2002 Purchase of 50 Milk St. Signaled Stability Trend
Jeffrey Miller did a dangerous thing in buying Boston’s 50 Milk St. in 2002 – he started a trend.
Working for CB Richard Ellis Real Estate Investors, Miller advised an Australian investment group to pay more than $400 per square foot for the 280,000-square-foot office building. While the price raised eyebrows, Miller reasoned that a long-term lease to anchor tenant Brown Brothers Harriman made the 21-story Financial District tower the real estate equivalent of a bond instrument, offering a measure of stability worth the premium paid.
When the deal was made, few had any compunction about Boston’s office market. Talk of $100 per-square-foot rents led investors to covet properties sporting vacancy rather than those encumbered with term in place – commitments that would seemingly hinder upside potential.
That, of course, was then, which is a long, long way from now. Still traumatized by the exploding technology bubble three years ago that cratered the office sector, real estate investors today are fleeing to core, single-tenant assets in such droves that they have driven Miller off the investment path he had employed in pursuing 50 Milk St.
“There’s just too much capital chasing the low-risk opportunities right now,” said Miller, who now runs the United States real estate investment group for the Australian client. Known as Challenger America, the operation is not only headquartered at 50 Milk St., its investment strategy was tailored after the approach used in buying that Hub property.
Challenger America has since made a few similar core purchases in Denver and Austin, Texas, but Miller said the fever has grown so great for such properties that it no longer makes financial sense to vie for those assets, at least not on the open market. Unwilling to blindly overpay for a deal, Miller said the firm is changing the way it chases opportunities.
Rather than relying on brokers bringing deals to him, for example, Miller tries to identify assets that have not yet been listed, essentially sleuthing out acquisitions. “A lot of people think the next six months or so are probably the best time to sell,” said Miller, who hopes to identify uninitiated owners who might be motivated by the window of opportunity.
Challenger America is also entering the build-to-suit arena, with Miller aiming to attain properties through buying out a developer who has a strong credit tenant under long-term contract before beginning construction. “It’s a difficult game to play, but its one way of tying up deals and not getting into a bidding war,” said Miller, who stressed that the firm is not relaxing its conservative investment standards. Any build-to-suit would require a minimum 15-year lease in place before his company would become involved, and strong tenant credit is also critical, he said.
Other investors are also trying to be restrained, but observers say the demand for commercial real estate remains high. “There’s unbelievable amounts of capital right now,” said Michael Smith, an investment specialist with Spaulding & Slye Colliers, whose firm has brokered several Boston and suburban assets during the past 12 months. “It’s very similar to 2003,” Smith said of the first quarter 2004 investment environment. “The capital appetite is very deep and broad, and is mostly looking for durable income and good, quality assets.”
Market Shift
Some observers are beginning to notice signs that investors are no longer as white knuckled towards more speculative opportunities, however. Although office market fundamentals are hardly inspiring, with rents remaining flat or even still trending downward slightly, a spate of tenant demand is helping to embolden buyers in some areas.
“Investors in general believe we’ve hit the bottom of the leasing market,” said James F. McCaffrey, who oversees the investment team at Trammell Crow Co. “People feel we’re headed for better times.”
Trammell is receiving encouraging interest for several assets it is marketing, said McCaffrey, including the Lexington Corporate Center in Lexington, a four-building complex that is reportedly under agreement to a Massachusetts investment group. The firm is also trading several suburban buildings on behalf of Boston Properties and is enthused by the activity there, said McCaffrey.
Robert E. Griffin Jr., president of Cushman & Wakefield of Massachusetts, has also seen a steady flight to quality for real estate assets. “Credit is absolute king,” Griffin said during his annual Top of the Market program last month, although he also outlined several recent deals where investors took a chance and came out as major winners.
Among other examples, Griffin outlined the sale of 55 Fairbanks Blvd. in Marlborough earlier this year to Boston Scientific Corp. The Natick firm paid $43 million for the 500,000-square-foot complex, providing a substantial markup for the sellers, Ian Gillespie and Denison Hall. The pair had purchased the 106-acre property in 2002 for $27.5 million without tenants in place.
“The risk-takers have been richly rewarded,” said Griffin. Cushman & Wakefield is also seeing considerable capital in the market, with the firm marketing such local properties as the Tower at Northwoods in Danvers, 100 Technology Center Drive in Stoughton and 100 Franklin St. in Boston.
