(FORTUNE Magazine) – The flashbacks come at the oddest moments. Suddenly Ric Clark is staggering through the streets of lower Manhattan, the air filled with smoke from the flames beneath the heap of rubble and steel that was the World Trade Center. Then Clark comes to his senses. When he looks out of the window of his conference room, he can see that the debris has been carted away. The sidewalks are teeming with office workers and tourists. Everything's okay. Or is it?

Clark has more than a passing interest in what happens to ground zero. He is CEO of Brookfield Properties, lower Manhattan's largest commercial property owner. A publicly traded company with headquarters in New York City, Brookfield manages 120 million square feet of residential and commercial real estate in the U.S. and Canada. Nearly one-third of Brookfield's $800 million net operating income last year flowed from four skyscrapers surrounding ground zero. Together, these buildings--One Liberty Plaza and three of the World Financial Center's four towers--make up 8.4 million square feet of downtown's best office space. Brookfield has leased space in the towers to blue-chip tenants such as Goldman Sachs, Dow Jones, Nasdaq, and CIBC World Markets. The company has been promising Wall Street at least 15% annual growth in net income, and delivering.

Now all that is in question. Brookfield suffered $300 million in damages and other losses on Sept. 11. More than a year later, 35% of Brookfield's downtown space is unoccupied. Tenants like Lehman Brothers and Nasdaq have abandoned their offices. Goldman Sachs hasn't returned. They're all still paying rent, mind you, since they still have leases--for now. But even excluding those absentee tenants, Brookfield currently has 1.4 million square feet of empty space on its hands downtown.

"We have more confidence in the future of lower Manhattan than anybody," maintains the 44-year-old CEO. But Clark's struggle to convince investors and corporate executives that the World Financial Center can still be a great address speaks volumes about the future of the area. If current leaseholders hold lower Manhattan in such distaste that they're willing, in some cases, to pay double rents not to be there, what are Brookfield's chances--or anybody else's--of raising New York City's financial district from the ashes?

Son of a commercial real estate broker, Clark has seen his share of disaster. He came to New York in 1984 to work for Paul and Albert Reichmann's Olympia & York. The Reichmanns built the World Financial Center in New York and London's Canary Wharf. When the office market collapsed in the late 1980s, the Reichmanns lost it all. Clark was part of the group of former Olympia & York executives who held on to many of the company's U.S. assets. They convinced some of the Reichmanns' Canadian creditors to bankroll them. Out of the wreckage of Olympia & York was born Brookfield Properties.

Revenues from Brookfield's holdings, especially its Manhattan portfolio, soared from $1.5 billion in 1998 to $2.2 billion last year. Clark's career followed a similar curve. In February he was promoted from Brookfield's head of U.S. operations to CEO. Yet he never forgot the Reichmanns' spectacular fall. In the late '90s Clark was convinced that the real estate market was headed for a downturn. The last thing he wanted was a lot of empty space when the bubble burst. So he signed new contracts with tenants whose leases were expiring in the next five to six years, locking them in for an average of 11 years. If tenants wouldn't bite, he got them out of his buildings so that Brookfield could sign long-term leases with new companies.

Those deals were part of the reason Clark kept his cool after Sept. 11. Even as the New York City Police Department was using the ground level of One Liberty Plaza as a morgue, Brookfield's crews were repairing One Liberty Plaza and One World Financial Center. (Though Brookfield owns Two and Four World Financial Center, the lead tenant, Merrill Lynch, is responsible for repairs there. American Express and Lehman Brothers co-owned Three World Financial Center; they were responsible for restoring that skyscraper.) Brookfield's buildings suffered virtually no structural damage, but 1,550 windows were blown out; trading desks had to be ripped out and junked.

Meanwhile, lawyers told Brookfield that as long as the company could get its towers repaired within 15 to 24 months, it could continue to collect rent. All four of the company's buildings around ground zero were reopened within six months. "We've been very fortunate," says Clark. Even so, he knew there would be a price for having so much space vacant. "It casts a pall over your buildings," says a prominent New York developer. It also limits what a landlord can charge in the future. Admits Clark: "Obviously, when we go to renew [leases], the lower the vacancy rate the higher the rental rate."

Brookfield had every reason to be fearful. In early October 2001, Lehman announced it would buy a skyscraper from Morgan Stanley on Times Square for a reported $700 million and relocate its headquarters there from Three World Financial Center. "We were definitely blind-sided," says Clark. Lehman also ditched 717,000 square feet of space it had agreed to lease from Brookfield in One World Financial Center.

No matter how hard he tried, Clark couldn't stop the corporate exodus. Though Merrill Lynch and American Express returned, Goldman Sachs scattered its employees in New Jersey and elsewhere; CIBC World Markets and Nasdaq set up shop in Midtown. "It's extraordinary in this recession that companies are willing to pay 50% to 100% more rent to be in a neighboring office district," says M. Myers Mermel, CEO of TenantWise, a New York City real estate broker.

Then Lehman put its 1.1-million-square-foot headquarters in Three World Financial Center up for sale. Earlier this month Brookfield bought it for $158 million--less than half what it might have been worth last year. Why on earth would Brookfield increase its downtown holdings when its own tenants were fleeing the area? According to Clark, the company has cash to invest, and there's no better place than downtown. Brookfield also wanted to prevent a competing property owner from getting a foot in the door of the World Financial Center. But now Brookfield has another one million square feet of empty space on its hands--a mighty big number for a company that depends on lower Manhattan for such a big chunk of its net operating income.

It's at times like these that Clark is relieved he did all those long-term deals at the height of the real estate boom. Goldman's lease runs out in 2015. The leases on Nasdaq's space and Lehman's space expire in 2021. So those tenants, he says, are on the hook for years to come. "If they had a lot of space coming due to be leased, I'd be concerned," says Greg Brooks, senior vice president of Cohen & Steers, a real estate fund company that is one of Brookfield's largest shareholders. Indeed, in early September, Brookfield's stock had recovered from a post-Sept. 11 swoon and climbed back to $19 a share--nearly the same price it was on the eve of the attack.

But there are a few things Wall Street doesn't appear to be taking into account. First, not all of Brookfield's space is on long-term leases. In the next four years Brookfield must fill two million square feet of space downtown--nearly 5% of the company's entire office portfolio. For example, Dow Jones, whose lease on 323,000 square feet in One World Financial Center lapses in 2005, is already shopping outside lower Manhattan. Even if the company stays at the World Financial Center, it may be unloading a good deal of its old space. When it moved back in August, Dow Jones reoccupied only three of its seven floors.

Though Clark says that Brookfield has plenty of time to renegotiate those shorter-term leases, the reality is that he needs to start doing it now: Large leases are usually negotiated three years before they begin. And the talks will be taking place in perhaps the worst possible climate. If all those offices become vacant and if Brookfield can't fill its existing vacancies, the company could lose as much as $100 million a year in rent. Clark insists he's in discussions with six companies and adds that Brookfield could sit on all the space if it doesn't get the right offer. But "investors wouldn't like it," he concedes. Probably not. The company has already lowered its net income growth target next year to 12%.

Then there's the fact that Brookfield is now competing with some of its own rent-paying tenants. Lehman and Nasdaq can't afford to sit on their empty space, so they are trying to cut their losses by subleasing it. And they're willing to do so for less than Brookfield. According to Julien J. Studley, a national real estate brokerage, the most recent average asking price for the best office space downtown was about $50 a square foot. Lehman recently leased 84,344 square feet to the law firm Richards Spears Kibbe & Orbe for only about $40.

Though Brookfield is betting that rents will rise in lower Manhattan, exactly when is anybody's guess. The city's last real estate recession ended in 1995 after eight years. Lower Manhattan rents didn't pick up for another two years. Now the situation is even more perplexing. Downtown lost 13.4 million square feet of prime office and retail space in the Sept. 11 attacks. Yet the amount of available space has nearly doubled in the first six months of the year, to 20%. "We've got our work cut out for us," Clark sighs.

No wonder Brookfield executives talk so much about the redevelop-ment of lower Manhattan. Brookfield's conference room is filled with architectural plans. There is a drawing of a "downtown Grand Central Station" beneath ground zero that would deliver millions of commuters each day to Brookfield's doorstep. There are models of a memorial for the victims of Sept. 11 that Brookfield believes will attract hordes of tourists, transforming the World Financial Center's restaurants and shops into gold mines. "We're going to have somewhere between six million and ten million people [a year] down here," says John Zuccotti, Brookfield's co-chairman.

What Clark doesn't want to see, obviously, is a bunch of new office towers going up at ground zero to replace all or part of the 13.4 million square feet of space lost on Sept. 11. A spokesman for Larry Silverstein, head of a group of investors that holds the lease of the complex, says the developer hopes to have the first of several towers ready for occupancy by 2008. That's the last thing Brookfield needs at the decade's end when it's courting Merrill Lynch, which occupies four million square feet in the World Financial Center. Clark disparages Silverstein's plans: "What's the hurry to build any more office buildings? From a practical standpoint, it's not going to happen for a long time anyway."

He's probably right. When it comes to mega-developments, nothing goes according to schedule in New York City. The World Trade Center, for example, took 11 years to build. Brookfield can't afford to wait that long for lower Manhattan to turn around. Ric Clark has some office space he'd like to show you now.

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