General Electric Asset Management’s recent decision to put Boston’s Independence Wharf on the market can only end in one of two ways, industry insiders predict: either the owner takes a serious haircut, or the building stays put.
GE Asset Management, the management firm that handles General Electric’s pension fund, is believed to be seeking a price north of $100 million, or $300-$350 per square foot, for the 14-story, 337,000-square-foot Class A office building at 470 Atlantic Ave. That price is characterized as highly aggressive by brokers and real estate investment professionals.
When GE purchased the former warehouse building from Modern Continental in 2002, it paid $82.2 million, or $244 per square foot. GE has slowly shored up Independence Wharf’s tenancy, bringing it to an occupancy rate of 89 percent. The neighborhood surrounding the building has improved greatly with the completion of the Rose Kennedy Greenway and the InterContinental Hotel.
Even so, the building Independence Wharf is most often compared to, 745 Atlantic Ave., only attracted bids in the $180-$190 per square foot range when it hit the market recently. The building’s owner was seeking a price in the neighborhood of $70 million, or more than $400 per square foot.
10 Percent Less
Lease comparables also suggest Independence Wharf’s income streams could be in for a tumble. Published asking rates are seeking between $55-$58 per square foot for seventh-floor space that has low ceilings and tight column spacing by Class A standards. By comparison, the law firm Fish & Richardson signed a lease for $55 per square foot for space atop Joe Fallon’s new Fan Pier building.
A realistically underwritten deal for Independence Wharf would likely put rents in the low $40s. Downtown Class A asking rents were at $54 in the first quarter of 2009, according to data from CB Richard Ellis. According to tenant broker CresaPartners, many deals are closing at least 10 percent under asking prices.
All of that means that commercial values are dropping.
“As powerfully and explosively as values escalated, with strong fundamentals, cheap and plentiful capital, and rent growth, the exact opposite is happening now,” said Mike Smith, a managing director in Jones Lang LaSalle’s capital markets group. He added that, generally, sellers are only moving assets when “there tends to not be a choice.”
Smith also said it’s a great time to buy, given historical values.
“A lot of things that have come on the market haven’t traded,” John Fowler, executive managing director of the finance firm Holliday Fenoglio Fowler, LP, told Banker & Tradesman. “There’s a gap between the bid and the ask.”
Sit & Spin
Boston office buildings that have tested that gap by entering the sales market recently haven’t fared well.
745 Atlantic Ave. and 10 Post Office Square both hit the market and sat; the owner of 10 Post Office Square, Broadway Partners, eventually refinanced the building by investing an additional $10 million in equity.
Another Broadway property, the John Hancock Tower, didn’t move on the open market and eventually fell to a mezzanine foreclosure. Corus Bank took back 441 Stuart St., a mostly gutted former Class B building, after the Back Bay property failed to generate a satisfactory bid at a May foreclosure auction. Corus, the originator of a $42 million construction loan on the property, claimed the building at auction for $17 million, and is now attempting to sell it in the $20 million range.
Beacon Capital Partners wasn’t able to move One Beacon St., though the firm did succeed in selling a 50 percent stake to German insurer Allianz Group at $499 per square foot.
One Winthrop Square is reportedly under agreement to German investors GLL Real Estate Partners for $21.5 million, or $189 per square foot. That deal has not yet closed. In 1999, the building traded for $24.8 million.
The biggest outright sale to close in the Boston office market came when National Development and Charles River Realty Investors scooped up 10 Brookline Place in Brookline for $62 million, or $399 per square foot. That was in January.
Not So Kind 2009
“Sales will remain paralyzed this year, and into next,” Fowler said at a recent NAIOP forum. “There’s plenty of capital on the sidelines, but it’s looking at incredible returns to jump.”
Fowler attributed the turbid sales pace to owners’ unwillingness to recognize often-steep declines in values. He said many owners that would have sold in 2008 didn’t, because they hoped 2009 would treat them more kindly. It hasn’t, he said, so, “people are going to have to recognize impairments. They’re going to have to sell assets. We’re going to see a lot of assets for sale starting in early 2010.”
Mounting vacancies and sliding rents are eroding buildings’ values, making deals difficult to underwrite. Capital markets have only compounded those difficulties. Loans in excess of $40 million or $50 million aren’t just rare, they’re also expensive, meaning investors have to drive down purchase prices to make their margins work. The cost of capital is driving up cap rates on assets. Nobody will pay 8.5 percent interest to buy an office building that’s only generating returns of 7 percent.
Some institutional investors have become motivated sellers because stock market losses have left them over-allocated in real estate, and they have to balance their portfolios. Others are either facing redemption issues, or they expect to face redemptions, and they’re selling because their real estate is comparatively more liquid than their investments in private equity or venture capital.
A spokesman for GE Asset Management said the firm does not comment on its assets.
