As office tower prices continue to rise, Brookfield Property Partners has decided to develop a prodigious $2 billion glass tower, and avoid acquisitions for a while. In fact, rising office building prices in Manhattan has motivated many landlords to choose development over acquisitions. CEO of Brookfield’s office division, Dennis Friedrich points out the advantages of development in expensive markets such as New York City. “If you have a pipeline of development and you can develop below where assets are trading, it makes the investment decision easier.” Right now, the company is working on eight million square feet of development around the world.
Brookfield is not the only company that is participating in this trend. Boston Properties is selling Manhattan and Boston towers in order to develop office towers in San Francisco. In addition, Kilroy Realty Corporation has been on a West Coast development spree to compensate for high office prices in Los Angeles. For many landlords, the decision is simple. With cap rates in New York around 4% to 4.5%, returns from acquisitions are measly compared to developments bringing in 7% to 8% in annual returns. Cap rates are similar to bonds in the way that returns decrease as prices increase. Since office building prices are on the rise, cap rates in major cities are steadily decreasing.
Brookfield’s glass tower, called 1 Manhattan West, includes two million square feet, with 550,000 square feet already leased. The glass tower faces competition nearby, but the company is confident because of the small amount of development in Manhattan. Although companies are getting out of acquisitions and into development, Brookfield isn’t entirely out of the acquisitions market. The company recently acquired Canary Wharf in London, and is now working on acquiring a minimal amount of U.S. towers.