The owners of big office space blocks in South Boston’s Fort Point think it’s the right time to cash out after years of steep rent growth.
Nearly 750,000 square feet of office space is currently on the market, or nearly one-fifth of the neighborhood’s office inventory. The six properties include the Thomson Reuters office portfolio, an assemblage of 10 buildings containing 414,000 square feet of brick-and-beam space.
The transactions will go a long way toward determining whether Fort Point can retain its status as an Innovation District, or whether rents set by the new owners will force startups to look elsewhere.
“It’s a great time to harvest profits,” said Frank Petz, a managing director for real estate brokerage JLL. “There’s an acceptance of the Seaport as a credible investment class, and it’s on par with investing in the Financial District.”
Fort Point has attracted one of the region’s largest startup scenes with companies such as Zipcar, LogMeIn and dozens of smaller ventures. But converted warehouses that rented in the mid-$20 per square foot range just a few years ago are now leasing in the high $30s to low $40s, according to industry research. And landlords are getting choosier about the next tenant.
“Right now, the tenant requirements are much larger on average,” said Ben Sutton, a senior associate at NAI Hunneman. “You’ve got larger tenants with more money and better credit, and these landlords are looking for those larger institutional tenants to take entire floors of buildings rather than chopping it up.”
At the same time, large blocks of contiguous space are increasingly scarce. A 110,000-square-foot space in the Thomson portfolio is the neighborhood’s largest availability. The vacancy rate in Fort Point was 7.6 percent as of Sept. 30, according to research from brokerage Avison Young.
Fort Point’s emergence has gone hand-in-hand with new development on the South Boston waterfront, which is now a 4-million-square-foot office market. Since 2010, when the late former Mayor Thomas Menino proclaimed the area the city’s “Innovation District,” 3.7 million square feet of tenants have moved to the Seaport. The migration includes 1.4 million of space by former Cambridge companies, according to Avison Young research.
Rents have surpassed $50 a square foot at new office buildings in the Seaport District, narrowing tenant prospects to large corporate tenants such as PwC and law firm Goodwin Procter. Both will occupy build-to-suit towers now under construction.
Small Blocks For Startups
Just a few blocks away, Fort Point continues to offer discounts to the Seaport’s glassy new towers. But the rising demand has redefined affordable office space, with most of the 19th-century converted brick warehouses now renting in the high $30s and low $40s.
“I don’t know if people deem that affordable,” said Tom Ashe, a partner at brokerage Tranwestern/RBJ. “The opportunities are limited. It’s a very active market and it’s not a very big market in terms of the brick-and-beam space down there, which is what (startups) like.”
Infinata’s story is a familiar one as it relocates from Norwood to Fort Point. The company, which provides market research and news to the biotech and finance industries, needed a downtown office to recruit and retain tech-savvy employees, Managing Director Ruth Henry said. It ruled out Cambridge’s Kendall Square because of rents topping $70 a square foot and couldn’t find appropriate offices under 10,000 square feet in the Financial District.
“We found much more efficient space in Fort Point, but it’s a lot more competitive,” said Henry, whose company moved in Friday at 33-41 Farnsworth St. “It certainly feels like we got the last under-10,000-square-foot space in the neighborhood.”
Big Windfall For Crosspoint?
The Thomson Reuters portfolio – named after the financial information company that occupies 238,566 square feet as anchor tenant – could provide a big windfall for Crosspoint Assoc. Inc. The Waltham-based developer acquired the property in 2007 for $120.5 million, including $87 million from a joint venture with a private client of Anglo Irish Bank.
That purchase price raised eyebrows at the time, just three years after the property had sold for $92 million. But an industry source said the property could sell for over $200 million in today’s market.
For potential buyers, the question is how much more rent growth is reasonable to expect. The price they pay will set the tone for asking rents.
JLL’s Petz predicts rents will rise an average of 5 to 10 percent annually in the neighborhood for the next two years.
“It’s on par with downtown pricing and you could argue that it’s ahead,” he said. “If it’s $40 today, in three years you’re going to get to your number.”
Email: sadams@thewarrengroup.com
