Market heats up for office towers
Sales in Boston point to emergence from downturn
Boston’s office towers are again hot commodities after several years of slow sales, a sign the city’s economic recovery is gathering speed as businesses expand and investors swarm opportunities to snap up trophy properties.
Eleven buildings changed hands in the city last year, a nearly fourfold increase from 2010, according to the commercial real estate firm Jones Lang LaSalle. Among the towers sold were 40-story Exchange Place on State Street and 33 Arch St. - deals that totaled nearly $1 billion.
The increasing activity is one of the strongest indications yet that Boston’s business community is emerging from a downturn that resulted in hundreds of lost jobs, lower profits and confidence, and paralysis in both the residential and commercial real estate sectors.
Building owners are seeing their offices fill up, leading to higher rents, which makes their properties more attractive to potential buyers. Many buildings have been the objects of bidding wars in recent months, with pension funds, insurance companies, and overseas investors competing to own a piece of the skyline.
“Boston holds a very desirable spot in global capital markets,’’ said Michael Smith, a managing director at Jones Lang LaSalle. “Many investors believe the city has weathered the recession better than other markets.’’
The volume of sales is still far from 2007, when 34 buildings changed hands for total sales of $4.9 billion. But the improvement is unmistakable after a period between 2008 and 2010 in which only 14 office buildings were sold in Boston, the kind of cold streak that causes nightmares for commercial brokers.
Just this past week, CBRE | New England closed on the sale of a five-story office building that drew more than 50 bidders, including several large financial institutions that typically focus on high-rises. The building, at 179 Lincoln St., was sold to Invesco Real Estate for $75 million.
“179 Lincoln St. is a great example of how people are viewing Boston today as one of the most attractive markets in the US,’’ said Chris Angelone, an executive vice president at CBRE | New England. “Five years ago, it might not have been an institutional buyer, but today it is.’’
Real estate specialists said underlying causes are job growth in key sectors such as health care and technology, as well as higher office rents that promise better profits with less risk than stocks and other investments. Average asking rents at top-rated buildings in Boston rose by more than 4 percent last year, to about $49 per square foot.
Companies have continued to expand their operations in the city’s office buildings, with more employers hiring and taking back space that they shed during the recession. The jobless rate in the Boston metropolitan area dropped about one percentage point, to 6 percent, in 2011, below the national rate of 8.5 percent.
While some Boston towers still have empty spaces on lower floors, many are boasting stronger tenant rosters than a few years ago.
In the Back Bay, vacancy in top-rated buildings is now 5.7 percent, according to the real estate firm Richards Barry Joyce & Partners. Rents in the most desirable buildings in that part of the city are starting to reach $70 per square foot.
“People are feeling more confident about the investment basis and the potential upside,’’ said Frank Petz, head of sales for Richards Barry Joyce. “There’s definitely a migration toward real estate as an investment class, as opposed to equities, venture capital, and certainly the bond market.’’
Building sales in 2011 were constrained by the limited number of available properties.
The deals for Exchange Place (purchased by the Swiss financial giant UBS for $610 million) and 33 Arch St. (purchased by TIAA-CREF, the teachers’ pension fund, for $365 million), accounted for the bulk of last year’s $1.3 billion total. One Exeter Plaza, a second-tier tower in the Back Bay, was snapped up by AEW Capital Management for $112 million.
Brokers expect to see more buildings for sale in 2012. Many owners will be moved to sell by debt payments coming due or lured by stronger market conditions, and investors have stockpiled capital to make purchases.
Boston is also seen as particularly attractive to buyers because it does not suffer from oversupply and few new buildings are under construction, which means rising demand for office space will continue to push rents higher.
In most cases, that does not guarantee double-digit investment returns, but it does mean that buyers can be confident they will see positive returns. Most specialists put Boston among the top investment markets, along with Washington, D.C., and New York
“This is going to be a very busy year,’’ said Lisa Campoli, a managing partner at the commercial real estate firm Colliers International. “For institutional investors, Boston is seen as a top-three market, based on economic growth, potential for increased value over time, and its knowledge-based economy.’’
Casey Ross can be reached at email@example.com.