Wednesday, January 02, 2008

Big Makeovers for Office Buildings Outside of Midtown - New York Times 

Big Makeovers for Office Buildings Outside of Midtown - New York Times

It's time to get creative in the commercial real estate market. Enterprising developers have bought buildings that are in less than ideal shape but are located in up-and-coming improving neighborhoods.

Will these investments pay off? Time will tell.

“What all of these buildings have in common is ‘location, location, location,’” said Howard Fiddle, the vice chairman of CB Richard Ellis. “They are all in very different neighborhoods that are improving.”

Mr. Fiddle said older buildings are getting unusually expensive makeovers near ground zero, the Brooklyn Bridge and Madison Square Park. Although the rents in these areas tend to be higher than in other large American cities, they are still lower than rents in Midtown Manhattan.

Take, for example, 14 Wall Street. Two large private equity firms — the Carlyle Group and Capstone Equities — bought this 1.1-million-square-foot 31-story building for $325 million in April. The new owners plan to spend $50 million more on renovations, including sprucing up the lobby, the corridors and common bathrooms, adding elevator banks and enhancing the security system.

They intend to spend $5 million on the lobby alone. Besides altering the floor plan and lighting to modernize the look, they are buying original artwork, including a work commissioned from the glass sculpture team of Christopher Cosma and Denise Amses. “We think tenants will appreciate the art,” said Josh Zamir, the managing principal of Capstone Equities. “We want them to know that there is an owner in the building that is paying attention.”

Brokers say that the former owners had considered converting the building to condominium apartments, but the new owners scrapped those plans.

About 300,000 square feet of the building was vacant when Carlyle and Capstone bought it. Much of that space was on the second through the fifth floors, which Bankers Trust vacated some years earlier. About $10 million of the renovation budget will be spent in fitting out 130,000 square feet of prebuilt offices on those floors. The new owners have leased about 50,000 square feet so far, much of that to smaller companies in media, advertising and law.

Then there is the 31st-floor penthouse. The financier J. P. Morgan kept a private apartment there in the early part of the last century, and it later served as a restaurant. While the floor plates on the lower levels are around 40,000 square feet, the penthouse is 6,700 square feet. The new owners hope a small hedge fund or private equity firm will rent it for the panoramic views of the Statue of Liberty and the Verrazano-Narrows Bridge.

Mr. Zamir said the rents for the prebuilt offices at the base of the building are in the mid to high $40s; they are above $60 a square foot for the penthouse. He also said he expected local rents to rise. “There is really no new significant office supply until 2011 or 2012, and so much of downtown is being converted to residential that that takes a significant amount of supply out of the equation,” Mr. Zamir said.

Mr. Fiddle of CB Richard Ellis agrees that office rents are likely to rise downtown. In fact, he says, there is an unusually wide gap between rents in Midtown and downtown.


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