Greater Boston developers are moving forward on major office projects with a more speculative nature, from the Back Bay’s first office tower in over a decade to repositioning of older properties downtown and in the suburbs.
In a sign of the tightening office market, Boston Properties broke ground this month on a 17-story office tower at the Prudential Center with only five floors leased. Another half-dozen properties are being repositioned or converted to office space without confirmed tenants, including 9 Channel Center and 333 Summer St. in Fort Point and the former Atrium Mall in Chestnut Hill.
“You’re hearing rumblings in the market about people starting to think about spec office development,” said Carlos Febres-Mazzei, a senior vice president at CBRE/New England.
As office tower prices approach record highs, developers have opportunities to get better returns from new construction, said Andrew Maher, managing director at Anchor Line Partners in Boston.
“That’s leading the charge. There’s so much capital that would love to get into play in Greater Boston, some of the developers are getting out in front of it, with new construction for better returns than if they buy it,” Maher said.
Typically, speculative development takes off when vacancy rates fall to around 8 percent. With current construction costs, rents need to approach $70 a square foot to support ground-up development, said Febres-Mazzei said.
The case study for successful recent speculative development is in Cambridge’s Kendall Square, where developer Skanska USA broke ground in 2011 on a 123,000-square-foot office and lab building at 150 Second St. In 2013, two biotech companies leased over 80 percent of the building and Skanska sold the property to Alexandria Real Estate Equities for $94.5 million.
In the current market, Kendall Square continues to be a strong candidate for speculative development, with vacancy rates dropping to 2 percent in the third quarter and asking rents for class A properties topping $70 a square foot. The market statistics were compiled in brokerage Avison Young’s fall 2014 office report.
Boston Properties Bets On Back Bay
Office rents in the mid-$60 per square foot range are needed to support speculative development downtown, said Anthony Cutone, a managing director at HFF’s Boston office. Among core Boston submarkets, only Back Bay has average rents topping $60 for class A properties, according to industry research reports.
That explains projects such as Boston Properties’ groundbreaking this month on 888 Boylston St., the first office tower built in Back Bay in over a decade. Natixis Global Asset Management’s 128,000-square-foot lease is the only confirmed tenant in the 425,000-square-foot building.
“Now you’re seeing people take on the developments where most of the building is speculative,” Cutone said.
Steady demand from large corporate users for trophy-grade office space has been another driver of construction activity, with eight major build-to-suit projects fueling an office pipeline totaling 2.7 million square feet.
“There are many large users in the market willing to pay what it costs for brand-new product, and they’re driving the construction,” said Brendan Carroll, vice president of research at Avison Young.
Greater Boston’s office market now has six straight quarters of positive absorption, and vacancy rates have fallen into single digits in Back Bay and the Seaport District.
Currently, 88 percent of Greater Boston’s office construction consists of preleased space, primarily because of build-to-suit projects for large users such as Novartis in Cambridge and PwC in the Seaport District. That compares with a 10-year average of 64 percent, according to Avison Young research.
Will Fixer-Upper Strategy Pay Off?
In other markets and the suburbs, repositioning projects are an increasingly popular strategy of developers looking to meet demand for office space.
After acquiring the Atrium Mall in Chestnut Hill in 2012 for $46 million, Bulfinch Cos. of Needham is gutting the 280,000-square-foot landmark on Route 9 for a conversion to medical offices with retail space on the first two floors.
Michael Wilcox, Bulfinch’s director of leasing, said the company never considered other uses, including residential. The property is well-positioned to draw medical tenants from the Longwood area and office tenants from Route 128, Wilcox said.
The exact mix depends upon tenant demand, but the finished structure will probably contain up to 80 percent office space with the remainder set aside for retail, Wilcox said. The new exterior should be complete by early 2015, followed by an interior buildout with amenities determined by leasing activity.
“We’ve had strong interest. The issue is what is the right tenant to kick off the entire project,” said Robert Richards, a president at Transwestern RBJ which is the leasing agent.
In Boston’s Fort Point, Boston-based Berkley Investments is converting a 19th-century warehouse into 76,000 square feet of office space with ground-floor retail. The project at 9 Channel Center includes all-new building systems, windows and elevators is scheduled for delivery in fall 2015, Berkeley Vice President Barbara Smith-Bacon said.
Email: sadams@thewarrengroup.com
