Although tower sales appear to be leveling off locally, interest in the mid-level investment market continues to remain strong, with a pair of downtown Boston office properties trading hands last week, and several more deals in the pipeline.
Taurus New England Investments has closed on 148 State St. and 184 High St., both in the Financial District, acquiring the two buildings in a joint deal from Modern Continental Enterprises. The $19.8 million purchase of the two properties continues an extended buying spree on behalf of Taurus, which now controls nearly four million square feet of commercial space in Eastern Massachusetts, despite entering the region just a few years ago. The latest acquisitions total 115,000 square feet.
Taurus NE Managing Partner Peter A. Merrigan told Banker & Tradesman that the purchases reflect his firm’s confidence in the Boston market, especially in that particular section of the Financial District. Currently scarred by work from the Central Artery depression, the area along Broad Street where the two buildings are located should be among the greatest to benefit from the Big Dig project, he said, someday offering a clean path between Faneuil Hall and the Boston waterfront.
We think the Broad Street area on a long-term basis will continue to improve, Merrigan said. It really looks positive for the long haul.
Merrigan added that Taurus NE sees the acquisitions as long-term holds, whereas Modern Continental sold the two buildings less than two years after buying them. The Cambridge-based firm, whose prime business is heavy construction, had bought the properties separately in May 1998.
Modern Continental Vice President Robert L. Shepard said last week that the sales do not indicate a plan to divest of the company’s other commercial real estate holdings, but were part of a larger tax-deferred exchange coinciding with its purchase last year of 470 Atlantic Ave. in Boston. That 335,000-square-foot former warehouse was purchased for $52 million in August and is in the process of being upgraded to modern office space.
It made a lot of sense for us to do it, Shepard said of tying the deals together. Besides the tax benefits, he added that Taurus offered us what we thought to be a very good price.
Indeed, Modern Continental seems to have done quite well in the upside of the two buildings after having purchased 148 State St. for $5 million in May 1998 and 184 High St. later that same month for $8.1 million. According to one Boston investment specialist familiar with the Taurus sales, the properties broke out to $11.1 million for 148 State St. and $8.74 million for 184 High St.
That’s a nice turnaround, said the broker, adding that Modern Continental exhibited a great sense of timing in its moves. Seconding that opinion was Christopher Griffin, who oversees the Middle Market sales group for Trammell Crow’s Investment Sales Group in Boston. Griffin, whose division focuses on property sales up to $30 million, noted that rental rates for Class B and Class C buildings have improved dramatically during the past decade, bringing property values up along with them.
The rents have really spiked for those buildings, and they will continue to go up, Griffin said last week. There’s really no relief in sight.
Whereas investors were loathe to consider such buildings during the early 1990s, a time when the regional recession sparked a so-called flight to quality among office tenants, Griffin said that today, everybody’s interested in Class B and C buildings, especially in the downtown Boston market. Domestic pension funds, local syndicators, and even foreign investors are actively seeking deals, Griffin said. Taurus itself is backed by German investors and has been one of the few overseas investors willing to buy value-added properties.
Griffin agreed that most foreign players have typically shunned the Class C market, but he said they have shown interest in Class B+ properties, buildings that are older and smaller than the city’s modern office towers, but that are stabilized and require little in the way of renovations. In any event, Griffin said his division foresees a broad list of suitors for its middle-market offerings.
We have and will continue to see those type of sales in the coming year, he said. I don’t think it’s any busier per se than [1999], but it has remained steady … and I think interest will remain strong for the rest of 2000, especially in the downtown market.
Limited Supply
Besides the lack of space in the upper-end towers, Class B and C properties are also in vogue because of the limited supply of such buildings. Due to conversion to other uses, Griffin said there is about 15 percent fewer of those buildings available in the Hub today than 10 years ago, noting that 89 Batterymarch St. is now a hotel, 131 State St. is being used for corporate apartments, and 161 Devonshire St. has met a similar residential fate. And with land costs what they are in Boston today, Griffin said investors are confident that there will be no additional supply of such buildings in the future.
A lot of that stuff is gone, and it’s not coming back, Griffin said.
Merrigan estimated that Taurus NE now owns nearly 300,000 square feet in Boston, and said the group is closing in on several other deals in the Hub. The firm also recently purchased 71-77 Summer St. in Downtown Crossing and will continue to focus on value-added deals. Merrigan said improvements will be made at both 148 State St. and 184 High St., including facade upgrades, HVAC modernization, and restoration of elevators and common areas. He concurred with Griffin’s assessment of solid fundamentals in the older product.
I continue to be amazed by the rent growth in the B market, he said. All of our buildings are 100 percent occupied, and if something does come available, somebody else comes along to grab it.
Meanwhile, Modern Continental will continue to seek out investment opportunities, Shepard said, although the firm is focusing most of its attention on the renovation of 470 Atlantic Ave. Shepard said work on that project is expected to begin next month with demolition of interior finishes. While no commercial deals are on its radar screen at present, and Shepard said he believes prices may be getting somewhat overheated, he said that, if a deal comes along that makes sense, we will look at it.
Indeed, Modern Continental has remained busy on the residential end, having closed last week on a 22-unit townhouse development in Arlington for $2.4 million and hoping to finalize a deal this week to buy an 85-acre tract of land in Scituate on which it plans to develop 58 house lots. Modern Continental has also completed a $4 million purchase of 40 acres of land in Norwell, on which it will develop housing for people aged 55 and older.
