Capital improvements key to keeping tenants.

Welcome to capital improvement season, when lobbies get re-done, elevators upgraded and all manner of overhaul is conducted.

Many see it as a market driven hedge against tenant defections, while others see it as simply a good business practice.

The trend is a marked departure from the boom years of the late 1990s when landlords had no trouble retaining tenants. That market was so tight that tenants weren't faced with many choices. Now, however, comparison shopping tenants are keeping many landlords on their toes.

"Building upgrades exemplify commitment to your tenants. Also, it puts you a step ahead of the competition," said Matthew Astrachan, a managing director at Cushman & Wakefield.

Astrachan recently oversaw two major upgrades within adjoining buildings on Fifth Avenue. At 245 Fifth Ave., the owners invested $20 million in a capital improvement campaign and the results have been exemplary.

"Leasing velocity here has been extraordinary. We've leased 200,000 SF in 14 months," said Astrachan.

He mentioned Class B properties as most in need of upgrades, especially when a landlord is charging "graduate school rents inside a grade school building," as Astrachan put it.

One drawback to an ambitious capital improvement program is that landlords must move tenants around within the building, depending on where the work is being done. The end result, said one broker, is akin to a chess game.

"Especially with a gut renovations, you really have to move people around the building. But it is happening at a lot of buildings," said Gregory Knoop, a managing director at Insignia/ESG.

At 350 Madison Ave., Knoop managed an extensive gut renovation project. SOM designed a signature lobby for the building, all of the mechanical systems were overhauled and even the elevators were upgraded in the process.

"(Capital improvements are) just great marketing. They are improving their product as well their packaging," said Jim Fagan, managing director of CB Richard Ellis' metropolitan division.

Since keeping tenants is so essential, Fagan identified regular upgrades as good public relations, too. Also, if many leases are about to expire in a building, it may be a pivotal moment for a landlord to spend some money on upgrades.

Other owners regularly schedule such projects during the best of markets. The Fisk Building, for instance, is in the middle of such a campaign which began two years ago.

Gorge Fabian, general manager of the Fisk Building, said that the upgrades should be completed by the middle of 2003.

"This is a major reinvestment in the building. When it is completed, I'd like to see my rents back where they were 18 months ago," said Fabian, who works for Helmsley-Spear.

The Fisk Building upgrades involve new elevator cabs, upgraded A/C, and a new lobby among other major changes.

"The partnership led by Peter Malkin is doing a tremendous amount of work in the Fisk Building, and elsewhere in our leggy New: York portfolio," said Anthony Malkin, president of W & M Properties.

Malkin noted that many of the ongoing capital improvements were scheduled in advance of the market, in the manner of many veteran Manhattan landlords.

"Now it matters what you have. A few years ago, it really didn't matter because everything rented," said James Buslik, principal of Adams & Company, a brokerage and management firm.

On one hand, capital improvements benefit tenants. They also allow landlords to boost- rents, which does not necessarily help tenants facing an imminent lease renewal.

"It's not as strong a market as past years. The only way you get higher rents is by upgrades," said Buslik.

Grubb & Ellis is repositioning several of its Manhattan properties. The approach, said Grubb & Ellis brokers, is aimed at adding value for ownership.

"We are in a unique position to do this. By looking at a property and its intrinsic value, we can add value to the building," said Howard Rosen, a managing director at Grubb & Ellis.

At 460 Park Ave., a building that Grubb & Ellis has managed for years, the enhancements have been extensive, and--by all accounts--led to higher rent rolls.

"This market really lets us shine," said John Cannon, senior managing director at Grubb & Ellis.

711 Fifth Avenue, a 326,000 SF office building, is also being repositioned by Grubb & Ellis. Coca-Cola owns the building, and has already spent some $10 million for infrastructure improvements.

"We proposed to them that it was time to make improvements that people could see," said Cannon.

These renovations are expected to raise rents in the building somewhere in the range of $25 million over the next decade. Exterior lighting, upgraded concierge services, and a new videoconferencing facility are all part of the capital improvement campaign here.

As Cannon sees it, the upgrades were triggered by "an opportunity" that Grubb & Ellis saw whereby the firm could serve Coka-Cola in an advisory capacity and possibly add value to the building.