Spectacular urban implosions at the John Hancock Tower in Boston and at the Bay Colony Corporate Center in Waltham came to define commercial distress in 2009.
And while 2010 looks like it may shape up to be no less painful for commercial owners and investors statewide, no place is more primed for massive bloodletting than the corridor along Interstate 495, where the majority of troubled loans in the Greater Boston area are concentrated.
“More than half the troubled loans we’ve seen are on 495,” said Frank Petz, an executive vice president at Richards Barry Joyce & Partners.
“We look at 25 [properties] a week, and 22 aren’t worth the debt,” added James Thomson, a principal in Newmark Knight Frank’s capital markets practice. “I’d venture that at least 50 percent are underwater. That’s why the sales volume is off. You can’t sell anything because, the simple matter is, a lot of it is not worth the debt.”
Richards Barry Joyce & Partners pegs the volume of troubled loans around greater Boston, which it defines as Boston to the 495 border, at $3.8 billion. That’s roughly equivalent to 8 percent of the total investment sales volume between 2005 and 2008, putting the city slightly ahead of the national average of 10 percent.
Petz argued the large numbers associated with the Hancock and Bay Colony collapses skew those figures. When those two properties are removed from the equation, he said, there are relatively few troubled loans in Boston and Cambridge, with lenders and investors pricing loans around 75 cents on the dollar.
Around 495, however, where vacancy rates are near 30 percent in some places, weak market fundamentals have unleashed a wave of distress, even though loans carry much smaller face values. Buildings are being priced at fractions of replacement costs, and loans are being discounted by as much as 50 percent.
“The fundamentals are tough on 495,” Petz said. “We’re seeing buildings and portfolios with vacancies greater than 50 percent. We’re seeing value declines of 50-75 percent. If it’s leased, it’s still probably off 15-30 percent. They’re bigger users and bigger buildings. Many buildings have been vacated entirely. In the downtown, businesses downsize. On 495, people disappear.”
A seven-building portfolio seized from Gale International and Mack-Cali Realty recently by UBS shows a likely course for the outlying suburbs’ distressed commercial market in 2010.
Three years ago, Gale, Mack-Cali and JP Morgan scooped up the 667,000-square-foot portfolio, which stretches along Route 3 up to 495, for $53.6 million, or $80 per square foot. The seven buildings are spread between Andover, Bedford and Billerica. UBS took the keys to the properties in September, after a loan maturity struck the ownership group.
Last month, UBS divested the first piece of the portfolio, selling 8 Oak Park Drive in Bedford for $1.89 million, or $29 per square foot. When UBS seized the property, it valued the vacant property’s debt at $4 million.
“It was a significant discount off replacement cost,” said William Deshler, general manager of Boston-based CRE Management, an affiliate of developers GFI Partners. Deshler’s firm placed an ownership group for 8 Oak Park, negotiated the purchase price, procured a tenant, and will be running the remaining leasing and tenant fit-up. Investors and lenders have been looking to the UBS portfolio to set a new mark for vulture pricing, he said.
“It’s the mark in the market,” according to Deshler.
A second building in the UBS portfolio, 300 Federal St. in Andover, sold last week for just $2 million, or under $17 per square foot, according to public documents.
Midland Loan Servicing, a large commercial mortgage backed securities special servicer, recently put a seven building, 520,000-square-foot portfolio similar to UBS’ on the market. Those assets, acquired by Everest Partners in 2004, stretch from Wilmington through Billerica and Lowell, and into Nashua, N.H. PNC Bank, Midland’s parent, provided the original $34.7 million securitized loan. The portfolio is being priced under $50 per square foot, sources told Banker & Tradesman.
Other sales comps are scarce, as property owners and lenders have resisted selling in a brutal market. The few comps that do exist are not encouraging.
In Marlborough, Cernet acquired the vacant former Verizon site at 280 Locke Drive in February for slightly more than $9 million, less than $40 per foot, as an owner-occupier. In 2007, the site sold to 280 Locke Drive LLC for $13.8 million. For perspective, Verizon predecessor Nynex Properties Co. bought the property in 1989 for $8.1 million, according to data obtained from The Warren Group, Banker & Tradesman’s parent company.
National Grid’s 300,000-square-foot former campus in Westborough is being priced at $60 per foot, with a 250,000-square-foot lease to BJ’s in place; as a nearly-vacant property, it sat on the market for a year with no takers. Thomson said he’s seeing capitalization rates, the percentage used to determine the value of a property based on its income, of up to 12 along 495; that figure is 7.5 in Boston, indicating suburban sellers’ weak rents can no longer support wishful asking prices.
Values are expected to erode further in 2010, as rents continue to soften. That softening will be hastened as properties trade hands and investors with little debt are able to reset rents, said Bret Wilkerson, CEO of Property & Portfolio Research.
“Clearly, rents have gone in the wrong direction from the projections of two to three years ago,” Deshler said. “It’s completely driven by vacancy. To obtain returns, the purchase price needs to adjust. The entire market is being reset. We’re going to see lots of properties trading off their replacement costs.”
Deshler said he sees most investment opportunities, i.e. opportunities for cash-rich buyers to scoop up properties on the cheap, occurring outside the city of Boston.
“I don’t see wholesale trading in downtown,” he argued. “Despite the lower rents, there’s still too much value [around 495]. The opportunity is where there is significant supply.”
