PwC’s headquarters in the Seaport sold for a record-breaking $452 million last summer.
Boston’s skyline is attracting record sums as real estate investors from around the world throw around massive amounts of money to snap up the city’s top office towers.
So go figure this: Office rents at the city’s top corporate addresses are actually lower – in fact considerably lower – than they were either in 2008, before the global financial crisis, or for that matter way back at the start of the century in 2001.
If the gap between those two numbers – the stratospheric prices Hub towers are trading at compared to their relatively hum-drum rent growth – doesn’t bother you, it should. The next bubble to blow up is far more likely to come from the overheated commercial real estate sector than from home prices, as crazy as they are now.
Don’t believe for a minute the happy talk that Greater Boston will somehow be immune to it all thanks all our supposed uniqueness, because we certainly aren’t.
All the constant drivel about our ivy-clad universities and our amazing, innovation-driven economy can’t spare us from the fact that investors are bidding up the price of our office towers to dangerously high levels. Nor can we forget our array of very pricey apartment towers, which are also part of the commercial real estate mix that investors are throwing dollars at right and left.
The Federal Reserve has already started to send up warning flares, though unfortunately in this age of 24-hour-a-day, Trump-dominated news, it hasn’t gotten anywhere near the coverage it deserves.
The Fed, in its twice-yearly report to Congress, recently cited “growing concern” over soaring commercial real estate prices and the nearly $2 trillion debt, much of it from smaller banks, that investors have used to pack their portfolios with trophy properties. It is the latest in a series of carefully worded warnings the Fed has issued in its Congressional reports over the past two years.
The Moody’s/RCA Commercial Property Prices Indices are now 23 percent above their last peak in 2007, having doubled in value since hitting bottom in 2009. By comparison, home prices across the country and across the state are just now getting back to peaks last set a decade ago.
So far, much of the focus when it comes to the commercial real estate bubble has been on the overload of glitzy new luxury apartment towers taking shape in Boston and other cities, with Fed board member Eric Rosengren calling out the Hub’s forest of construction cranes and ever more pricy digs.
And certainly there are lots to be concerned about, with the latest surveys showing rent declines in the luxury rental market in Boston as thousands of new units flood the market. But at least apartment rents remain – or are hovering at – record or near record levels, even if builders are having to offer up enticements like a month or two of “free rent” in order to get young professionals and empty-nesters to sign leases.
Record-Breaking Deals
The gap between what investors are willing to shell out for a top-shelf Boston tower and what they can expect to get back in rent is far greater on the office side. In fact, it’s more like a void now than a gap.
Office towers in the Boston area’s urban core are snagging rich deals from investors that are starting to break the $1,000 a foot mark – once only seen in San Francisco and New York.
A Canadian pension fund in 2015 paid out roughly $1,000 a square foot – a total of $1.3 billion – for 500 Boylston and 222 Berkeley in the Back Bay.
PwC’s shiny new glass encased headquarters in the Seaport shattered the Boston record last summer, taking in $452 million, or a hefty $1,027 a square foot.
Tower prices have certainly come a long way since developer John Hynes shocked the Boston real estate market with his deal in 2004 to sell the newly-built State Street Financial Center near South Station for a then-unheard-of $688 a square foot.
In fact, just three years before, the sale of One Federal, another top Financial District tower, generated a buzz when it was poised to sell for – gasp – $350 a square foot.
But it’s clearly not the fundamentals that are driving these astronomical prices, as a quick look at how office rents have stagnated in Boston over the past two decades shows.
Rents in Boston’s top tower addresses – Class A – passed the $70 a square foot mark in the fourth quarter of 2000 and stayed in the $60s per square foot through all of 2001, stats from Colliers show. Downtown tower rents peaked again at just over $69 a square foot in the spring of 2008 before taking a big hit during the Great Recession.
Today, there are probably more than a few tower owners who would kill for a $70 a square foot office lease.
Class A office during this latest real estate boom have barely broken the $60-a-square-foot mark, just crossing $61 during the first quarter last year, according to Colliers.
And in a sign that can’t be good for investors who have paid out silly money for Hub towers, rents may very well have already peaked, dropping back to $60.85 for the rest of 2016.
Defenders of these record-breaking deals note the new owners will certainly try to raise rents, especially before it comes time to sell in two or three years. But that’s a risky proposition, especially now with Trump and his chaotic wrecking crew at the controls of the global economy.
The rents just aren’t there to support the big jump in office tower prices. It’s called overpaying. And if and when the economy finally goes south again, some of these high-water-mark deals being lauded today may look very foolish indeed.
