Lucent’s Marlborough campus at 55 Fairbanks Blvd., which investors Denison Hall and Ian Gillespie purchased last summer for $27.5 million or about $55 per square foot, is among the few recent “value-added” transactions involving large suburban Boston properties.
One might call it a fright to quality. While the commercial real estate industry was built on the back of risk-taking entrepreneurship, offering rich rewards for those who dare to take a chance, the latest industry downturn has apparently spooked investors so much that many buyers are shying away from any deal that smacks of trouble. Because of that, early indications seem to be that 2003 will be another sluggish year for office building sales, especially those located in suburban locales.
Spaulding & Slye Colliers principal Jeffrey Swartz said last week that investors are willing to buy in the suburbs, but only if they can find either a stable, cash-flowing asset or a seller willing to offer a deep discount to reflect a property’s occupancy shortcomings.
“There’s a lot of money out there for available product, but the money is being very careful,” Swartz said. Although “anything that is well-leased is getting a ton of attention,” Swartz said the same is not true for so-called value-added opportunities – properties that may require renovations or extensive lease-up efforts to reach full potential. And while he does anticipate some owners will attempt to dispose of their properties over the near term, Swartz said most are well capitalized enough that they will not trade unless a certain price level is attained. “There’s no real pressure to sell en masse,” he said.
Codman Co. principal James Belli concurred that the level of distressed sales is down dramatically from a decade ago when recession led to many liquidations, creating a continuation of the standoff seen for much of 2002 between optimistic owners and pessimistic investors. Because the suburban market continues to see problems, potential buyers are having a difficult time pegging rent expectations, said Belli, making it difficult to match a seller’s high-flying expectations. While there has been some positive news of late, with a handful of sizeable leases being inked and several firms with six-figure space requirements circling the suburbs, Belli said it still remains difficult to assess the near-term outlook.
“I don’t think a lot of [investors] have suburban office very high on their radar screen right now,” he said. “People still believe in the marketplace, but it’s just a question of how do you underwrite it.”
Investment broker Gary J. Lemire of CB Richard Ellis/Whittier Partners said many property owners have held onto their assets with the notion that the market would soon begin to improve. It appears, however, that some owners are beginning to rethink their projections, Lemire said, adding that could lead to more properties coming to market. “As [the recovery] gets pushed out, people are asking, ‘Why am I continuing to be optimistic?'” Lemire recounted. “I think they are realizing its not going to get better until the numbers get better, and those clearly have not turned around yet.”
Signs of Life
Pricing an asset correctly is a critical element to attracting buyers, said Scott R. Hughes, whose Hughes Properties Corp. is brokering the sale of 225 Cedar Hill Place in Marlborough for its owner, the Maggiore Cos. Coupled with a tenant roster that fills up about 60 percent of the 105,000-square-foot building, the $12 million asking price offers prospective buyers a mix of solid cash flow with future upside, said Hughes, whose firm has scheduled a call for offers on the building for next Friday, March 14.
“It has been very well received,” Hughes said of 225 Cedar Hill Place, with the bulk of the interest coming from investors, although he said there has also been a handful of firms interested in purchasing the building for their own use, as well. Users are attracted by the efficiency of the property, said Hughes, who estimated it has a loss factor of unusable space of about 12 percent.
Hughes agreed that the oft-cited bid/ask gap between what buyers will pay and what sellers expect to reap in a property sale has continued to be a roadblock to making deals, but he also said he has seen signs the chasm is beginning to close during the past six months. It is, he said, a combination of owners being more realistic and buyers enthused by a recent spate of leasing activity in the market.
“Nobody is coming way off their [initial] bid, but there is some movement,” Hughes said. “All of a sudden, the office market is starting to show some life, and that has helped.”
And while it may have slowed deal volume substantially, the relative health of real estate owners is positive for the market overall, Hughes said, adding there is a measure of stability not seen a decade ago during the last major industry downturn. That underlying strength should help foster the recovery quicker, he said, because landlords will not be required to compete against bargain-basement rental opportunities. Others, including Lemire, said they expect to see investor/owners begin to test the waters as the year goes on, although the primary opportunities to date have remained corporate dispositions such as the 3Com property and Lucent’s Marlborough campus at 55 Fairbanks Blvd., which investors Denison Hall and Ian Gillespie purchased last summer for $27.5 million. That deal, made at about $55 per square foot, was perhaps the most notable value-added play of the year.
Joe Clements may be reached at jclements@thewarrengroup.com.
