Let’s call the frothy market for downtown Boston skyscrapers what it is: A bubble.
Yet the big question is not whether office tower prices are getting loopy again – they are. Rather, why prices are hitting such crazy levels so soon after the last crash?
The Great Recession was at its peak just six short years ago, with trophy towers and suburban complexes still getting foreclosed upon just a bare three or four years ago.
But here we are again, with a nice but hardly spectacular Back Bay office complex going for $1.3 billion – about what the Hancock tower fetched during the last bubble – and prices per square foot pushing the previously unheard of $800 to $1,000 a square foot.
We even have a plan by the REIT that owns the State Street tower to sell shares, with the tower priced at roughly $900 a square foot, or more than double the median for downtown Boston.
So it is fair to ask whether there we are seeing some perverse market incentives at play right now. A globe awash in easy money is certainly one factor right now. All that money has to go someplace, after all.
But the lack of any really dire consequences for reckless office market investors after the Great Recession is certainly lurking in the background as well.
Scott Van Voorhis
While millions of homeowners were kicked to the street as the real estate market and economy tanked, for too many developers, losing a prized office tower to the bank was just another day at the office.
Short Cycle
Compared to past downturns and recoveries, it has certainly not taken long for commercial real estate to show signs of overheating.
It was just five years ago that the Polaroid site, where a major retail and office complex is now taking shape along 128, was snapped up out of foreclosure for $40 million by developer Sam Park. The previous developer, Related Cos., had shelled out more than $100 million for the same land.
Boston Properties snapped up the giant and at that time distressed Bay Colony Corporate Center for $185 million in 2011 – again, less than half the price that was paid for it at the bubble’s height.
Compare that to the more than decade long slog after Boston’s office market cratered in the late ’80s, only hitting a peak again with the short-lived dot-com bubble.
Fueling The Bubble
So why is the Boston office market – and that of a number of the world’s top cities – already back in bubble territory? What gives?
Well, for starters, the Fed’s decision to keep interest rates at rock-bottom levels has arguably worked too well, flooding the U.S. and global economy with cheap money.
Home prices have come back as cheap mortgages have enabled buyers to pay more for modest – and not-so-modest – homes.
Investors are also using all that extra cash and credit out there to pump massive amounts of money into the stock market – another bubble in the making – and of course, commercial real estate.
Fair enough. But the striking lack of any truly catastrophic consequences for developers who bet big on the market and lost in the aftermath of the Great Recession has also set a slippery and dangerous precedent.
The Great Recession was brutal for homeowners who gambled on rising real estate values and overpaid. The Obama Administration’s various rescue programs were largely inept, leaving struggling homeowners with the choice of simply walking away or eventually getting evicted by whatever shadowy lender wound up with the loan.
But for many developers, struggling to stave off foreclosure or losing a trophy property to the bank might have been embarrassing, but it was hardly a show-stopper.
Related Cos. may have fumbled the Polaroid site, but it is alive and well, taking on new projects in Boston through a partnership with the Beale Cos. and building a major development in the Big Apple, as well.
Broadway Partners wound up with egg on its face after shelling out a then-record $1.3 billion for the Hancock tower, only to see it sold at foreclosure for half that money.
But Broadway has since reinvented itself as apartment complex investor, targeting second-tier, garden-style developments across the country.
Respected players like Beacon Capital and Tishman Speyer both battled to stave off foreclosure to various office towers and now appear no worse for the wear.
Still, maybe no one beats New York developer Harry Macklowe for chutzpah, or just pure gall. After handing back to the bank a $7 billion portfolio of towers – oops! – Macklowe is back in the thick of things, with plans to build the tallest condo tower – 1,400 feet – ever seen in New York.
Given this track record, what is there to deter the most aggressive players from bidding up the market and hoping their luck holds?
But such wild risk-taking, if enough things go bad at once, can come at the expense of a lot more than just a few elite developers.
Bubbles can be dangerous, as the global economy’s near-miss with another Great Depression just a few years back shows.
This is playing with fire, and someone is going to get burned. Let’s hope it’s just a few of these office tower cowboys and not the rest of us that wind up picking up the bill when the latest bubble bursts.
In the end, all bubbles burst, and so will the office bubble now filling up so rapidly.
