Principals of Leggat McCall Properties are: (from left) Eric Bacon, Mahmood Malihi, Eric Sheffels and Steven Fessler. Leggat McCall is headquartered at 10/Ten Post Office Square in Boston (pictured in background).
The principals of Boston-based Leggat McCall Properties insist they are not abandoning their hometown. It only looks that way.
“This is the first time in 20 years that we have no property in Massachusetts,” principal Mahmood Malihi noted in an interview last week. “And we’re pretty happy about that.”
Malihi is one of four LMP veterans who took over the reins of the commercial real estate concern one year ago this week, replacing retiring company icons J. Brad Griffith and J.H. Walton. Along with the transfer of power was the sale of $600 million in assets, including such well-known Bay State properties as Waltham Woods Corporate Center and Totten Pond Office Center, both in Waltham, Concord Road Corporate Center in Billerica and 10/Ten Post Office Square in Boston’s Financial District. The estimated $150 million worth of properties remaining in LMP’s portfolio are scattered elsewhere along the eastern seaboard, with holdings in such markets as Northern Virginia, Philadelphia and New Jersey.
However, even with the local liquidation and a sense among LMP’s leadership that the Hub’s real estate market faces continued struggles, Malihi and his colleagues stress that they remain bullish on the long-term prospects for Massachusetts. Among the region’s strong points, they say, are a diverse economic base and its recognized status as a worldwide financial and educational center.
“Of all the different markets we deal in, Boston has the best fundamentals,” said LMP President Eric Sheffels. “Going forward, the vast preponderance of our efforts are going to be in the Boston area – that is where our focus is going to be.”
It just may take a while to get to that point, although the dearth of recent acquisitions is not for lack of trying. Principal Steven D. Fessler and LMP’s investment management division have pursued everything from hotels and industrial buildings to multifamily assets and even raw land, but have yet to nail any deals that make fiscal sense to the firm. The chasm between what buyers will pay and what sellers will accept has yet to close, said Fessler, at least not enough for LMP’s satisfaction.
“It’s not as if we have ever stopped looking [at deals], but rents are still difficult to peg and so is job growth,” Fessler said. “But I’m optimistic the bid/ask gap will narrow with time. We just have to be patient until it does.”
Sheffels offered a similar outlook, predicting that building owners will begin to get the message that the office market is bloated with excess space and that the recovery will take longer and be flatter than some might admit. “By early 2003, reality will have caught up to many owners, and when that happens, the buying opportunities will be there,” Sheffels said.
Based on the company’s track record, LMP’s observations certainly warrant careful consideration. The firm was one of the earliest investment groups to recognize that the real estate market was nearing its peak, with Fessler explaining that the company determined from deals they were pursuing that pricing was getting overheated. Maintaining that “you are buying your property if you are holding onto it,” Fessler said LMP decided it was an optimal time to cash out. That led to the disposition approach, one that yielded average leveraged returns in the mid- to upper-30 percent range, phenomenal results by any measure.
“Nobody harvested profits in this market as successfully as we did,” acknowledged Malihi, while Sheffels added, “Most opportunity funds continued to buy hard in 2000 and through 2001, and we didn’t.”
‘Ride the Upside’
LMP’s discipline is now paying off, as the firm has been able to wait on the sidelines until pricing adjusts to a satisfactory level. LMP is especially emboldened in that approach given the experience of having lived through the brutal 1990-1991 recession, from which some of the best deals ever found emerged for those with the capital available to exploit the market. “We look at the cycle as an opportunity to make investments and ride the upside,” Fessler said.
In the interim, LMP is taking another page out of its recession survival guide, concentrating on third-party fee development to generate income. It is a model similar to that which LMP used in the early 1990s when it became a leader in managing commercial properties for clients while development activity was at a standstill. LMP ultimately built its third-party management portfolio to 15 million square feet before selling out to Insignia/ESG in 2001 in order to concentrate on other business ventures.
LMP has actually been building its fee development business since 1996 when principal Eric Bacon launched a corporate services team to help assist companies and institutions with a vast array of real estate needs. Along with advising on leasing and other real estate services, the company began overseeing development projects for third-party clients.
LMP renovated office space, built fitness centers and even constructed bank branches on behalf of Fleet Bank, for example. It also aided the Massachusetts Medical Society in buying the land and developing the association’s 320,000-square-foot headquarters in Waltham. Equity Office Properties also turned to LMP to oversee the real estate investment trust’s 500,000-square-foot office complex at Riverside in Newton.
By January 2001, LMP had grown the fee development business to $200 million, but has since “turned on the turbo-chargers” on that sector, said Malihi, with the firm currently handling a whopping $600 million worth of development. And the firm is not concentrating on traditional commercial real estate ventures, either. In one instance, it is developing a 6-megawatt co-generation plant. In another, LMP is constructing a modern ambulatory care center for Partners Healthcare. The firm is also overseeing construction of a $220 million mixed-use complex at Battery Wharf in Boston’s North End, one that will yield a blend of hotel, residential and retail space.
Sheffels said LMP thrives on the complex undertakings, efforts he said the company is particularly equipped to handle. “We have a diverse base of construction and engineering talent that runs very deep,” he said. Even the principals themselves are well versed in such matters, with Malihi holding a master’s degree in construction management, Sheffels a master’s in construction engineering and Fessler a master’s in civil engineering. Ironically, all three attended Stanford University for their graduate studies.
Other real estate companies are beginning to turn to third-party development, but Sheffels maintained that LMP has a leg up on that arena thanks to Bacon’s work in building the business during the past six years. The company’s background in fee development even extends beyond the corporate services business, Sheffels said, noting that the firm redeveloped 73 Tremont St. in Boston for J.P. Morgan Investments back in the late 1980s.
Healthcare and biotech are among the leading lines at present for LMP, although it is even overseeing construction of a new headquarters and plant for the Necco candy company, currently in the process of relocating from Cambridge to a $100 million facility in Revere. LMP is also developing a 200,000-square-foot headquarters for Agilent in Boxboro, and is managing the interior fit-out at Boston’s World Trade Center for the Foley Hoag & Eliot law firm.
Through it all, Bacon, Fessler, Malihi and Sheffels have been successfully establishing themselves as the new generation of LMP leadership, helping make their mark on the local real estate market much the way Griffith and Walton did during the past three decades. While other real estate firms struggle to survive the current downturn, Malihi said LMP does not have that distraction.
“We’re in a fortunate position of having harvested our profits and are now generating enough fee business that allows us to concentrate on buying opportunities,” he said.
