If Brookfield Office Properties’ newly aggressive stance in Manhattan isn’t keeping Related Companies’ Stephen Ross and Silverstein Properties’ Larry Silverstein awake at night, it probably should be.
Publicly traded Brookfield Office Properties, led by CEO Ric Clark, is looking to lease up as much as 10 million square feet of office space over the next few years in Manhattan — which may be the most space any private company has ever put on the market at one time.
The onrush of inventory includes Brookfield’s proposed 5.4 million-square-foot Manhattan West project, as well as 3 million square feet in the World Financial Center, which Brookfield is upgrading. The need for tenants puts Brookfield in direct competition with the aforementioned moguls’ Manhattan mega-developments: Related’s Hudson Yards and Silverstein Properties’ World Trade Center towers.
In addition, Brookfield Asset Management — the firm’s Toronto-based parent company — is making its most aggressive plays yet in New York in other areas of real estate.
In June, that company, which is also publicly traded, announced plans to pour $250 million into redeveloping the retail in the World Financial Center. That same month, it deepened its New York bench when it brought on Mitchell Rudin, former president and CEO of the New York Tri-State Region for CBRE Group, as president and CEO of U.S. commercial operations. And in September, it expanded its financing division into investment sales and announced two other big hires.
In November, the Tenants’ Association at Stuyvesant Town and Peter Cooper Village voted to partner with Brookfield Asset Management to explore the possibility of the company buying the massive, 110-building complex and then converting units from rentals to condos.
And, in December, it indirectly waded into the local residential market with its purchase of Prudential Real Estate and Relocation Services — which owns the franchise rights to the city’s largest residential brokerage, Prudential Douglas Elliman.
Also in December, Clark told an audience of Real Estate Board of New York members that the firm plans to spend $6 billion in Manhattan alone over the next eight years.
That all comes after Brookfield Asset Management injected $4.3 billion into the bankrupt General Growth Properties, the second-largest mall owner in the country, in 2010 and 2011.
“They are an extremely well-capitalized company,” said Peter Riguardi, president of the New York region for commercial firm Jones Lang LaSalle, who added that the firm is well-positioned for its ambitious agenda. “They have a very strong balance sheet.”
Brookfield Asset Management is, in fact, a sprawling conglomerate that claims $150 billion in a wide variety of assets around the globe. And, if it didn’t have enough going on already, Brookfield Office Properties — which counts former New York state superintendent of banks Diana Taylor, Mayor Michael Bloomberg’s longtime girlfriend, as a board member — has recently been in the spotlight as the owner of Zuccotti Park, which became a household name as home base for Occupy Wall Street.
In addition, other subsidiaries of Brookfield Asset Management generate electricity used in New York, control coal-shipping terminals and even make carry-out bags used in fast food restaurants here.
Locally, Brookfield Office Properties has given the company as a whole a reputation as a measured and careful player. It is in a strong position following the downturn, largely because it didn’t make any losing bets in New York during the upswing.
But with so many projects in the air simultaneously, the company — which has had a presence in New York since it bought the World Financial Center from bankrupt commercial landlord Olympia & York in the 1990s — is now facing the biggest test of its New York tenure.
“Starting out in 2012, they now have a lot of commercial space — potentially available [as well as currently available] — in their portfolio,” Riguardi said.
New territory
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Brookfield’s office division has been a low-key presence in New York since its World Financial Center purchase in 1996. But it is now pursuing a number of company “firsts” — which in some cases are firsts for the city.
For starters, sources say, no private firm has ever attempted to come to market with as much office space at once. (An analysis of data from commercial information firm CoStar Group confirms that Brookfield Office Properties has more office space on the market than any other commercial landlord — by far.)
While Brookfield is in a strong financial position to lure tenants with lower rents and other inducements, CoStar shows it has a looming 5 million square feet — or 25 percent of its nearly 20 million-square-foot Manhattan portfolio — available for direct lease. That is only in the firm’s 10 existing Manhattan office buildings, and does not count the mega West Side complex, set to rise right near Related’s Hudson Yards, a block west of Penn Station.
On the one hand, that’s a landlord’s dream, because it can likely sign tenants at rents higher than those with in-place, expiring leases. But even Clark was cautious. In June, speaking at a real estate investment trust conference in Midtown, he said the company might not top some expiring leases at World Financial Center. While the leasing market has been active, employment has not yet fully recovered, and there are not as many tenants absorbing big blocks of space the way financial services firms did during the boom years.
Yet the firm has leased about 2.5 million square feet of space in 2011, company senior vice president in the New York office, Jerry Larkin, told The Real Deal. He also said he’s confident his new and existing buildings will be competitive.
Still, Brookfield will have to nab some of the largest tenants in the market to have a chance of successfully leasing up. Currently, there are an estimated 40 tenants looking for more than 200,000 square feet each, hunting for an aggregate of 14 million square feet. Some of the biggest include Time Warner, News Corp. and Credit Suisse — firms that brokers say are all looking for at least 1 million square feet of space.
To catch these big fish at Manhattan West, Brookfield is deviating from its usual strategy of handling leasing in-house, and has tapped a team led by Bruce Mosler, the chairman of global brokerage at Cushman & Wakefield, to help with the lease up. While construction hasn’t started at the site, a company in Italy is building a sophisticated piece of construction equipment that will be shipped here to build the $300 million platform over the site’s commuter train tracks, Larkin said. While construction on the platform will move forward once that mechanism is delivered, the company will not start constructing the actual towers until it signs an anchor tenant, he said.
Mosler declined to identify which ten ants his team was courting, but said, “We are meeting with the obvious players, with some growth tenants that are in the media sector, [and] some financial tenants that find efficiencies in this building and want to consolidate multiple sites.”
One factor that may work to Brookfield’s advantage is that it will have two different generations of buildings at different price points. For example, the World Financial Center, built in the mid-1980s with, as one critic said, “punch windows,” will have asking rents in the $50-per-foot range. (Larkin did not rule out hiring a third-party brokerage to help lease up that site, too.)
By contrast, Manhattan West will have the latest modern amenities, and it will compete against other brand-new towers, like the World Trade Center, Boston Properties’ 250 West 55th Street and even the SJP Properties speculative tower at 11 Times Square. Asking rents are now in the $70-to-$80-per-foot range, Larkin said.
Meanwhile, Brookfield and Related are vying to get into the ground first with their competing Far West Side projects.
“At the end of the day it comes down to the gross rent that both parties are going to be offering, and that is where the competition is going to be,” Larkin said.
Some give Related a better chance because it has a larger 40 percent tax break for tenants, and has already inked an office user: designer Coach. Because of that, Related has committed to providing them space in the 1.7 million-square-foot tower by late 2015, a Related source said. In addition, it is offering tenants the option of buying “at cost,” meaning the $700 per square foot that it is paying to build, or leasing for about $70 per square foot, in a building that will be near the new terminal for the 7 train. Yet, despite the proximity to the new station, some knocked Hudson Yards for being too far west.
While Manhattan West, on the other hand, has a lower, 25 percent tax break, it is one avenue from the city’s most active transit hub: Penn Station.
“From a timing perspective, I think [Brookfield] is going to be ahead of Related,” said Richard Bernstein, vice chairman at Cassidy Turley, pointing to the simpler process of building a foundation platform at Brookfield’s site. “There is a lack of supply in the market overall for good quality, large blocks of space.”
Still, some brokers are skeptical about the location of both projects and question how much interest either developer will garner until more space is leased in Midtown proper. The difficulty was underscored last month when Silverstein said his company may cap 3 World Trade Center at just seven retail floors if it can’t attract an anchor office tenant by the end of the year.
“For most tenants, [either project] will be out of the way,” Michael T. Cohen, president of the Tri-State Region for Colliers International, said. “I think with all the space hat needs to be absorbed, you’ve got to see the Trade Center and Financial Center lease up first.”
More like GE
Many in the industry put Brookfield Asset Management in the same class as private equity giants like Blackstone Group or Kohlberg Kravis Roberts. But in some ways the firm, which does have a private equity arm, is more akin to a General Electric — a massive conglomerate of industrial firms, finance and investment management.
The company had $13.6 billion in revenues in 2010, the most recent full year available on record, and has about $12 billion in its own and investors’ equity to place in a variety of industries globally. It has a wide array of real estate divisions, the most well-known of which is the publicly traded Brookfield Office Properties.
Brookfield Office, unlike the more restricted REIT model used by SL Green Realty, for example, has a slightly different corporate structure that allows it to reinvest its profits. As of the end of the third quarter of 2011, Brookfield Office Properties owned 79 million square feet in 111 properties in North America and Australia, and JPMorgan Chase analysts anticipated annual rental revenues of nearly $2.2 billion, up 20 percent from 2010.
But Brookfield Asset Management, too, invests in real estate. It owns 38 percent of the formerly bankrupt General Growth Properties, which operates the Staten Island Mall, the largest in the borough, and through a European subsidiary controls a share of London’s high-end office towers known as Canary Wharf.
In New York, the firm last year hired investment sales brokers Eric Anton and Ronald Solarz from mid-tier sales firm Eastern Consolidated to help expand the real estate finance platform at global investment bank Brookfield Financial, a Toronto-based subsidiary of the company, which entered the New York market in 2009.
Some critics said, however, there may be a conflict of interest for a major property owner like Brookfield to also have an investment sales arm, even as firms like CBRE, Newmark Knight Frank and Andrew Farkas’s Island Capital Group all have affiliates that are property owners as well as brokers.
Anton said, however, that “there is a Chinese Wall” between different divisions of Brookfield, and noted that none of the major property owners he’s met with since joining the firm have expressed any concern over a conflict.
“I have not had any resistance like that from the owners, and I am talking to the biggest owners in the city,” he said.
The division has not announced any significant transactions in Manhattan to date, but did land the assignment to market $21.7 million in Bank of America loans on commercial multi-family properties. And, the company, which was founded in 2003, has completed some of the largest deals ever in Canada.
Going residential
Brookfield is no stranger to residential real estate. Its Brookfield Residential Properties is a home-builder in the U.S. and Canada that manages 100,000 properties. And its brokerage and franchise operation now has 80,000 affiliated agents globally, including the national franchise Real Living.
Yet some critics say it may be over its head in a potentially historic residential project in the city. Brookfield Asset is trying to do its first condo conversion in New York at Stuy Town and Peter Cooper Village. If successful, it will be the largest condo conversion in New York City history, with about 11,500 apartments.
City Council Member Daniel Garodnick, who lives in the complex and works with the tenants association, said: “The goal is to put together a bid in the spring” for Brookfield to buy the property, in partnership with residents. “The tenants met with dozens of potential partners. They felt Brookfield had the capacity to bring them to a positive result.”
But some question the feasibility of that plan. Attorney Adam Leitman Bailey, who has significant experience in condo conversions, said that while it’s a noble idea, the conversion is probably a pipe dream.
“Tenants buying their apartments in today’s home-purchasing environment could only happen if you believe in Peter Pan and Neverland.”
He said tenants living in rent-stabilized apartments by definition don’t make more than $200,000 per year, and will therefore have trouble buying their apartment anywhere near market levels, in part because of the tough lending market. Garodnick said there might be novel property tax abatements that would allow the deal to work.
Also on the residential front, Brookfield’s $110 million purchase of Prudential Real Estate and Relocation Services expands its hold on the residential corporate relocation market. Brookfield is a leader globally in relocations, and it may be able to feed business to Prudential Douglas Elliman, some agents suggested.
Dottie Herman, CEO of Prudential Douglas Elliman, said her only meeting with the firm about the deal was a brief one in December at her Midtown office, even though her company is the largest in the network and pays millions of dollars each year in franchise fees. She is scheduled to have a more in-depth meeting this month.
But Brookfield’s purchase has already convinced her and co-owner Howard Lorber to consider reversing their plan to drop the franchise when it expires in a little over a year, she said.
“We don’t know anything, so we cannot make a decision,” she said, noting that the reason they wanted out of the Prudential agreement was her company was restricted from expanding in Florida. “We want to see what they have to offer. If we can’t grow, we’ll leave.”
A spokesperson for Brookfield said Elliman was in “good standing,” and added, “We do not comment on affiliates’ franchise agreements.”
The Brookfield Team
One insider close to the firm called Brookfield Asset Management’s CEO, Bruce Flatt, the “wizard” behind the scenes.
Sources say he’s been hands-on in New York City for years. For example, Flatt was instrumental in 1993 in beginning negotiations to buy the World Financial Center out of bankruptcy. And, in 2002, months after the Sept. 11 attacks, reports say Flatt led an effort to buy Lehman Brothers’ interests in one of the WFC towers for just $128 per square foot.
“Bruce Flatt. That is the guy you make a big deal with,” one leading leasing broker said. “He will be in the room.”
Since the firm’s presence in Manhattan is dominated by its office holdings, Clark, Brookfield Office Properties’ CEO, is the most familiar face to the industry here.
He’s even on the advisory board of local brokerage firm Massey Knakal Realty Services, according to an article last year in the trade publication the Mann Report. Under him, most of the leasing is handled by a team led by Larkin, who, like Clark, is a veteran from Olympia & York.
David Falk, president of the New York Tri-State Region of Newmark Knight Frank, said given all of Brookfield’s new projects and pursuits “you can just feel their presence in the city more, from broker functions to advertising to Manhattan West.”
“They are not just staying status quo with their Class A product in Downtown and Midtown,” he said. “You can feel their ambitions are larger.”