A daisy chain of exploding debt has sunk two separate owners of the Bay Colony Corporate Center in the past year, making the one-time trophy asset in Waltham one of the most prominent faces of the commercial real estate bust.
Now, the office park’s fourth owner in three years is putting the 970,000-square-foot complex on the block, creating a feeding frenzy among some of Boston’s highest-profile developers.
“It’s the deal everybody’s talking about,” said Scott Jamieson, a managing director in Jones Lang LaSalle’s capital markets group. “It comes as no surprise that there’s a lot of interest. It’s every real estate investor’s dream asset, the opportunity to turn around a premiere asset. It clearly was, at one time, the premiere suburban asset. A lot of people think with the right program, it can return to that stature.”
The real estate arm of Prudential Insurance Co. is in the process of seizing Bay Colony from its current owners, Eastern Real Estate, through a mezzanine debt foreclosure. Once the foreclosure is complete, Prudential will put the hilltop office complex on the auction block. According to several industry sources, Prudential is asking bidders for their best all-cash offer to completely buy out the insurance giant. Prudential is also said to be willing to enter into a joint-venture partnership to recapitalize the property and operate it as a value-add project.
A Different Deal
Brokers and investors surveyed by Banker & Tradesman pegged Bay Colony’s current value anywhere between $150 million and $185 million. A bidding frenzy could push the purchase price north of $200 million.
Numerous high-profile Boston developers are said to be readying bids for the Waltham office complex, including Boston Properties, National Development, Beacon Capital Partners, the Davis Cos., Marcus Partners, and Griffith Properties. Interested out-of-state firms with significant local operations include Hines Interests and DivcoWest.
Until now, big-ticket Boston-area properties hitting the market have been stabilized, cash-flowing buildings. Those deals – which include the $106 million sale of Boston’s Independence Wharf building, the $96.8 million sale of One Brigham Circle in Boston’s Longwood Medical Area, the $102 million sale of 10 Brookline Place and the recent $200 million sale of Shire Pharmaceuticals’ home at Lexington Technology Park – targeted institutional investors looking to buy core assets.
Bay Colony is different. The office complex has large chunks of vacancy, as well as millions of dollars in deferred capital investment needs. Significant near-term leasing rollover means it could take years, and cost upwards of $70 million in tenant improvements and leasing commissions, to stabilize the property.
Then there’s the matter of the property’s $144 million securitized mortgage, which matures in June 2012. In March, one industry source told Banker & Tradesman the mortgage was the equivalent of a “ticking time bomb.”
At the same time, investors are now more confident in taking on risk than at any time since the September 2008 market crash. In Waltham, they’re drawn to Bay Colony’s pedigree, and the possibility that it could sell for little more than half its pre-bust price.
National Scale
When Broadway Partners bought the complex from Beacon Capital Partners in 2007, it was assessed at $366 million. With help from Lehman Bros., Broadway put $350.5 million in debt on Bay Colony. After the current foreclosure converts Prudential’s mezzanine debt into equity, all that will remain of that $350.5 million debt tower will be the $144 million CMBS loan.
“You could argue it will be the highest-profile value-add deal in the country since the downturn,” one industry source argued. “There are no other major deals of this size and type in the country.”
This source predicted that Bay Colony’s size and stature create a rare opportunity that will drive pricing upward, before quickly adding, “It’s a great asset in a great submarket, but it needs a lot of work.”
“No question, it’s not going to sell at the price it sold at three years ago,” said David Begelfer, CEO of NAIOP Massachusetts. “It could go at a relative premium price. It’s a quality product in a great location, and it has some issues. The price will be down from its high, but within the market today, there will be some serious competition that will push the pricing up.”
“Most investors are pretty sure we’ve hit bottom, and a lot of them are out there looking at value-add deals because they think it’s a good time to buy,” added John Steiner, a partner in Boston offices of Sullivan & Worcester. “If it looks like a solid asset, you’re going to see a fair amount of money chasing it. That’s what we’ve been seeing lately.”
Steiner said demand is being driven by cash-rich REITs, foreign investors and funds with mandates to invest in real estate.
“Last year, commercial sales activity was all but stagnant,” he said. “We’re not back where we were three or four years ago, but we are seeing movement and life, and more competitive bids for assets with upside potential.”
