Developer John B. Hynes III has begun shopping a taller, cheaper plan for One Franklin St. in Boston’s Downtown Crossing, re-incorporating residential development and halving the proposed office space in what is now the third iteration of the stalled project’s design.
"What good does it do us to be stubborn about the product when it’s stuck in the mud?" Hynes said at the Urban Land Institute’s Urban Marketplace forum this week. He called the redevelopment of the Filene’s parcel, which has been on hold for several months now, "temporary, uncomfortable and embarrassing, but at the end of the day, it’s going to happen."
The latest version of One Franklin is a 38-story mixed-use tower, Hynes told Banker & Tradesman. That’s taller than the 32 stories Hynes and his development partner, Vornado Realty Trust, proposed in December, and just shy of the 39 stories for which the tower was originally permitted.
The new version also puts residential back in play. It slices the project’s office space component in half, to 300,000 square feet from 600,000, replacing the lost office space with 250 luxury residential units. Most of those units will be rental, Hynes said, though a few will be condominiums.
The new plans have yet to be filed with the Boston Redevelopment Authority. But Hynes believes this version of the One Franklin tower will be able to attract the financing that has eluded his team since last fall.
Hynes and Vornado had previously jettisoned the project’s residential component. On the decision to scrap residential, Hynes previously told Banker & Tradesman, "Residential is a lightning rod, nationally. Boston might be a stronger market but, nationwide, lenders aren’t interested in it. These loans aren’t originating in Boston, and national and international lenders are saying, ‘No residential.’"
Two things have made the residential turnaround possible. The tower plans now call for a majority of rental units, which are currently more attractive to banks than condominiums. Secondly, Hynes said lenders are beginning to realize that, once the economy begins climbing upward, the current construction freeze may leave Boston with a shortage of residential units.
"Now, the theory is that, in this recovery cycle, the first thing that may come back will be residential," Hynes said. "Therefore, maybe we should think about reducing the office space, reducing the floor plates, and adding residential. It’s an option we’re investigating."
One of the strengths of the Filene’s site, Hynes said, is its malleability – it can support any mix of hotel, retail, office and residential uses. The final mix of uses, he said, will be driven by a single question: "What’s appropriate for that [committed] capital?"
It’s that question that brought residential back on the table, he told a crowd at the Urban Land Institute’s conference this week. Hynes recently took meetings with two separate groups of investors from Asia who had cold called him after reading about the project’s capital difficulties in the Boston Globe. The investors have sizable holdings in U.S. Treasury bills, and were looking to invest in real estate as a hedge against inflation in the American economy. Both groups, he said, were primarily interested in the site’s residential potential.
"Fundamentally," he said, "the location is one of the best locations in the city."
The project’s retail and hotel uses have remained unchanged since the fall. Retail slots are substantially pre-leased, and the developers have secured a $100 million commitment to open a Meridien Hotel in the tower’s lower levels.
At the ULI event, David Epstein, president and COO of the Abbey Group, echoed Hynes’s residential rebound theory. Epstein’s $200 million residential tower at 45 Province St. will soon open just steps from the Filene’s site. Recession economics have undoubtedly harmed luxury condo sales, but "pent-up demand" should rebound quickly, he said.
"The quantity of inventory is very small in a city like Boston. You read about macro issues in the newspaper, but we function at a micro level."
A recovery in the office market may take longer. The downturn for office product accelerated greatly during the first quarter in 2009, according to data from CB Richard Ellis. Greater Boston’s office market shed more than 2.4 million square feet in occupied space during the first three months of 2009. Boston’s office market alone suffered negative absorption of 1.3 million square feet. By comparison, negative absorption for the entire region’s office market in the fourth quarter of 2008 was a little more than 1.3 million square feet. Sublease inventory in Boston marched north of 1.5 million square feet, according to CBRE, while average asking rents in the city fell by $5.73 per square foot. Joe Sciolla, managing principal at CresaPartners, doesn’t expect to see rents rise until 2011.
Amid that deterioration, One Franklin’s anchor tenant bolted for Fan Pier: Fish & Richardson signed a letter of intent on 145,000 square feet at Joe Fallon’s South Boston development. The law firm’s decision – driven by the absence of vertical construction at their prospective downtown home – left Hynes in the position of having to fill 600,000 square feet in a rapidly declining market. The new plan would cut that chore in half, while maintaining a sizable presence in the downtown office market.
Despite the Filene’s building’s 38-story height, smaller floor plates and plummeting construction costs mean the new proposal carries a lighter price tag – $450 million – than either of the previous two proposals. The first two clocked in at $700 million and $525 million, respectively.
The new price tag leaves Hynes and Vornado in need of $250 million in financing additional equity.
"That’s a big loan by any day, and in this climate, it’s extra big," he said. Boston Properties recently secured a similarly sized construction loan for its Russia Wharf development by cobbling together several lenders, and agreeing to harsh recourse provisions.
