Brookfield Embarks on High-Price Makeover of Fifth Avenue Tower

By Peter Grant

Real-estate giant Brookfield Asset Management is starting a $400 million overhaul of the tower at 666 Fifth Avenue, undeterred by a lackluster office leasing market in Midtown Manhattan and an aging bull market in commercial property.

Toronto-based Brookfield said it would deliver 1.6 million square feet of modern office space and expects to begin construction in 12 to 18 months after roughly 10 business tenants vacate the building. Brookfield officials said they expect to complete the project in early 2023.

Brookfield purchased a 99-year lease of the property in a 2018 deal that valued it at $1.29 billion. When finished, the project will be one of the costliest office building makeovers ever in New York.

"The building in its current state is probably a $60- to $70-a-square-foot building," said Ric Clark, Brookfield Property Group chairman, referring to current rents. "After investing this money, we expect to get substantially higher rents."

He said Brookfield is aiming for an average of more than $100 a square foot, though the firm hasn't started marketing the property and no leases have been signed.

The tower is one of the best-known office buildings in the city. It was owned by a venture led by Kushner Cos., which is owned by the family of Jared Kushner, President Trump's son-in-law and senior adviser. The building was facing a possible default on its mortgage coming due in 2019 when Brookfield acquired it, according to public loan documents. The Kushners still own the land under the building.

The lease gives Brookfield complete operational, leasing and development control.

Brookfield plans to upgrade the 1950s-era building between 52nd and 53rd streets, which has fallen behind more modern competitors because of low ceilings and numerous columns. It plans to eliminate many of those columns and offer double-high ceilings and add four terraces on the 39-story building.

"It's kind of a dinosaur," said Mr. Clark. "You can basically feel the wind coming through it."

The firm also plans to replace aluminum cladding on the exterior of the building with floor-to-ceiling windows and change the building's address from 666 Fifth to 660 Fifth. A Brookfield spokesman said the firm is changing the name because "it will be a completely new building with a completely new identity."

The $400 million price tag includes $300 million to overhaul the exterior and core of the building and $100 million for tenant interior work.

Brookfield is moving ahead with the project when the Midtown market is showing signs of softening because of slow leasing and increasing development. The "availability rate," which includes vacancy and space coming on the market, increased to 11.5% in the third quarter, its highest level since the third quarter of 2017, according to commercial real estate services firm CBRE Group Inc.

But the situation is slightly better for developers who are building from the ground up or giving existing buildings makeovers. For example, Rockefeller Group International, a subsidiary of Mitsubishi Estate Co., had fully leased 1271 Sixth Avenue while an overhaul of that building was in progress. SL Green Realty Corp. has leased about 60% of One Vanderbilt, a new 1,401-foot office tower above Grand Central Terminal that is still under construction.

CBRE said that 42% of the blocks of office space larger than 50,000 square feet leased in the first half of 2019 were in new or renovated buildings, up from 41% in 2018. Tenants today are more willing to pay up for modern space than they were in the past to attract a millennial workforce at a time of low unemployment, analysts say.

The younger workforce "has a completely different expectation of what a workplace should offer them," said Nicole LaRusso, CBRE's research director for the New York region.

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

October 15, 2019 00:20 ET (04:20 GMT)

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