Future of 42nd St. tower in question.

As of last Thursday, things were not looking good for the accounting firm Arthur Andersen. The firm was facing indictment in the Enron scandal, its clients were reportedly defecting en masse, and two of its major prospective buyers, Ernst & Young and Deloitte Touche Tohmatsu, withdrew-from

This news, coming as the steel beams are being put up for Times Square Tower - the building that was supposed to become Andersen's headquarters in 2004 - must sound awfully unpleasant to Boston Properties, the developer of the building.

Back in the summer of 2000, when the real estate market was hot and many large businesses were scrambling to find space in Manhattan, Boston Properties undertook the development of a 1.2 million SF, 47-story building in the Times Square district. With the assurance that Arthur Andersen, a prestigious accounting firm, would about 400,000 SF at the tower for the price of approximately $70 per SF, the decision must have seemed like a no-brainer. Now, however, there is a chance that the developer might end up without a profit altogether.

Steve Solomon, the spokesman for Boston Properties, said the firm is confident that Andersen will come through on the agreement. But he also admitted that, so far, the developer has no other tenants for the building. "We are in discussion with a number of major firms," he said.

According to Gordon Ogden, managing director of Byrnam Wood, a tenant representation firm, Boston Properties would be hard-pressed to find a replacement for Andersen at the same price before 2004. "I think that even if Arthur Andersen is bought, the buyer's position would be to take it without the lease liability," he said. "So the risk on the project is almost all Boston Properties'. The likelihood. of them recouping at $70 per SF is not high. They would be in a tough spot in any market, let alone in a declining market. If they push the leasing back to 2005, there will be a hand full of people in line for the building. But then they would have a timing problem."

For Peter Patterson, a real estate consultant, the question is not how much Boston Properties could get for the space, but whether the Times Square Tower will be built at all.

"They will probably have to start the leasing campaign all over again," he said. "At the end of the day, Arthur Andersen will be hard to sell, if not impossible. And Boston Properties has a hole in the ground right now. Without a lead tenant, it's uncertain whether the banks will continue to finance. They probably will and Boston Properties will probably get a tenant at some kind of a high rent, but the market will not be like it was 24 months ago for a while."

There are some brokers, however, notably on the landlord side, who think the two years the developer has until the building is completed will give Boston Properties enough time to find a replacement.

"I think they shouldn't have any problem leasing that space," said Kenneth Krasnow, senior managing director for Cushman & Wakefield's New York metro region. "It's not going to be ready for a while and it's a first class building, so it's going to be appealing for a lot of corporations that are considering that kind of space."

"And I don't think there will be any dramatic drop-off in the rate," he added. "They still have time and we are seeing signs of the market coming back, so time is on their side. If it was space that was sitting vacant today, it would be a different story. But since it's not ready yet, time is on their side."

It will take another month or so to see if Arthur Andersen will survive. And a recovering economy might make things easier for Boston Properties. But according to one source in the real estate industry, so far the developer is "in the worst possible situation."