Like in that old Clash song, owners of downtown towers and suburban office parks face a tough choice in an increasingly hot market: Should I buy now or should I sell?
And right now, two of the largest and savviest players in the Greater Boston office market are opting to sell, with the threat of rising interest rates overshadowing the now-booming market.
Top Boston Property executives recently told analysts they are putting on the block various buildings in their nationwide portfolio, with plans to unload $1 billion in towers and buildings in 2014.
But with a few “targeted exceptions,” BXP has no plans to take those gains and join the feeding frenzy of buyers competing for the limited number of high-rises on the market.
BXP’s move comes as another national player in the office market, investment giant Blackstone, pushes ahead with its own plans to sell a sizeable chunk of the downtown Boston office market.
“We’re probably a little bit more inclined to be sellers than we are buyers, largely due to where interest rates are,” Boston Properties President Doug Linde recently told Wall Street analysts.
To Buy, There Must Be Buildings For Sale
Boston Properties and other big players in the office markets are clearly facing a dilemma not all that dissimilar to the one many homeowners now confront in Boston and other hot real estate markets across the country.
It’s relatively easy to sell right now. The problem comes trying to find something to buy, with limited choices and rising prices meaning you might not be able to trade up.
In the office market, there is no shortage of buyers right now, with the market awash with a bewildering array of investors armed with lots of cash. But with the number of buildings on the market still limited, especially when it comes to big-name high-rises, there are many more bidders than towers and office parks to go around.
“It’s becoming more competitive and more difficult for us to underwrite acquisitions today,” Linde told analysts, according to a transcript of the call posted on Seeking Alpha.
“The fact that lots of folks are looking at the opportunities to invest capital in real estate today because they can finance very cheaply – that plus the lack of yield anywhere in the world economy – is driving dollars being allocated to our kind of real estate and the kind of things that we would want to buy,” he said.
Fortunately for its own bottom line, Boston Properties has a built-in alternative to joining the sell-then-buy treadmill.
The developer plans to use some of that cash to pay for a number of big new projects it has on the drawing boards. And BXP has big plans for its hometown, working with City Hall on a sky-rise complex at the Garden, a new office and retail building in front of the Prudential retail complex, and new buildings in Cambridge and Waltham.
Blackstone’s intentions are somewhat harder to divine, given that, unlike the publicly traded Boston Properties, it is a privately held operation and generally tight-lipped. But it’s interesting to note that Blackstone, which has been a major player snapping up and renting out or reselling distressed homes across the country, is winding down that buying campaign as well. Blackstone recently unloaded 28 State Street for $345 million and is seeking buyers for the bulk of its remaining Boston-area holdings, according to the first-quarter Boston market report by Colliers International.
On the block is a $2.5 billion portfolio, including 225 Franklin, 100 High Street, Rowes Wharf, 125 Summer Street and One Memorial Drive in Cambridge, Colliers reports.
The Darling Of Commercial Real Estate
Of course, the strategy of both Boston Properties and Blackstone is to seek out those value-added opportunities when others are too scared to jump into the market, and then cash in later when things heat up. This is their basic investment strategy – it would be crudely simplistic to say both are bailing out of the market ahead of an expected rise in rates.
That said, the inevitable end to the era of rock bottom interest rates can’t be dismissed either.
The historically bizarre, crazy low interest rates we have seen over the past couple of years are a direct result of the Fed’s multitrillion-dollar bond buying campaign. Those freakishly low rates, in the 3s and 4s, have helped spark the buying frenzy that has made bidding wars the norm in the residential market and which is having a similar impact on the office sector. And with the Federal Reserve’s decision to slowly but surely deescalate its campaign to underwrite low rates, the writing is now on the wall.
“Forecasting interest rates is a perilous duty, needless to say,” said Owen Thomas, BXP’s chief executive, in that chat with analysts. “Our overall view at Boston Properties is that we will, someday, face rising interest rates. It’s just it seems like that’s been put on hold, given what’s occurred this quarter and given the sluggish economic growth that continues.”
So where does that leave all those investment funds and groups chasing after every available high-rise and office park?
They certainly aren’t fools. Rather, they are betting the best is yet to come, with a rebounding economy sparking job growth and demand for office space.
Investors looking to buy into the Boston market are betting on a future of rising rents and ever more lucrative returns – they want to get in while the getting is good. They see booming life science and high-tech companies and a thriving base of hospitals, research institutions and universities.
“Boston is the darling of the investment community right now,” said Frank Petz, New England capital markets chief for commercial real estate firm JLL. “It has all the right fundamentals that investors are looking for.”
Buyers are making one bet, while the sellers are making another. Still, the $1.3 billion New York investor Broadway Partners deal for the Hancock Tower in 2006, at the last office market peak, should serve as a cautionary tale for overly optimistic/aggressive buyers.
Alan Leventhal’s Beacon Capital, another savvy investor in the BXP mold, was the seller who pocketed this windfall, having bought the iconic skyscraper for roughly $626 million in 2003.
Two years later, the Great Recession hit and Broadway had to turn the tower keys over to the bank.
The tower then sold to a local developer, who turned around and resold it again to Boston Properties for $930 million. BXP didn’t sell at the absolute rock bottom, but it got a very nice discount indeed.
The big guys aren’t always right, but ignore their moves at your peril.
Email: sbvanvoorhis@hotmail.com
