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Photo by Ian B. Murphy | Special to Banker & Tradesman
You can get a tattoo, a vaping rig, a comic book action figure and a $3 slice of pizza all in a short stroll through Somerville’s Davis Square, a neighborhood that’s balanced gentrification with a defiant indie sensibility.
Now big institutional real estate investors are discovering the square, eyeing opportunities to build dorm-style housing and shake up stagnant retail tenant rosters.
North Carolina retail developer Asana Partners is the latest heavyweight to target Davis Square as a growth market, with last month’s $40 million acquisition of nearly an entire block of office and retail buildings on Elm Street.
Asana’s challenge will be achieving rent increases to satisfy its third-party investors, while maintaining a mix of compelling tenants, said Andrew Jaffe, senior vice president for retail brokerage Bialow Real Estate.
“You need to make sure to be focused on local retailers and new retailers not in the market that will be attractive to customers,” Jaffe said. “I think you’ll see a mix of apparel and fitness users that will really complement the area.”
Street-facing tenants in the portfolio include H&R Block, Eastern Bank and Chipotle. The Davis Square Plaza, a courtyard between the two largest buildings, is lined by a mix of smaller tenants including salons, a nonprofit, medical offices and a cash-for-jewelry shop.
Asana Hit Bumps in Cambridge
The transaction has prompted speculation about Davis Square’s potential loss of quirky charm, amid a continuing uproar in Cambridge over Asana’s management of a Harvard Square portfolio that it acquired in 2017 for $108 million.
Local gathering spot Crema Cafe was forced to leave after failing to reach an agreement with Asana on a lease extension. Bluestone Lane, a New York-based coffee chain that’s raised over $35 million in venture capital funding, took its place. Other newcomers to the Harvard Square portfolio include Patagonia, Ray-Ban and clothing chain Marine Layer.
Some neighborhood activists and officials say Asana has ignored their requests for information on its plans and imposed new common area maintenance charges on tenants.
Asana Partners is the newest deep-pocketed national developer to acquire properties in Somerville’s Davis Square, paying $40 million for nearly an entire block of commercial properties in August. Photo by Steve Adams | Banker & Tradesman Staff
“Tenants who had leases starting to renew were having a really hard time getting in touch with Asana,” Cambridge Vice Mayor Jan Devereux said. “It’s a little bit their culture. They just don’t get Harvard Square.”
There’s been little controversy in Back Bay, however, since Asana bought the 28-building Newbury Collection portfolio from Jamestown last December for $298 million. Back Bay Association President Meg Mainzer-Cohen said she’s unaware of any turnover among the tenant roster so far, and the developer’s property managers have been active in the local business community.
“What we see on Newbury Street is there are property owners really focused on curating quality retail and restaurants, and others that just want to fill the space,” Mainzer-Cohen said. “I find Asana to be the former.”
A High-Growth Urban Strategy
Founded in 2015 by a group of former executives from retail developer Edens, Asana Partners invests in urban retail portfolios located in 25 high-growth U.S. metros with large Millennial and college populations, according to a 2018 prospectus. The privately held firm raises money from institutional investors such as the Los Angeles City Employees’ Retirement System, along with foundations and high net worth individuals. Its second fund, which targets returns of 11 percent to 13 percent over an eight-year term, closed in April after raising $800 million from outside investors.
Asana Partners executives did not respond to requests from Banker & Tradesman for an interview. In a 2017 profile in the Business North Carolina publication, Managing Partner Sam Judd said the company seeks to buy retail properties that are insulated from online commerce competition, such as those with restaurants and gyms, in neighborhoods with high pedestrian traffic.
Davis Square has many of those characteristics, but Somerville rents remain significantly lower than the Boston and Cambridge markets at $50 to $60 per square foot, Jaffe said. Asana’s ability to raise rents will be hampered by Davis Square’s smaller tourist draw, he said.
“There’s limited really good retail space in Harvard Square and some tenants have really wanted to get into the market and are paying the higher rents,” Jaffe said. “Davis Square always has been a little more of an isolated market, so I don’t think you’ll be able to stretch the rents as much.”
With a proudly independent sensibility, as exemplified by its annual HONK Festival as much as its wide range of small businesses, Davis Square presents a challenge to institutionally-backed landlords making acquisitions in the neighborhood.
Little New Development in Past Decade
Many commercial properties in Davis Square have remained under long-term ownership by small developers and family trusts, 35 years since the MBTA Red Line station opened and laid the groundwork for the neighborhood’s resurgence.
And Davis Square largely has been untouched by the development boom that is reshaping many transit-served areas in Boston and inner suburbs over the past decade. The last commercial building developed in the neighborhood opened in 2005: a 3-story, 42,833-square-foot office and retail building called One Davis Square.
That points to a lost opportunity for job creation, said George Proakis, Somerville’s executive director of strategic planning and community development.
“There were a lot of people in the tech and biotech community who said, ‘If we’re going to do new development in Somerville, we’re going to want to be on the Red Line,” Prioakis said. “Davis Square can offer that.”
For now, the largest development on the horizon is likely to be multifamily, not office or lab space. Student housing specialist Scape in July ground-leased three properties from a Newton landlord that has owned them for decades, including parcels occupied by the Burren Pub and McKinnon’s Market.
Prospects for larger-scale commercial and multifamily development – including on Asana’s parcels – could be enhanced by the city’s comprehensive zoning review which could come to a final vote this fall. The city is considering building heights from 4 to 6 stories and reduced parking ratios in Davis Square. Scape has met with city planning staff and is likely to wait until a final rezoning vote before filing any development plans, Proakis said.
A related city planning study, known as the Davis Square Neighborhood Plan, highlighted 15 properties that could be redeveloped under new zoning. The Scape-leased property at 233-239 Elm St. could accommodate approximately 100 multifamily units in a 5-story, 120,000-square-foot building, the study determined.
“The Scape proposal has suddenly generated a whole new interest in the neighborhood plan,” Proakis said. “There’s a lot of conversation about the type of housing Scape has built in other places. The community is interested in what they are proposing and the sooner we start those conversations, the better.”
