Beacon Capital Partners’ $910 million purchase of the John Hancock Tower complex in Boston was one of the few significant deals in the local commercial real estate investment market during the first six months of this year.
When it comes to Greater Boston’s commercial real estate investment market, there was not a lot to show for the first six months of 2003 – literally.
While several significant deals were completed, including Beacon Capital Partners’ $910 million purchase of the Hub’s John Hancock Tower complex, a dearth of inventory is blamed for keeping deal volume generally depressed to date. “There is a lack of properties you can sell,” acknowledged CB Richard Ellis/Whittier Partners principal Gary J. Lemire. “Office buildings just aren’t coming on the market right now.”
A continued plunge in rents is keeping potential sellers on the sidelines, said Lemire, with suburban owners particularly reluctant to accept lower values for their properties. Those who feel they have “missed the market” are also in better shape to ride out the current storm, Lemire explained, partly due to stricter underwriting when purchasing their assets, and also because of the refinancing option offered by historically low interest rates.
While acknowledging that there is less product than he anticipated at the start of the year, Spaulding & Slye Colliers principal Michael G. Smith said he believes that situation is about to change. A surge of pension fund, private and overseas capital that has produced some hefty competition for the scant supply will pique the interest of owners, Smith predicted, adding that his own firm is already seeing an uptick in opportunities to trade.
Along with properties it is peddling downtown for Boston University, Spaulding & Slye Colliers is marketing 801 Boylston St. in Boston’s Back Bay and 29 Burlington Mall Road in Burlington. The latter facility is a 108,000-square-foot office building owned by Hewlett-Packard. Smith said the company is also garnering solid interest in 175 and 375 Paramount Drive in Raynham, which carries an asking price of $11 million. Owned by Boston Capital Institutional Advisors, the pair of suburban office buildings sports a solid location and strong credit and term in the rent roster, said Smith, all elements highly sought after by risk-adverse investors.
‘Lower Returns’
The most skittish investors are often from overseas, and the rush of most capital sources to credit-quality assets has conspired thus far to keep traditionally active German investors from completing any major deals in Massachusetts during 2003. But it is not for a lack of effort, according to Smith, a member of the Association of Foreign Investors in Real Estate who has been working closely with German funding sources.
“They are very interested in coming here,” said Smith, maintaining that many properties which have traded locally in 2003 were pursued by German buyers, just not successfully. Banker & Tradesman reported this spring, for example, that two German funding sources had finished one-two in the bidding for 745 Atlantic Ave. in Boston, but due diligence disputes supposedly kept those deals from being completed. Sources claim an Australian investment group now has the office building under agreement.
German investment volume in real estate has certainly been much lower throughout the United States in the past two quarters, with an overview by Real Analytics estimating that such capital has bought or committed to less than $1 billion in US property in 2003. That is well behind last year’s pace, which resulted in $4.3 billion of German property acquisitions in the United States, more than all other foreign capital combined.
Some observers have suggested that the flood of all capital fleeing the stock market into commercial real estate has driven yields down so substantially in the United States that German property buyers can now get comparable returns in Europe, but Smith argues otherwise. Having visited Germany regularly, and meeting last week in Boston with a German investor, Smith said he senses no such letup in interest toward the United States. Indeed, Smith said he anticipates that German investors will respond to the lack of core properties by broadening their long-held focus on downtown office buildings.
“They are willing to be more aggressive,” Smith said. “As the money piles up and piles up, we think [German investors] are going to accept lower returns and diversified product types, because they need to get the money out.”
Spaulding & Slye has turned to domestic sources to complete several deals locally this year, including Cornerstone Properties’ recent $33 million acquisition of Boston’s 3 Post Office Square and the pending purchase of Archon’s 7 Winthrop Square in Boston by a local private player, said to be Jonathan Samuels. And while he said there will be continued interest from domestic capital, Smith forecasts that “there will be some Boston buildings sold to German sources in 2003.”
For Trammell Crow Co., investment sales have been slow but steady, according to principal James F. McCaffrey. “We’ve been pleased to get a couple of deals done,” said McCaffrey, whose group opened the year by brokering the sale of the Westborough Office Park to the Windsor Fund of Boston, as well as a land piece to local investor Carruth Capital. Trammell Crow is also marketing the Framingham Corporate Center in Framingham, and recently handled the $12.8 million sale of the Norwood Business Center in Norwood to Everest Partners.
McCaffrey’s team has several other deals in the works, mostly in the $10 million to $50 million range. “The action has really been in the middle-market deals,” said McCaffrey, with single-asset trophy properties not trading in nearly the same volume as in the past several years.
