TIAA-CREF earlier this year purchased 99 High St. in Boston’s Financial District for $275 million.
“Money for everything” could be the mantra of the moment for commercial real estate, or so it would seem from last week’s breakfast program on investment trends sponsored by the Massachusetts chapter of the National Association of Industrial and Office Properties.
“We are experiencing [increased sales] across all asset classes,” Charles River Realty Advisors President and moderator Brian H. Kavoogian told the audience of some 300 people gathered Wednesday at Boston’s Rowes Wharf, while panelists Kevin C. Phelan and Marci Loeber joined TIAA-CREF Acquisitions Director Scott R. Kempton in trying to make sense of the super-charged capital flow. The torrent has led to record pricing in New England and beyond, reported Kavoogian, who acknowledged an ongoing debate as to whether the underlying fundamentals for office buildings and other product support the robust response by investors.
“Are we rationalizing or are these assumptions based on fact?” queried Kavoogian, who left it to Loeber to launch the analysis. A principal with Cushman & Wakefield of Massachusetts who has brokered $10 billion in property transactions during the past decade, Loeber said she believes commercial real estate has become increasingly sophisticated, with standardized criteria now available to establish performance levels demanded by pension funds and other investors or to make it easier to trade in the public financial markets.
“Real estate is seen now as an acceptable asset class,” said Loeber. “It is providing a lot of liquidity in the market.” Besides the improving economy, a lack of alternative sources in which to put capital has also buttressed real estate’s standing, said Loeber, even as competition among investors sends returns spiraling downward. Trophy properties are drawing as many as 20 bidders when put on the trade block, she estimated, leading some investors to separate themselves from the pack by agreeing to non-refundable deposits or reduced due diligence requirements.
That competition is leading to a “secular shift” downward of capitalization rates, Loeber maintained, especially for hot assets such as stabilized office buildings, retail or multifamily properties. Some grocery-anchored shopping centers are trading in the 6 percent capitalization rate range, said Loeber, adding the same is true in other deals. Equity Residential bought a Waltham residential development at a 5.4 percent capitalization rate, for example, even though the lease-up process had not yet commenced. The pro forma capitalization rate for the Village at Quarry Hills in Braintree is also in the 5 percent range, said Loeber, whose firm is in the process of selling that 326-unit apartment project to Archstone-Smith for nearly $110 million.
In what Loeber termed “the shot heard around the world,” Cushman & Wakefield began 2005 by brokering the sale of the Bay Colony Corporate Center in Waltham at a 6.8 percent capitalization rate after a rush of well-heeled capital sources locked horns vying for the Class A office park. In another climate, the property might have seen a rate in the 9 percent range, Loeber said, but even the long-troubled suburban market is garnering confidence. Bay Colony also reached a suburban Boston record for its $272 million price tag, which equates to about $281 per square foot.
Boston ‘Significant’
At its high-water mark in 2001, Bay Colony was capturing leases at rates above $60 per square foot, but while those days are long gone, with space now pacing in the $28 range, Loeber insisted that the lofty price paid by Beacon Capital Partners for Bay Colony ultimately will prove fruitful. Already, the core Route 128 community is seeing asking rents reaching $35 for prime destinations such as Bay Colony, and Loeber said rates above $40 per square foot that will be needed by Beacon should be achievable for the premier market’s leading office campus.
In his remarks, Kempton said that TIAA-CREF financial gurus are not the only ones pursuing commercial real estate at present, citing $250 million being generated monthly from annuity holders who are specifically selecting that asset class. As the world’s largest privately held pension fund, TIAA-CREF already has plenty of capital to invest, including $140 billion alone from fixed-income accounts. A good portion of that capital is finding its way into Massachusetts, including the firm’s purchase earlier this year of 99 High St. in Boston’s Financial District for a hefty $275 million.
While substantially above the $213 million paid by the previous owner, Kempton argued that 99 High St. has an “irreplaceable location,” given its proximity alongside the planned Rose Kennedy Greenway and nearby South Station. There also have been substantial physical improvements made to the 32-story office tower, said Kempton, adding that 25 percent of the tenant roster is investment-grade companies, while half of the space does not roll over for another seven years.
“We feel we’re getting [something that is] close to a new building” well below replacement cost, particularly with construction materials now skyrocketing. “We think it is going to [produce] a very solid return,” added Kempton, who said his company is bullish on the Bay State long-term despite its recent economic struggles. “Boston is still a very significant financial player,” Kempton noted, while the educational system and life sciences sectors are also seen as solid aspects of the region for real estate investment, he said.
Phelan, a principal with Meredith & Grew Oncor, provided an overview of the debt side of commercial real estate, one that is also coursing with money looking for investment outlets. Loan-to-value ratios are again soaring upwards, in many cases exceeding 100 percent, fueled by a steady source of mezzanine money. While stressing “it’s not quite Cowboy City,” Phelan said the debt landscape is peppered with funding sources, including an aggressive Wall Street. Commercial mortgage-backed securities could reach $150 billion this year, said Phelan, remarkable given that figure was virtually zero in the early 1990s.
“It’s a very heated market,” acceded Phelan, so much so that the once-shunned hospitality sector is even attracting interest, with Phelan detailing one recent transaction where reserve requirements were actually dropped from the terms in order to secure the deal.
