Brookfield CEO Sees Office Resurgence

NEW YORK CITY-Dennis Friedrich, president and CEO of Brookfield Office Properties’ US commercial operations, likes what he sees on the horizon for the sector. “We’re very encouraged by the leasing market,” Friedrich told a Real Estate Lenders Association audience here Tuesday morning.

He noted that all of the markets in the BOP portfolio have seen vacancy declines, and he expects “a serious pipeline” of leasing deals in 2011, as tenants make proactive business decisions rather than simply defending the fort. And while recovery of the office sector in North America has been helped by the lack of overbuilding in contrast to previous cycles, Friedrich said some domestic markets are getting to the point of being ready for new development. To that end, BOP recently hired Veronica Hackett to oversee what is currently a 15.6-million-square-foot development pipeline across the continent.

That being said, Friedrich told the RELA audience, “We want to become more international and diversified.” BOP’s $1.6-billion acquisition of a 16-building portfolio in Australia this past summer was a major step in that direction, Friedrich said, as well as a move toward establishing Brookfield as a pure-play office company. GlobeSt.com reported earlier this month that a shareholder vote to spin off BOP’s Carma Homes division, and exit the residential development sector, is scheduled for March 15.

The Australian acquisition from Brookfield Asset Management gave BOP eight million square feet of office assets in Sydney, Melbourne and Perth. “We see more upside in those markets than in many of the North American markets,” said Friedrich, calling Australia a “high-growth” region.

Domestically as well, BOP has been quite active in asset acquisition, as demonstrated by its late-2010 purchases of Heritage Plaza in Houston for $325 million and 650 Massachusetts Ave. in Washington, DC for $113 million. In both instances, Friedrich said Tuesday, BOP was attracted by the prospect of high returns, with levered IRR of 15% or better for both assets.

Friedrich observed that there’s still a major imbalance between supply and demand, with cap rates continuing to compress in core markets. Notwithstanding the worrisome possibility of an increase in interest rates, Friedrich said he doesn’t expect to see cap rates widening anytime soon, as bidding wars continue to erupt on a few choice properties.

At the suggestion of Woody Heller, executive managing director at Studley, who was in attendance at Tuesday’s RELA event, Friedrich charted the progress being made in redeveloping Lower Manhattan. More than two-thirds of BOP’s 18.4-million-square-foot office portfolio in the New York metro area is Downtown, and Friedrich said “all of the things that are going to transform Lower Manhattan” would “lock into place” within the next few years. Among them: the Fulton Street Transit Center, the Santiago Calatrava-designed PATH terminal and, of course, the rebuilding of the World Trade Center.

The office components at Ground Zero, including the Port Authority of New York and New Jersey’s 1 World Trade Center and the three towers planned by Silverstein Properties Inc., all represent “stock that New York City needs,” Friedrich said. He noted approvingly that the towers will come on line “in staggered fashion” rather than hitting the market all at once. A few blocks west of the WTC site, BOP intends to redevelop its eight-million-square-foot, four-building World Financial Center complex, and Friedrich said the company expects to announce plans very soon.