With job growth projected for 2004, the Greater Boston real estate market has begun to stabilize after a 7.6% drop from peak employment from February 2001 to the end of 2003. Overall market fundaments remain weak, however, as high availability continues to erode rents. In spite of these soft fundamentals, a large amount of private, REIT, and institutional capital aggressively continues to target the Boston real estate market. With investors in search of perceived safety and yield, premium Boston office product has attracted deep bidding pools. Meanwhile, suburban office product has had difficulty garnering interest with investors shying away from properties with higher perceived risk.
Highlights
Through the first half of 2004, four buildings traded hands in Boston for an average price of $521 per square foot. There were two office-building sales in Cambridge with an average price of $630 per square foot, while 13 office sales were transacted in the suburbs at an average $129 per square feet. Three suburban R&D sales averaged $61 per square foot, while eight industrial sales averaged higher at $62 per square foot. The Boston office investment market is heating up with a wide range of properties on the market for sale. If the current opportunities all successfully trade, sales volume could total $1.4 billion. With the continued vacancy in the office market and increased residential demand due to low interest rates, some of the properties are expected to be redevelopment plays to take advantage of the hot residential market.
Activity
With the purchase of One Lincoln Street, American Financial Realty made a big entrance into the Boston real estate market. At $675 per square foot, the sale broke records for a Boston office property. The 1.0 million square foot tower, with a top-notch credit tenant, State Street, and a 20-year lease term in place, attracted strong interest from investors. Lincoln Plaza at 70-80 Lincoln Street, totaling 213,000 square feet, recently sold for $27.5 million to Cresset Group and Third Sector New England. Cresset Group is expected to redevelop 70-80 Lincoln Street, and a portion of 89 South Street into 80 residential condos, while Third Sector will own and occupy a portion of 89 South Street. There was significant interest in the buildings, with most of the potential buyers favoring redevelopment with some form of residential component.
Outlook
With current market fundamentals expected to persist through 2004, the bifurcation between the premium Boston buildings and everything else will continue to be apparent through year-end. Acquisition interest is currently less focused on the residual, but rather the emphasis is on current yield, which continues to outperform alternative investments. Both Lincoln Plaza and 451 D Street in Boston were taken back by lenders in the first quarter, but it is not yet clear whether this will establish a trend. Foreclosure activity could increase if interest rates begin to rise rapidly. Interest rates will also influence the velocity and direction of the sales market. Volume in 2004 and market appetite should be similar to 2003, however while unlikely, a dramatic change in interest rates could shift the markets’ direction.
