Fan Pier, a 21-acre site overlooking Boston Harbor and the city’s financial district, is being sold to a real estate consortium for $125 million. That works out to almost $6 million an acre, but it’s not just any parcel of dirt. The seller, Chicago-based Hyatt Development Corp., spent six years guiding the site through the city’s arduous planning and permit process. Hyatt initially signed a deal with a group of Florida developers, but it fell apart in September when the would-be owners were late with their first down payment. Local firms New England Development Corp. and Boston Properties along with New Yorkbased Related Cos. stepped into the breach; the consortium now hopes to close the deal in the next few months. Then the team will break ground on an estimated $1.2 billion project, developing 3 million square feet of residential, retail, hotel and office space on the resurgent South Boston waterfront.
“We see this as one of the great development opportunities in the country, and could not be more excited that it is in our own backyard,” New England Development chairman Stephen Karp said in announcing the deal. New England Development also has proposed a 1 million-square-foot mixed-use project at Pier 4, to the east of Fan Pier.
The mixed-use development taking shape on the waterfront provides welcome relief to a city real estate market still struggling with high office vacancy rates in its central business
district -- downtown and Back Bay. In the second quarter Boston’s office vacancy rate stood at 14.1 percent. That’s down from 14.9 percent in the first quarter, but it’s still high enough to depress development. As a result, Boston’s waterfront developers, like their counterparts in other cities with an excess of office space, are increasingly turning to mixed-use projects. Combining retail, hotel, residential and office space has proved a winning strategy everywhere from Dallas to Atlanta.
“The mixed-use concept is really coming of age,” says Paul Grant, executive vice president in the Boston office of Urban Retail Properties Co., a Chicago-based property management and development firm whose past projects include Water Tower Place in Chicago and Copley Place in Boston. “Live, work and play has tremendous appeal.”
The final development frontier for a land-strapped city, the South Boston waterfront, which encompasses the Fort Point Channel area and the Seaport District, is leading the way as Boston recovers from the trough of the last real estate cycle. The area features the new Boston Convention & Exhibition Center, an $800 million project that opened in June, and an older landmark, the $220 million John Joseph Moakley U.S. Courthouse, adjacent to the Fan Pier site, which opened in 1998 and helped spark the waterfront’s redevelopment.
Like much of the city, Boston’s harborside is benefiting from the recent completion of the Big Dig, the nearly 14-year-long construction project that moved the I-93 central artery underground, replacing an elevated roadway that separated the waterfront from the financial district. (In mid-September the tunnel sprung its first leak, snarling traffic for several days.) For the first time in 47 years, the waterfront is once again connected to the rest of the city. Under construction on the revitalized waterfront: a $200 million, 790-room Westin hotel and a $330 million, 20-story building, owned by New Yorkbased Intell Management & Investment Co., that will house a 424-room InterContinental hotel and 130 luxury condominiums.
“The real estate community recognizes that this area has arrived,” says Alan Leventhal, CEO of Boston-based real estate investor Beacon Capital Partners, which owns waterfront property and is currently developing the Channel Center, a few blocks from Fort Point Channel. That project will encompass 1.6 million square feet of space in both new and redeveloped buildings.
Beacon Capital’s real estate portfolio of 13 million square feet consists mostly of office blocs in major U.S. cities, but its Channel Center, like most Boston waterfront projects, will include residential and retail space along with office buildings. Beacon’s nearby Fort Point Place project, completed in 2001, also has a mix of condominium and office buildings.
“The South Boston waterfront district is very much the future of Boston,” says Leventhal. “This city is going through a huge transition.” The Big Dig infused $15 billion into the Boston area, improving highways and public transportation. “Combine that with the new convention center and you see a tremendous boost to the Boston economy,” Leventhal says.
Commercial property fundamentals remain under pressure in Boston and other U.S. cities. According to real estate services firm Cushman & Wakefield, office vacancies nationwide are running at 15 percent for central business districts, down from a 19.9 percent high in the first quarter of 2003, but a far cry from the 6.8 percent low in the third quarter of 2000. As a result, investors and developers are opting for more mixed-use projects. Ross
Perot Jr.'s Fort Worthbased Hillwood Development Co. is transforming 72 acres of railroad tracks and power plants in Dallas into Victory, a development that will combine hotel, residential and office space. In Atlanta, on a 138-acre site that once held a steel mill, Jacoby Development is spearheading the development of 12 million square feet of mixed-use space.
The exciting changes under way near Boston Harbor don’t extend to the city’s central business district, which continues to struggle. It includes 61 million square feet of office space, the vast majority in the financial district and Back Bay. Although rents for premium high-rise space have held firm at about $42 per square foot, according to real estate services firm Spaulding & Slye Colliers, they continue to decline for low-rise class-A and class-B spaces, which have dropped from a fourth quarter 2000 high of $72.04 and $49.65 per square foot, respectively, to $38.53 and $28.15 per square foot.
“Boston’s downtown market has unequivocally bottomed out, and the waterfront offers all this undeveloped land,” says Rob Griffin, president of the New England region for Cushman & Wakefield. “But we’re not out of the woods yet. This is a fragile and difficult recovery.”
The South Boston waterfront emerged slowly. As in many contemporary urban narratives, the funky artists’ lofts came first. A few of the 19th-century industrial warehouses on the South Boston waterfront, most of them built by the 168-year-old Boston Wharf Co., were converted into residential lofts in the 1970s. But it was not until the 1980s that the first major wave of development hit. Local developers Drew Co. and Pembroke
Real Estate, a subsidiary of Fidelity Investments, built the World Trade Center complex, whose first building opened on the waterfront in 1984. It now consists of three office buildings totaling about 1.9 million square feet and a 426-room hotel; another undeveloped site can support 650,000 square feet of office space.
Since the original construction of the World Trade Center complex, the waterfront streets and alleyways have grown more crowded. According to a recent study commissioned by Save the Harbor/Save the Bay, a local advocacy group, the residential population of the area grew 12 percent between 1990 and 2000, from 73,481 to 82,500, compared with the city’s overall growth rate of 3 percent during that period. Employment in the waterfront area grew by 29 percent, to 236,320, between 1994 and 2001, as compared with 11 percent for the city as a whole.
“At first nobody understood the direct economic value of the harbor and the waterfront, and it’s quite significant,” says Save the Harbor/Save the Bay’s Lauren Budding. “These developments will bring people to the harbor. And that’s good for the city.”
The waterfront is far more accessible than it was just a few years ago. In addition to the benefits of the completed Big Dig, the Massachusetts Bay Transportation Authority’s subway and train system links the waterfront to South Station, one of Boston’s two major rail hubs, and to Logan International Airport.
Along with Beacon Capital Partners, Boston Wharf Co., Drew Co., New England Development and Pembroke, other major players on the South Boston waterfront include Fallon Co. and Frank McCourt, a local developer and an owner of the Los Angeles Dodgers baseball team, who is said to be looking for a buyer for his land holdings next to Fan Pier.
The Fan Pier parcel isn’t the only piece of waterfront real estate to change hands this year. San Franciscobased AMB Property Corp., an industrial real estate investment trust, bought the 376,300-square-foot Boston Marine Industrial Park building for $69.7 million in February; and Boston Wharf Co. sold a portfolio of 12 buildings totaling 380,000 square feet to an affiliate of Indianapolis-based HDG Mansur Capital Group for $92 million in July.
As of August, about $1.1 billion worth of real estate pro-jects were under construction in Boston’s waterfront district. Additionally, projects valued at $2.6 billion have been
approved and given permits and $6 billion worth are under city review. Virtually all of them are mixed-use developments.
Equity Office Properties Trust, a Chicago-based REIT, has proposed a $300 million redevelopment of its Russia Wharf property, a mix of brick, granite and terra-cotta buildings
dating to 1897, which is located on Fort Point Channel. One renovated building will house lofts, another two could hold a hotel and retail and entertainment space. Drew Co. and
Urban Retail Properties propose to build Waterside Place, $400 million worth of residential, retail and hotel space on an
11.3-acre site across the street from the convention center.
“The area is different from downtown, and it’s unlike the Back Bay,” says John Drew, CEO of his namesake company. “You can’t put a price tag on its being adjacent to the harbor.”
Indeed, the view is entirely changed just a couple of miles away in the financial district, where One International Place, a more than 1 million-square-foot office building, is 13.3 percent vacant, and 33 Arch Street, a 600,000-square-foot building completed at the end of May, remains 45 percent vacant. What’s more, two big mergers, those of Manulife Financial Corp. with John Hancock Financial Services and Bank of America Corp. with FleetBoston Financial Corp., will bring even more vacant office space to the central business district, perhaps as much as 1.3 million square feet, as the combining entities consolidate operations.
Still, despite the vacancy rate and the weak rental market, sales volume has been strong. In the six months through the middle of September, 21 office buildings in Boston’s central business district changed hands for a total of about $1.8 billion, according to Real Capital Analytics, a New Yorkbased real estate research firm. All told, the greater Boston area, including the suburbs, saw 47 properties sell for a total of $2.55 billion during the same six-month period. In this respect, Boston can be seen as a proxy for many U.S. real estate markets, which are enjoying the effects of still-low interest rates and ample equity capital.
In Boston, as in many other markets, investors are paying top prices for first-tier, fully leased buildings and are resisting offers for lesser buildings. Case in point: In February, Gale Co., a Florham Park, New Jerseybased developer, sold One Lincoln Street, a 1 million-plus-square-foot office tower located where Boston’s Chinatown and financial district meet. The price was a whopping $705.4 million, or $672 per square foot. That compares with an average selling price in Boston’s central business district of $345 per square foot. Jenkintown, Pennsylvania-based REIT American Financial Realty Trust, the buyer of One Lincoln, invests exclusively in properties leased to financial institutions, and One Lincoln is fully occupied by State Street Corp. “The building is the newest in the city, it has a parking garage and access to rail, and State Street occupies 100 percent on a 20-year lease,” says American Financial Realty CEO Nicholas Schorsch. “It was absolutely worth the price.”
Gale and its investment partners, Morgan Stanley Real Estate Funds, the State Teachers Retirement System of Ohio and local community organization Columbia Plaza Associates, began building One Lincoln as a purely speculative project in April 2000. By May 2001, well before the building was completed, State Street signed on for all the space.
The owners had not planned to sell until the summer of 2005, but toward the end of 2003 they started hearing from would-be buyers. “Brokers were inundating us with offers,” says John Hynes III, Gale’s managing partner in Boston. In fact, at least one of the final contenders, which included Wells Real Estate Investment Trust, Prudential Real Estate Investors, DB Real Estate subsidiary RREEF and German investor Jamestown, offered a higher price than American Financial. Gale ultimately sold to American Financial because it made an all-cash offer that included no due-diligence requirement.
Fidelity Investments scored a coup with its June sale of two
financial district buildings, 245 Summer Street and 7 Water Street, to Benderson Development Co. of University Park, Florida; Fidelity master-leased back all the space and plans to continue to occupy the vast majority of it. Benderson is said to have paid about $305 million for the properties, totaling 911,000 square feet.
Do such sales suggest that values are plateauing for class-A, fully leased office buildings? The New Boston Fund, a value investor in New England real estate, suspects so. In late August it was under contract to sell 116 Huntington Avenue in Boston’s desirable Back Bay area for $77.3 million, or $291 per square foot, to an unidentified institutional buyer. New Boston had purchased the property in January 2003 for $68 million. But after improvements to its basement-level parking and an extension of the main tenant’s lease, the building experienced a “pop in value,” says the fund’s chief equity officer David Kieran. He decided it was time to cash out.
“You’ve seen a lot of activity in the market, but we’re very cautious about this recovery,” says Kieran. “I think it’s going to be slow and steady. It’s not going to be like the mid-'90s, when all of a sudden vacancy rates dropped, and people couldn’t build things fast enough.”
