In the largest local commercial real estate deal of the year, the John Hancock properties, including the tower in Boston’s Back Bay section, sold for $910 million. Despite decreased rents and rising vacancies, office buildings are still commanding top-dollar sale prices.
In 2003, landlords watched as rents dropped and vacancies increased. In a year that favored tenants, investment sales prices for Class A office buildings remained strong in 2003, leaving some wondering how new owners – stripped of the ability to command high rents in the existing market – can hold onto their new purchases, and even make a profit.
“That’s the dilemma of the business right now,” said Kevin McCall, president and chief executive officer of Paradigm Properties in Boston. “The divergence and fundamentals of capital has had people shaking their heads for two years.”
Despite the slumped commercial real estate market, building sales still commanded hefty prices. In the largest deal of the year, the John Hancock properties, including the tower in Boston’s Back Bay section, sold for $910 million. In August, 99 Summer St. in Boston sold for $69 million and, in the suburbs, the Norwood Polaroid campus sold for $17.3 million. Already expected to be one of the largest deals in 2004, the Hub’s One Lincoln St. entered the market this year with brokers hoping to garner $600 per square foot. Another almost-record sale of the year – $400 million for the Boston Wharf buildings – collapsed after concerns over space and structural issues.
“The John Hancock, and the buildings that are viewed as the best of the best, people are scrambling to buy them,” said George J. Fantini, chairman of Boston-based Fantini & Gorga/iCap Realty Advisors. “But the fundamentals of office leasing are lousy. Rents are coming down; there are decreases in occupancy. To pay these very full prices, it doesn’t seem to add up.”
Fantini said there is a lot of money chasing commercial real estate deals, and while the deals may not be great, the supply of money remains strong. In his annual year-end “Bings and Bongs,” he offered some holiday advice about trophy office property sellers: “Wrangle an invite to these holiday parties, where they’ll be serving a veritable buffet of caviar and Cognac. They racked up sweet profits despite weakening property fundamentals.”
As real estate investment trusts continue to outperform the Standard & Poor’s 500, an increasing number of investors are pouring money into REITs. The U.S. Securities and Exchange Commission lists about 180 REITs with total assets of more than $300 billion. More than two-thirds are traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq.
“No one is abandoning real estate,” McCall said. “But there’s still a residual hang-over from the heady days of the tech boom.”
McCall expects that investors, backed by large chunks of capital, will continue searching for real estate well into the New Year.
“Is it sustainable? Probably for 2004,” he said.
But there’s another element – in Boston and across the country, an increased number of buildings are being foreclosed or are in danger of being turned back over to lenders. Congress Group Ventures’ Wayland Business Center is one example of a troubled building – Polaroid signed a 340,000-square-foot lease for the 400,000-square-foot building, only to withdraw after filing for bankruptcy.
While McCall doesn’t expect that the number will reach the height of the last commercial real estate market crash, he said it’s still a present trend and one that may grow next year.
“There’s a re-pricing in store,” McCall said. “There will be specific buildings that will trade at deep discounts because they lost most of their occupancy.”
McCall cited an example in San Francisco. Within the past six months, one building – well occupied with long-term leases – traded for $500 per square foot while another, with only 20 percent occupancy, sold for $100 per square foot.
McCall predicted that Boston will see its share of similar transactions in the near future.
“There are big leases in the suburbs being done but it’s a trickle, not a trend,” McCall said. “It may turn into a trend in 2004 but there’s a long way to go before we have a healthy market that will support an increase in rental rates to support these prices. We’re left with a big gap.”
