What a difference three years can make. As Boston prepares to finalize its triennial assessment of all city properties, the effort is revealing the remarkable rebound in the Hub’s office market, with values up virtually across the board on the commercial front. Since the last revaluation in Fiscal Year 1998, values have increased by as much as 200 percent for some of the 41 Class A buildings that make up the city’s tower market.
“The assessments confirm what everybody knows: We have a very strong market in Boston right now,” Assessing Commissioner Ronald W. Rakow told Banker & Tradesman last week. “I don’t think there’s anything that’s terribly unexpected here.”
While that may be the case, the rebound has truly been impressive, and helps to show just how far Boston has come from the depths of the early 1990s. In FY 1992, for example, the Class A market plummeted by 20 percent from the previous revaluation, a precipitous drop caused by the glut of office overbuilding and the regional recession which accompanied that added supply.
Activity has improved quickly since then, with low vacancy rates driving office rental rates up sharply. Because Boston uses the so-called income approach to value, rather than simply building sales prices, the rent increases are a major contributor to the improvement.
Compared to FY 1998, when the assessed value for the Class A market totaled $4.35 billion, the city places that figure for FY 2001 at $7.93 billion. Even with two buildings added since the previous overview (total additional value of $188.4 million), the numbers reflect a major hike in the overall pool. The assessed value for FY 2000 was $6.24 billion.
Two multibuilding developments lead the charge in values in 2001, with the Prudential Center tops at $678.39 million. That compares to an assessment of $362.84 million in FY 1998, making for a whopping 86.9 percent increase during that time. One and Two International Place follow closely behind, with the city valuing the properties at a combined $649.88 million, or 82.4 percent higher than the $356.18 million posted in FY 1998.
Among Boston’s stand-alone properties, 125 High St. garnered the highest amount at $495.80 million in FY 2001, fully 129.5 percent greater than FY 1998, when the 1.4 million-square-foot building was valued at $215.98 million. Other notables include 100 Federal St., up 93.6 percent to $395.39 million, and One Post Office Square, a 41-story, 760,000-square-foot Financial District tower now assessed at $251.14 million. That is 84 percent above FY 1998.
Top-End Prices
In some respects, the latest numbers are already outdated, given that the FY 2001 values reflect market conditions only through the beginning of 2000. Although Rakow warns that one “shouldn’t sell 1999 short,” the increase in rental rates has accelerated quickly in 2000, with landlords such as Equity Office Properties now quoting $100 per-square-foot rents for its premier space at One Post Office Square. Those numbers will not be a factor until the next revaluation.
At the same time, other properties do seem to be finally reaching their potential. Equity’s 28 State St., for example, saw its value up more than 200 percent from the $57 million figure posted in FY 1998. Rakow noted that the building has undergone an extensive overhaul during that time, with the completion of that renovation a leading reason for the bump in its assessment to $174.87 million.
At this point, it is unclear what reaction will come from the real estate industry. Although the city has already informed property owners of the preliminary results, there has yet to be any vocal opposition to the figures, while calls to landlords such as Equity and the Chiofaro Co., owners of International Place, were not returned by press deadline. Samuel Tyler of the Boston Municipal Research Bureau said his fiscal watchdog agency has not had enough time to decipher the latest numbers.
One group that should keep a close eye on the situation is the tenants themselves, warned Joseph Sciolla of Cresa Partners. Sciolla, whose firm represents tenants in leasing space, explained that Class A landlords typically pay base operating expenses, as well as taxes, for the first year that a lease begins. Any further escalations are usually up to the tenant. Depending on how the deal is structured, a tenant at 28 State St. might be concerned about that property’s recent improvement, for example, given that the jump in valuation could rest on their shoulders.
“You’ve got to be cognizant of how the landlord is pricing the building,” Sciolla said. “It can definitely get up there.”
At the same time, Sciolla said it likely will not impact whether a tenant decides to stay in the city or not, noting that suburban office values are also on the rise. Overall, Sciolla said, “it really hasn’t been an issue. The tenant’s are more shell-shocked by the top-end prices,” he said, noting that Boston is commanding rents into the high $80 per-square-foot range at present. Although final figures for FY 2001 are not yet available, the average per-square-foot tax bill in FY 1998 for Class A towers was $5.82. Rakow said final numbers will not be available until early December, but added he anticipates about a six percent average increase in that mark.
In addition, thanks to Proposition 21/2, there is a ceiling to what tenants and landlords will be required to pay. Due to Proposition 21/2, the corresponding commercial tax rate should drop significantly this year, with Rakow estimating it could fall below $30. The rate, which reflects how much is to be paid for every thousand dollars of assessed value, has been dropping steadily since the market rebounded in the mid-1990s. The number stood at $41.50 in FY 1997, then dipped to $38.50 in FY 1998. It is currently at $34.21, according to Rakow.
