When Boston's Hancock Center fetched $1.3 billion in December, the trophy sale of New England's tallest office tower brought the year to a fitting close. Office investment sales totaled a record $6.5 billion in 2006, easily eclipsing the $3.5 billion in sales the prior year. That's a stark contrast from a few years ago when downtown was reeling from a vacancy rate of nearly 20% and corporate consolidation was rife.
The metro office market was particularly active in the fourth quarter of 2006. There were 41 office sales transactions $5 million or higher, a record quarterly volume, reports Real Capital Analytics. Most of the large office sales over the last year involved Class-A buildings in the central business district (CBD).
“Investors really feel that the Boston market is rebounding. We're also viewed as the poor man's New York because our buildings sell for less money,” says Gary Lemire, senior vice president in the New England office of CB Richard Ellis.
Thanks to 935,000 sq. ft. of absorption in 2006, the vacancy rate for Class-A space dropped from 12.3% to 10.5%. One reason is that job growth in Boston's finance and professional services industries rose by 2% and 2.7% respectively, about double the growth rate in 2005.
The drop in vacancy has enabled landlords to raise Class-A asking rents from $40 to $46 per sq. ft. Similar growth is possible this year as smaller financial services and law firms increasingly flock to CBD space, says Lemire of CBRE. A limited supply of speculative office development — less than 250,000 sq. ft. of new office space is expected to hit the market during each quarter this year — should also insulate the market.
“Boston has had plenty of large companies consolidate in the past few years, but we're seeing strong leasing demand from many smaller businesses now,” adds Lemire.
The sale of the Hancock Center by Beacon Capital Partners was in line with the closely held real estate firm's strategy. Beacon buys properties through its own opportunity funds and holds assets for about three years. Beacon bought the Hancock property for $910 million in 2003. By selling it for $1.3 billion to Manhattan-based Broadway Real Estate Partners, Beacon realized a 43% profit.
“Beacon is structured as an opportunity fund, so it's not set up to hold properties once the big pop is gone,” says Hans Nordby, a research analyst at Boston-based Property & Portfolio Research (PPR). “That's the case, even if the assets deliver perfectly respectable returns like the Hancock building.”
Charles Millard, managing director of Broadway Real Estate Partners, sees potential upside with the 1.58 million sq. ft. Hancock Center, which currently has about 275,000 sq. ft. of sublease space available, according to CoStar Group.
The private equity firm has spent $3.3 billion on office assets over the past two years. “It's a very competitive market to buy properties, so you have to know the right time to acquire a property,” says Millard.
Private investors acquired 47% of all office properties nationally during the past three years, reports Real Capital Analytics. “Private buyers just can't seem to get enough commercial real estate,” adds Nordby of PPR. “So, you'll continue to see fierce bidding on most assets, not just in places like Boston either.”