The most expensive private-sector development in the nation is swiftly taking shape. Within months, the $1.7 billion AOL Time Warner Center will be open for business in Midtown Manhattan. Already it soars 750 feet above the Columbus Circle district.

The finished product will feature everything from a hotel to a jazz club to the new corporate headquarters for media giant AOL Time Warner, which is expected to move in early next year. That plan hasn't changed — but the anchor tenant's recent troubles have led many observers to question the company's need for more than 800,000 sq. ft. of new space.

Time Warner committed to the space long before the January 2000 merger. In fact, developer Related Cos.' 1997 commitment from Time Warner helped the developer seal its bid for the lucrative Midtown site. The land was formerly owned by the Metropolitan Transit Authority, which sold it to Related for $345 million.

As anchor tenant, AOL Time Warner bought a combined 860,000 sq. ft. of studio and office space in the 2.1 million sq. ft. building. It's estimated that AOL Time Warner will spend between $350 and $450 million on the purchase price. The firm plans to move 2% of its 90,000 employees into the new space at Columbus Circle. Most of AOL's staff will remain at its Dulles, Va., location.

“They will be using this space,” says Stephen Ross, CEO of Related, when asked if he has any doubts about the future of the space. Last year, says Ross, Related offered to take back some 150,000 sq. ft. of AOL Time Warner's space after a tenant showed interest in the space, but the firm declined to release any of its space back to the developer. AOL declined to comment on its real estate plans.

Critics are skeptical about the building's strategic purpose for AOL Time Warner. During the firm's annual meeting last May, one shareholder even scolded management for wasting investors' money by “replicating the Taj Mahal.”

AOL Time Warner already occupies 2.6 million sq. ft. of space in more than half a dozen Midtown locations. That includes its 547,882 sq. ft. lease at 75 Rockefeller Center, which is expected to become available as the firm moves into its new headquarters. The lease expires in 2014.

Exit Strategies

With its cash flow constricted, AOL Time Warner has been under pressure to pare down its debt. Only two months ago, AOL announced that it will cut hundreds of jobs at its Virginia headquarters. Jobs in New York also will be affected.

Investors have watched the value of AOL's shares erode drastically. In late January, the company's stock price registered about $14.25 per share, less than half of its 52-week high of $30 per share.

Many industry observers predict that AOL will be hard-pressed to fulfill its commitment to nearly 1 million sq. ft. of new office space. One thing AOL Time Warner cannot do, say observers, is walk away from the project. The firm could either market the space to another tenant or simply sell its interest in the building.

“I don't think anyone at AOL Time Warner knows what will happen with this space,” says Peter Pattison, a Manhattan-based real estate consultant. “The whole business vision there is up for grabs.”