Brookfield Sees Challenges Filling BofA/Merrill Space at WFC
Start each day with GlobeSt.com's New York AM Alert for original coverage of the latest transactions and trends shaping the commercial real estate industry. Sign Up Today!
(Save the date: RealShare New York comes to the Grand Hyatt, New York, NY, October 9.)
NEW YORK CITY-The slowdown in the pace of transactions is being felt in the lease-up progress on a number of available blocks, particularly at the World Financial Center, Brookfield Office Properties’ chief executive Dennis Friedrich said during its second quarter earnings call today.
The company is facing a large vacancy when Bank of America/Merrill Lynch vacates 3.1 million square feet at the WFC upon lease maturity in September 2013, and Brookfield’s original goal of having 50% of the space leased by year-end 2012 –roughly 1.5 million square feet – is becoming “unlikely,” he added.
“Although our level of serious activity and negotiations of that space from a very diverse mix of tenants is consistent from what we’ve reported over the last few quarters, our ability to advance those discussions to executed leases has been challenging,” he told investors and shareholders on the call. “As we emphasized before and tried to provide more clarity, the more critical date is when we are able to turn space over to new tenants to start their build-out and start the leases effectively, and that’s in the early portion of 2014. What level of pre-commitments we have in place by then is really what’s going to drive the value of the World Financial Center and our earnings.”
At the same time, Friedrich said the company remains “incredibly excited” about the positive developments in Lower Manhattan and the growing interest from both office and retail tenants. “We fully understand that the best support for the positive momentum that we see taking place in Downtown and at the World Financial Center specifically everyday and every week, there is an announcement on tenant commitments,” he said. “The velocity of these commitments is slower than we anticipated than at the start of the year, but I think that is pretty characteristic of what has happened throughout most of the Manhattan market.”
But overall, the REIT reported solid Q2 leasing activity across the portfolio, with 2.6 million square feet of new leases signed at an average net rent of $28.59 per square foot, representing a 34% increase over expiring net rents in the period. The portfolio occupancy rate finished the quarter at 93.4%, up from 92.9% at the end of the first quarter.
In New York, Brookfield inked a 17-year, 1.2 million-square-foot renewal and expansion with Morgan Stanley at One New York Plaza. In other markets, the company re-upped the US Secret Service for three years at Ernst &Young Plaza for 94,000 square feet in L.A., and signed a five-year, 164,000-square-foot renewal with Chevron at 1600 Smith St. in Houston.
Friedrich said the high amount of renewals are due to “uncertainty” in the market overall. “Tenants, particularly large-scale tenants, are reluctant to make decisions on a strategic basis unless pressured by large expirations or consolidation needs,” he said.
In New York in particular, Mitch Rudin, president and CEO of US commercial operations at Brookfield, said Manhattan overall has a 9% office vacancy rate, and certain areas are performing better than others. While Midtown has “suffered,” the low vacancy rate in Midtown South (under 6%) will eventually tenant spillover will occur into other neighborhoods, he explained. “And Downtown will likely be the greater beneficiary,” he added.
Overall, the REIT reported funds from operations of $171 million in Q2 2012, compared with $166 million during the same period in 2011. Commercial property net operating income for Q2 2012 increased to $342 million, compared with $217 million in Q2 2011, largely due to the impact of property acquisitions and the consolidation of its US office fund.
Be sure to visit GlobeSt.com's NEW Sectors-to-Watch page for in-depth looks on the Hotels, Industrial, Multifamily, Office, Retail, Student Housing, Net Lease and Healthcare Real Estate markets.
You can now be notified via email if this story is updated by clicking on the "Follow this Story" link. You must be a registered member to take advantage of this "members only" benefit.