Office Space. Reasonable. Contact The Reichmanns

It's an amazing transformation. Where derelict London dockyards stood only a few years ago, a half-dozen gleaming new buildings face one another across a broad avenue. A fountain bubbles away in a flower-laden square, while strollers head for a waterside pub. And above it all looms an 800-foot tower clad in dazzling stainless steel--Britain's tallest building.

Canary Wharf, the grand dream of Canada's Reichmann brothers, is finally a reality. The first of its tenants moved into the tower in early September, less than four years after the Reichmanns embarked on Europe's biggest real estate project, which could end up costing $6.5 billion by the next century. Their goal: to create a totally new London hub, three miles east of the existing City of London financial district. Built on 71 acres of canal-laced wasteland on the River Thames, the sprawling development will house some 50,000 office workers.

GRIM OPENING. Still, the financial outlook remains shaky. The first two phases of the project, about 4.5 million of a total of 10 million square feet, are only 57% leased. That's well below the 75% to 80% projected only a year ago by Michael Dennis, who heads the London arm of the Reichmanns' Olympia & York Developments Ltd. Not a single new tenant signed up during the 12 months from July, 1990, to July, 1991. And although O&Y has snared several tenants in recent weeks, "they must find life very tough at the moment," says John R. Parry, managing director of Hammerson Property & Development Corp., a big London developer. So far, O&Y has put in about $2.5 billion.

The problem? Canary Wharf is opening during a steep property slump. Vacancy rates in London's financial district are 18.5% and could hit 24% next year. That's up from 8% in 1989. Many of those properties are old and don't compete with Canary Wharf's modern, spacious buildings. But rents even on first-class properties have tumbled about 20%, eroding Canary Wharf's price edge. The project is difficult to reach, and prospective tenants have plenty of alternatives in more central areas. That has forced Canary Wharf into offering more attractive deals, including rent-free periods and cash for fixtures. "We didn't expect 15% interest rates or the strength of the downturn," says Dennis.

London isn't the only place the Reichmanns are feeling the recession. In troubled New York City, where the family is a dominant landlord, property values have tumbled as office vacancy rates have soared and rents dropped by up to 30%. The downturn in the market has forced the Reichmanns to quietly shelve a plan to sell a 20% interest in their vast U. S. holdings. One troubled building, 60 Broad St., was devastated by the collapse of its prime tenant, Drexel Burnham Lambert Inc., and is presently 62% vacant.

But don't expect the Reichmanns to follow in the steps of Donald Trump. Despite the New York slump, the Reichmann vacancy rate is holding at a low 8.9%, says John Zuccotti, CEO of O&Y's U. S. operations. And with the bear market coming to an end, Zuccotti says the Reichmanns may start buying new properties in New York as soon as next year. Their position is bolstered by more than $5 billion in stock market holdings, including controlling stakes in Abitibi-Price and Gulf Canada, which could be sold if things really turn down.

ACHILLES' HEEL. Although Canary Wharf isn't looking like one of the Reichmanns' big money-spinners, it's way too soon to write it off. The initial allure--big government tax breaks and ultralow land costs--remains potent. The Reichmanns' aim was to build their project for about $500 a square foot, the same as land alone costs in a prime central site. That allows them to offer low rents for high-class, modern space in a city overloaded with old offices that don't have air-conditioning. Dennis predicts that tenants will come running as the recession eases. His revised projection: Canary Wharf's first phases will be 75% to 80% leased by next July, a year later than planned. If the market does come back, Canary Wharf could prosper. The early phases had to have low rents to attract new tenants, and the Reichmanns have sunk vast amounts to improve public transportation, a major Achilles' heel. But by 1995 or 1996, when the third phase is supposed to be complete, Canary Wharf should be humming with retail shops and restaurants. A new subway line that should be in operation by then will ease transport woes. Both spell potentially higher rents--and bigger returns. "We will do well from this project," vows Dennis. Still, it will probably be late in the decade before any big payoff comes. Even for the steadfast Reichmanns, that's patient capital indeed.

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