Canary Wharf Starts To Sing

It has been three years since Canadian Paul Reichmann lost control of Olympia & York Developments Ltd., dumping one of the world's largest real estate empires into the laps of many unhappy bankers. Perhaps the biggest source of their dismay was Canary Wharf, the giant office complex in London's gritty Docklands area, where Reichmann had spent more than $2 billion on a financial sinkhole.

Today, though, Reichmann's Canary Wharf folly is looking like a winner--just as he predicted it would before a global office glut forced O&Y into bankruptcy. The complex is 75% leased and operating in the black.

There are even rumors that Reichmann wants back in. In April he dropped by to inspect the property, in the company of U.S. media magnate and investment titan Laurence A. Tisch. "Don't read too much into it at this stage," cautions Sir Peter Levene, chairman of Canary Wharf Ltd., now a development owned by 11 banks. "He was showing Larry Tisch around his masterpiece, and he came in to see me as a courtesy visit. We didn't discuss any offers." Nonetheless, London real estate professionals are speculating that Reichmann is interested either in the whole project or in two large undeveloped lots in the complex.

WELL-CUSHIONED. Whether Reichmann buys back in or not, it's easy to see Canary Wharf's appeal these days. The project is out of bankruptcy and well-cushioned with a $1.8 billion rescue package. A crucial 16-km subway extension, from London's center to the Docklands area, will open in 1998. And the property market is bouncing back, after a five-year recession.

In this environment, Canary Wharf's wide-open floor spaces--which banks need to modernize their trading rooms--are much in demand. Older buildings in the City of London are cramped in comparison. In March, Barclays de Zoete Wedd Ltd. angered planners in the City by leasing 500,000 square feet at Canary Wharf. BZW is the securities trading arm of Barclays Bank PLC, one of the complex' owners. BZW will move 1,700 traders and support staff there, joining Morgan Stanley, Credit Suisse, Texaco, Ogilvy & Mather, and several London papers, all paying rents around $30 per square foot, far below the financial district's $50 going rate. David Band, chief executive of BZW, says Canary Wharf "offers us the space we require now, as well as the potential for growth."

To keep up the momentum and reach 100% occupancy, Levene is courting several of Europe's biggest banks, such as Germany's Deutsche Bank and the Netherlands' ABN-Amro Holding, both in the process of looking for office space big enough to centralize their European trading operations. Only 2 out of a total of 10 Canary Wharf buildings are still vacant.

Potential tenants, at first put off by the distance from the financial district, end up appreciating the amenities. In the main tower, elevators whisk passengers to the 50th floor in just 40 seconds. Even mid-level managers of brokerage, advertising, and oil companies who once occupied tiny quarters in drafty downtown buildings find they get large, private offices with a river view--and a key to the on-site health club. And the real estate recovery is now strong enough, says Levene, that "the day is getting closer when we will have to do something with the unimproved lots" situated nearby. In the early 1990s, foundations had been dug for two more buildings, but the work was halted when the Reichmanns hit the wall.

The turnaround has surprised even Canary Wharf's owners, which besides Barclays include Lloyds Bank, Citicorp, Royal Bank of Canada, and Credit Lyonnais. One banker says he is convinced that, with its surging occupancy rates and gilt-edged tenant roster, Canary Wharf is worth "several hundred million dollars more" than the $1.8 billion in loans the banks put up in 1993. Levene, formerly an investment banker, says he has not been asked to find a buyer by the banks. But, he adds, the banks "want to cash in their investment when the conditions and the price are right." The wheeling and dealing over Canary Wharf is far from finished.