One Federal St., a 38-story office building in Boston’s Financial District, commanded $375 million in a sale completed last week.
Reflecting strong demand in Boston’s office market, an investment fund backed by German money closed last week on One Federal St., a 38-story tower located in the heart of the city’s Financial District. The 1.1 million-square-foot building traded for $375 million.
“We’re pretty excited,” said Mark Weld of Clarion Partners following the consummation of the deal. Clarion’s client, the IBM retirement fund, had owned the property for more than a decade before the sale to Atlanta-based Jamestown.
Trammell Crow Co. principal Robert E. Griffin, whose Investment Advisory Group brokered the sale, said he believes it is indicative of the solid fundamentals found in the Hub’s office market and the perception that barriers to entry for new construction remain formidable. Even with the office sector slipping dramatically in recent months, Griffin said there was widespread interest in the tower, which opened in 1975.
“It’s just a mega deal,” said Griffin. “And it seems to confirm that Boston’s [Financial District] is still hot, and that foreign investment, particularly the Germans, is still focused on the city.”
Griffin said he believes the One Federal St. deal is the largest commercial real estate sale locally since MGI Properties unloaded its entire portfolio last year, while the per-square-foot rate could be at or above the highest level ever recorded for an office building in the Hub. Weld noted it was a rare example where a third-party investor took full interest in a Boston tower, especially for such a large asset. Jamestown, for example, also owns the nearby 125 High St. office complex, but retains only a 74 percent stake in that property.
In terms of selling the tower, Weld said it was not a reflection of IBM or Clarion determining the market was peaking or any factors directly related to the tower itself. Instead, he said, the client has been gravitating toward making its investments in broad real estate funds vs. direct ownership of an asset.
“We think this was a good time because of our client’s objectives,” Weld said. The property does have a bit of lease rollover during the next few years, but Weld said for the most part, Jamestown was looking for an asset with good-credit tenants. “It has probably the best tenant roster in the city,” said Weld, citing such firms as Fidelity Investments, Fleet Bank and Bear Stearns.
The deal is also considered indicative of the changing attitudes of investors as the market evolves, given that buyers last year were more intent on acquiring properties possessing substantial lease rollover potential. In light of the industry’s recent downturn, with rents dropping and vacancies rising, Griffin said many investors are looking more at properties with strong tenant commitments for the foreseeable future.
“There clearly has been a shift from [preferring] vacancy to looking for credit and stability with the longer term leases,” said Griffin.
In some respects, however, that approach has always been Jamestown’s forte, noted Bradley J. Olson, a real estate advisor who specializes in overseas investors, especially German players. Most German buyers to date have concentrated on buying assets in strong urban centers such as Boston, New York City or Washington, D.C., usually with a goal of purchasing Class A properties. One Federal St. fit all of the company’s criteria, said Olson.
“It projects the right image for Jamestown,” said Olson. “It is in a prime location, it’s a handsome building architecturally and its tenancy speaks for itself.” Olson said that many German investors have been following the company’s progress in the deal, which was first announced by Banker & Tradesman in March.
“Everyone is looking at this acquisition to see how Jamestown does,” said Olson. “If they do well, I think it’s a very positive sign for the marketplace.”
German Investors
The dominant group of foreign investors in the United States and Boston for several years, Germany’s interest in U.S. real estate has been in a bit of flux during the past 18 months, with spurts of activity followed by dormant periods. Part of the reason has had to do with the progress of the euro, which tends to hurt such investment when it is doing poorly in comparison to the dollar. The euro has flagged in that regard for most of the past year, although there have been occasional rallies. A strong German stock market has also funneled money away from real estate in the past two years.
Jamestown’s deal should serve as a barometer for future German interest partly due to the broad range of investors that participate in such a fund, said Olson. Rather than institutional capital or a few high-net-worth individuals, Jamestown relies on “mom and pop” investors who contribute sums in the $25,000 to $50,000 range. The success – or lack thereof – in putting that sort of deal together could very well reflect German attitudes toward the current U.S. market, said Olson.
For his part, Olson said he feels bullish that Germany will continue to seek out real estate in the United States, predicting a “noticeable increase in investment” locally during the next one to two years.
“Generally speaking, I think we will see a significant uptick in the flow of funds from Germany,” he said.
With the sale, Trammell Crow has broken a record in topping $1 billion in investment sales so early in the year. The Investment Advisory Group, which includes principals Marci B. Griffith and Edward C. Maher Jr., also brokered the sale of 99 High St. in Boston earlier this year, as well as a half-interest in the Hub’s 75-101 Federal St.
