Construction of a 360,000-square-foot podium building containing office and retail space next to TD Garden could begin this spring, Boston Properties executives said.
Boston Properties likes expensive real estate – a lot. But these days, it likes development even better.
The real estate investment trust owns 45.5 million square feet in just four metros – Boston, New York, San Francisco and Washington, D.C. – but it’s picky about its acquisitions. In the current “challenging” market, with foreign investors bidding up trophy properties in global gateway cities, CEO Owen Thomas said, it’s better to build than buy.
So Boston Properties is putting its money to work with a $2.1-billion development pipeline comprising 11 projects with a 61-percent pre-leasing rate. It’s building the tallest skyscraper on the West Coast – the 61-story Salesforce Tower in San Francisco. In Greater Boston, it’s spreading office and residential projects across downtown, Cambridge and the suburbs.
“Logically, we’re more actively investing our capital in new developments rather than existing asset acquisitions,” Thomas said during a conference call to discuss the company’s first-quarter financials.
The 11 development projects should generate a higher return than acquisitions, with priojected net operating income yields of 7 percent.
Downtown Projects Tied To Transit
In Boston, the company could begin the first phase of its North Station redevelopment as soon as this spring. The first phase will be a 360,000-square-foot “podium building” containing loft-style office and retail space on the site of a TD Garden parking lot. The $950-million project has approvals for 2 million square feet of development including a 306-room hotel, 497 residential units and retail on three acres.
At the same time, executives presented a proposal to state highway officials last year for an air rights development above the MBTA’s Back Bay station consisting of two towers containing offices, housing and retail shops. Design and permitting on the project is ongoing, according to Boston Properties. A MassDOT spokesman did not return messages inquiring about the status of the project.
Construction continues on 888 Boylston St., a 17-story office tower that broke ground in October following a 150,000-square-foot commitment by Natixis Global Asset Management. Since then, four additional floors have been leased, bringing preleasing levels up to 55 percent.
At the John Hancock Tower, which it acquired for $930 million in 2008, plans have begun to reposition the bottom four floors to attract tech tenants. Tenants Manulife and State Street Corp. recently vacated 350,000 feet in the Back Bay landmark.
The goal is to replace departed tenants – which paid an average of $43 per square foot – with companies paying 40 percent more for the space. As part of the recruitment, it’s rebranding the lower level as 120 St. James and adding a dedicated side entrance.
On the multifamily side, the company is looking at Cambridge’s Kendall Square for a 160,000-square-foot residential development which could break ground this year. Multifamily will be a major part of the next phase of development, and executives predict the initial yields will be slightly lower than office development at 6 percent.
‘High-Performance Workspace’ In The Suburbs
Executives make another argument for their preference for new development and repositioning projects: office space is undergoing a generational shift in design. Cubicles are giving way to bench seating, and private offices are on the outs among the tech and creative firms that high-end landlords covet. Buildings that reflect the collaborative shift have the advantage.
“There is a fair amount of obsolescence in our industry,” said Bryan Koop, Boston Properties’ regional manager, at an industry forum this month. “We felt that we had to be aware of what was happening in our existing product, and keenly aware of designs for the future. The doing is the hard part.”
Two high-visibility examples can be found overlooking Route 128 in Waltham. At 10 CityPoint, construction began last year on the new headquarters of Wolverine Worldwide, which owns the Keds, Stride Rite and Sperry Top-Sider brands. Ground-floor restaurant space will give the 230,000-square-foot building more of an urban feel, while the office floors will feature wide open workspaces.
“It just has `big-ass floor plates,’ as we say. It’s wonderful for our customer,” Koop said. “It’s an example of high-performance workspace.”
Expect a similar transformation for the former Polaroid campus in Waltham. Boston Properties has entered a joint venture with developer 1265 Main St. LLC, which is redeveloping the 120-acre site. Construction will begin this spring following the signing of a 119,000-square-foot lease by a global shoe company. Clarks Shoes will move its North American headquarters from Newton upon completion, a source told Banker & Tradesman in January.
Risks From Economic Cycle
The board chose an outsider in Owen Thomas, a Harvard Business School graduate and former Lehman Brothers Holdings chairman, to take over as CEO in 2013 when co-founder Mort Zuckerman became executive chairman. Since then, Boston Properties has continued its development-focused strategy, considered by analysts to be one of its strongest capabilities.
Concentrating on the nation’s priciest office markets carries inherent risks, but analysts say the balance sheet is relatively conservative. As of March 31, the company had $1.1 billion in cash to fund the development pipeline and full access to its $1-billion credit facility.
It’s funded new development largely through the sale of assets that have appreciated sharply in recent years, such as its 45-percent divestment of 601 Lexington Ave. in New York and Atlantic Wharf and 100 Federal St. in Boston last fall for $1.5 billion. The company expects to sell another $750 million in buildings during 2015.
Its properties are populated by industry leaders including Google, Microsoft, Biogen and Citibank. While the tenant base is relatively diversified, the portfolio has significant exposure to government, financial services and investment banking industries which could hamper short-term leasing activity, Robert W. Baird & Co. analysts David Rodgers and Stephen Dye wrote in a recent research note.
Finally, the focus on tech-oriented markets raises cautionary reminders of the boom-bust cycle that burst in 2001.
“Whether or not the technology industry unravels in dramatic fashion or more methodically is difficult to predict,” Mizuho Securities analyst Richard Anderson wrote in a November 2014 analysis of Boston Properties. “However, trees will ultimately not grow to the sky and any bet on technology more than a few years out should be fully vetted.”
