The John Hancock Tower, part of a $910 million deal which was the largest sale in the country during the last quarter, was successfully negotiated based on its strong tenant roster.
Despite disparaging economic news, demand for quality investment real estate continues to be strong. The paradox of the past several quarters persists. Activity for properties with near-term cash flow, credit and occupancy has been brisk, while demand for properties with weak tenant rosters, technology exposure, sublease space and secondary locations has been scarce. Although quality opportunities are limited, those that become available are highly sought after by a variety of capital sources.
During the past two years, capital has clung to credit real estate as the safe haven for risk-adjusted yields. In that time, the Dow, NASDAQ and venture capital investment has dropped precipitously. As a result of the diminished yields available in alternative investment vehicles, capital allocation to real estate has increased, with over $30 billion of equity raised for real estate investment last year.
Bright Spots
The abundance of capital chasing a limited supply of core real estate has led to a compression of yield requirements by real estate investors, thereby increasing prices for this asset class. The increased prices are justified by the continued availability of debt at historically low interest rates, allowing for enhanced yields through positive leverage.
Investor interest is high among REITS, pension funds, institutions, foreign capital, local investors and high net-worth individuals. In addition, opportunity capital continues to probe the market searching for signs of distress that could lead to discounted sale prices.
Corporate dispositions are beginning to be an outlet for the large amount of opportunity capital available. Recently completed transactions include the sale of 3 Com’s campus in Marlborough to Berwind Property Group, and the Level III sale of their telecommunications facility in Needham to Resolution Capital. Recent additions to the market include offerings by Genuity, Cubist Pharmaceuticals, Scudder Investments, and Polaroid. As 2003 progresses, we expect to see more offerings from this sector.
On the debt side of this sector – with an emphasis on sale/lease-back transactions – lenders continue to scrutinize the balance sheets and credit ratings of tenants, which is reflected in the pricing of the debt.
Unlike excess corporate real estate, office sector investment properties suffering from high vacancy and short-term rollover are forced to weather the economic storm. While interest rates are at historic lows, the ability to obtain financing has become increasingly difficult. Lack of leasing velocity and more conservative underwriting criteria has made financing real estate difficult, but not impossible for potential investors, as well as institutional and Wall Street debt sources.
Underwriting trends include marking to market rents, increasing vacancy/credit allowances, and increased tenant improvement and leasing commission reserve requirements. However, there continues to be an oversupply of capital in the debt markets and good office deals will get done.
In the retail, and residential sectors, we continue to see “auctions” in the debt market for high quality transactions.
Despite the general negative outlook, market activity is still strong. Downtown Boston continues to be a top target for both domestic and foreign investment capital. At $910 million, the sale of the John Hancock Tower was the largest transaction in the nation during the quarter. The multi-tiered sale included the sale of the John Hancock Tower at 100 Clarendon St., the office buildings at 200 Berkeley St. and 197 Clarendon St., and the 2,000-space parking garage adjacent to the complex. The total area was in excess of 2.9 million square feet resulting in a unit price of $307 per square foot and an overall capitalization rate of 8.0 percent.
Suburban sales activity has been slow, characterized by many starts and stops with several transactions. While their existence is rare, capital does aggressively pursue well-leased properties in strong locations. The major transactions for this quarter echoed this theme. In the first quarter, HRPT purchased One Constitution Way, Foxborough from Cabot Properties for $30.1 million, or $144 per square foot. This property was under a long-term lease to OneBeacon Insurance. Also in the suburbs, General Investment & Development purchased Westborough Office Park from Archon for $49.6 million, or $132 per square foot. This first class office park is well located at the intersection of Route 9 and the Massachusetts Turnpike, was 90 percent leased at the time of sale.
Demand for multifamily assets remained strong this quarter, led by the acquisition of Mystic Place in Medford by Lend Lease. The centrally located 465-unit complex traded for $66.5 million, or $143,000 per unit. Also, Home Properties purchased Stone Ends Apartments in Stoughton from Archstone-Smith for $34 million, or $121,500 per unit. This 280-unit complex is the second purchase for Home Properties in the Greater Boston market.
From a lending standpoint, multifamily assets continue to remain the preferred product type. Spreads for lower leverage transactions for multifamily product are in the low 100s over comparable treasuries.
Overall sales volume for the first quarter 2003, excluding the blockbuster Hancock sale, is down nearly 75 percent after a very active fourth quarter. In fact, total sales volume for the fourth quarter 2002 was nearly $1 billion, including One Boston Place, 116 Huntington Ave., 501 Boylston St., Longwood Towers, and 955 Massachusetts Ave.
Though obtaining financing is challenging due to increasingly stringent underwriting criteria, the abundance of capital in conjunction with record-low interest rates continues to fuel the investment market. With alternative investment yields at all time lows, real estate as an asset class will continue to attract strong allocations among domestic and foreign investors.
Boston, as a robust, 24-hour city with a diverse economy, significant barriers to entry, and an abundance of intellectual capital, will remain a target for this real estate investment.
