The commercial real estate investment market in Downtown Boston is hot. It’s smoking, because Boston is where investors want to put their money, according to some industry experts.

But there is something else working here. At least for nearly the entire first half of 2013, the investment sales market downtown has been rather limited.

It’s true that prices for properties are sky-high. Just look at the recent deal for 40 Broad St., which a branch of Chicago’s Pearlmark Real Estate Partners sold to TIAA-CREF for about $110 million. When all is said and done, the property traded for about $385 per square-foot. Granted, the firm made significant capital improvements to the property, but also paid just about $50 million for the building in 2006.

Now, Deutsche Asset & Wealth Management, formerly RREEF Real Estate, which declined to comment for this article, has agreed to buy the nine-story, 70,000-square-foot office building at 45 Milk St., part of the failed Anglo Irish Bank portfolio of properties, for a whopping $21.2 million, or more than $300 per square-foot, industry executives told Banker & Tradesman. Anglo Irish paid nearly $34 million for the asset in 2007, just before the financial markets came crashing down.

But why is the current sales price whopping, given how much 40 Broad St. traded for, you might ask? It’s whopping because the Financial District building is just 10 percent occupied. Yes, you read that right, 10 percent occupied.  

“The heat in the market is because the fundamentals have been improving, and the yields on investment people are requiring in Boston are lower because they think the upside is greater,” said Frank Petz, the Jones Lang LaSalle broker that sold the Broad Street building to the financial services behemoth. “And while there’s plenty of capital looking, there’s little for sale right now.”

Among the properties that are for sale, 99 Summer St., being marketed by Eastdil Secured, is currently on the shopping block. Normandy Real Estate Partners owns the 20-story, 272,614-square-foot office tower and was originally looking for between $380 and $400 a square-foot, according to industry insiders. But after Normandy saw the price achieved at 40 Broad, the group raised their expectations to $400 to $420 a square-foot, according to sources. Eastdil did not return press calls.

‘A Little Funkier’

There are a couple of reasons for the elevated expectations. First off, it’s an actual tower, not a mid-rise like 40 Broad, which stands at just 12 stories, so it will have far better views from the top. Plus, 99 Summer was built in 1987, while 40 Broad was constructed in 1923. But, top brokers say, 99 Summer is “a little funkier.” Its floor plates are smaller, whereas 40 Broad’s floor plans are large and wide open. So it’s arguable which property is more ideal from an investor’s perspective.

Across the Financial District, Fidelity has hired CB Richard Ellis to sell its former headquarters buildings, four in total, clustered at 82 Devonshire St. the Fidelity block contains about 350,000 square feet of office space in the heart of the Financial District. The financial services giant has announced it would move its headquarters to 245 Summer St., where it already leases space.

Here’s the twist. CBRE, which could not be reached by phone, is marketing the properties as a redevelopment opportunity. On its face, that would usually garner a lot of interest from investors since Downtown Boston offers so little room for redevelopment. An office tower at the site could be built up to 400 feet tall.

Investors certainly are interested in the Fidelity buildings, but are really considering it a traditional investment sale, and not so much for redevelopment.

According to industry insiders, there are two primary reasons for that – Mayor Thomas Menino and Boston Redevelopment Authority chief Peter Meade. Since Menino announced his retirement, and now that it’s known Meade will follow him out of City Hall, real estate developers are very concerned with who will be calling the shots and what the redevelopment atmosphere will be downtown. On top of that, Fidelity will be moving its operations out the buildings in about two years. Given the change in leadership, plus normal market uncertainty, investors are hesitant to agree to take on a redevelopment project.

 “The activity is more brisk today that it was a year ago, but it’s hard to find a trend,” said Scott Jamieson, an investment sales broker for Avison Young in Boston. “The sales are really more coincidental than anything. I think what is impressing many owners is the pricing being achieved for these assets. It’s causing more people to think more seriously about selling today than they had in the past. But we’re facing the conundrum owners always face – if they do sell and harvest a strong gain, then where do they replace those dollars in the market? There’s so little for sale, and when you put it in the bank you earn close to $0.”

Email: jcronin@thewarrengroup.com