The commercial real estate industry in Boston has come to not only accept but to embrace the concept of middle-market segmentation in the investment sale business.
Middle-market transactions – those commercial properties trading between $5 million and $40 million – in many respects are a clearer indicator of the relative health of the investment sale business than is the occasional trophy asset sale.
At the year’s mid-point, the aggregate value of middle-market transactions is slightly over $300 million, compared to totals of $45 million in 2001 and $436 million in 2002. The transaction total was buoyed by the continued strength of the multi-family market with sales such as the Gateway Apartments in Malden Center, leading the way at $34.9 million or $171,921 per unit. The 203-unit apartment complex was purchased by Equity Residential Properties Trust.
In the office sector, HRPT Properties Trust started off the year with the purchase of One Constitution Way in Foxborough. The structure is a 100 percent full-leased, four-story, 208,000-square-foot office building, which sold for $30.1 million or $144 per square foot; an indication that in a troubled real estate market credit and term sells. Downtown activity remains light, but the recent sale of 3 Post Office Square for $238 per square foot indicates a persistent demand for well-located Central Business District properties.
While many of the same players participate in both the middle-market and institutional arenas, leverage plays a much bigger part in middle-market deals. Interestingly, the aversion many pension funds have to placing property specific debt puts them at a competitive disadvantage in this low interest rate environment. Private entrepreneurial buyers use debt to create positive leverage, increasing yields.
The favorable debt market continues to have as enormous influence on the middle-market sector – a trend that began in earnest in 2001. Despite more stringent underwriting criteria that have raised hold-backs and steeply discounted “see-through” tenancy, owners continue to be able to refinance as an alternative to an outright sale. This safety valve, in part, enables the persistent bid/ask gap to continue even in the face of enormous amounts of capital looking to be placed.
Notwithstanding the erosion of rental income, as leases executed at the dizzying heights of our 1990 to 2000 market continue to expire, prices have not significantly declined. Instead, pension funds, pension fund advisors and private syndications have bid up certain less capital-intensive real estate sectors. Multi-family, single-tenant net leased and distribution space are all commanding top pricing. This defensive buyer strategy seeks stability and low capital risk. It will not be until office demand strengthens and rental rates stabilize that we will see any significant renewal interest in the suburban office market.
