foye said at the time of the Dermot Co. deal.

Industrial properties headed for the auction block could include the Essex County Resource Recovery Facility in Newark, N.J., which is currently leased to Covanta Energy; Teleport, a 100-acre mixed-use industrial park on Staten Island; and Bathgate Industrial Park, a 20-acre Bronx property.
The report recommends modernizing the agency’s port facilities to increase efficiency and handle the new generation of Post-Panamax cargo vessels. But it also suggests repurposing, redeveloping or selling underperforming assets like the Red Hook Container Terminal in Brooklyn, which loses $8 million per year on average and has low cargo volumes.