Recovering From an External Economic Shock: The Effect of Terrorism Threat on Chicago “Trophy” Buildings and Their Immediate Area

Abstract This paper studies the extent of the office market recovery of the shadow (immediate) areas of three Chicago trophy buildings (Sears Tower, Aon Center, and John Hancock Center) comparing before and after September 11, 2001 (9/11) office market trends from 1997 until 2005. The results indicate that these three areas have not yet fully recovered almost five years after 9/11 based on their direct and sublease vacancy rates. Controlling for all three shadow area fixed effects, sublease vacancies after 9/11 increased on average by 84% and direct vacancies increased by 69%. In contrast, there is no statistical difference between the before and after 9/11 rent levels for all three shadow areas. The attacks of September 11, 2001 (9/11) took place less than five years ago, and although the absence of an attack targeting a downtown area in the United States has strengthened the confidence of tenants locating there, the fear still exists. This fear, combined with the economic recession from which the country is starting to recover, has not yet allowed certain downtown office areas to fully recover. Although the attacks of 9/11 were not the first targeting office buildings in the U.S., they were a turning point in the reevaluation of security procedures, especially in dense downtown areas and among Class A1 office space. There have been two other significant terrorist attacks targeting office buildings. The first was the bombing of the World Trade Center (WTC) in New York City in 1993, which killed six people and wounded 1,042 (Rubin, Renda-Tanali, and Birkland, 2003). The building withstood the blast, but the crater was 130 feet wide by 150 feet long and five stories deep (United States Fire Administration-FEMA, 1994) and the damage was estimated at $250 million. Although no significant damage was reported by the surrounding properties, many of the major tenants in the area started developing contingency plans in case of another event. The second attack came two years later in 1995 with the bombing of the Alfred P. Murrah Federal Building in Oklahoma City, which killed 169 people and injured 500 (Rubin, et al., 2003). In this case, a significant part of the building collapsed and the blast effects were felt over 30 blocks, severely damaging or destroying 25 nearby buildings and lightly damaging another 300 (Risk Management Solutions, 2001). Originally, the building was erected in 1977 at a construction cost of $14.5 million. After the attack the House of Representatives requested $40.4 million for expenses of real property management and related activities (House of Representatives, 1995; and The City of Oklahoma City, 1996). The attacks of 9/11 led to the death of 2,752 people in New York City (CBS News) and the total destruction of more than 13 million square feet of office space at New York City's World Trade Center area. The total cost for the City of New York was estimated close to $105 billion by the city comptroller; not considering, however, the impact on the U.S. economy and downtown office attractiveness. High profile buildings, such as the Empire State Building in New York City (1,250 feet), Sears Tower in Chicago (1,451 feet), and the U.S. Bank Tower in Los Angeles (1,018 feet), changed their security approach almost overnight in order to make their tenants feel more secure and deter significant tenant relocation. Although the majority of trophy buildings implemented a layering security approach, which included an assessment of the site perimeter, building envelope, and interior (American Institute of Architects, 2004), the majority of technology related improvements took place in the interior and building envelope. Among the most common security technology applications in building interiors after 9/11 were access control, weapons detection, and CCTV (Nadel, 2004; and Dermisi 2006). This paper tries to ascertain the recovery of the Chicago downtown office market by focusing on vacancy and rent levels before and after 9/11, not only among Chicago's trophy buildings but also among buildings in close proximity to them. …