Condominium conversion is a trend that has become increasingly popular across the country, and with good reason. For homebuyers, condominiums in general tend to be a more affordable alternative to single-family homes. And for developers, conversion projects are more cost-effective than new condominium development. These cost benefits, coupled with low interest rates, make conversion projects very attractive to residential buyers.
According to the National Association of Realtors (NAR), condo prices across the nation have been rising at more than double the rate of prices for single-family homes. In the third quarter of 2004, condominium sales were up 5.2 percent over those in third quarter 2003. NAR also reports that 2004 was the ninth consecutive year for record condo sales.
The affinity for this property type is playing out in central Boston, where condominium sales have been much stronger than in the outlying suburbs. Baby Boomers who are entering an “empty nest” phase and young singles both are increasingly drawn to urban condos, a trend which gives such projects further appeal.
Given the hot condominium market, GMAC Commercial Mortgage (GMACCM) recently agreed to provide $30.4 million in construction financing for a condominium conversion project at the extreme west end of Newbury Street, adjacent to the artsy Newbury Street boutiques and the popular Back Bay area. This submarket recorded the highest average asking rent in the Boston metropolitan area during the third quarter. According to data from Reis, average rents for the Central City/Back Bay/Beacon Hill submarket came in at about $2,189 per unit for this time period.
The property in question, located at 360 Newbury St., began as a circa-1918 warehouse. Renovated in 1989 using a design by famed architect Frank Gehry, the 127,903-square-foot, eight-story building’s first three floors house a Virgin Megastore, which is under a long-term lease. The five stories above the Virgin Megastore will be converted in early 2005 from office space to 54 luxury residential condominiums.
The project had strong sponsorship from Morgan Stanley and from the firm Boston Residential, which is well versed in residential development, and Morgan Stanley.
GMACCM has completed numerous transactions for Morgan Stanley Real Estate Funds in the past. The most notable transaction may be the $250-million construction loan for One Lincoln St. in Boston, which has been leased in its entirety to State Street Bank. In total, GMACCM has loaned approximately $500 million to Morgan Stanley during the past six to seven years.
The mixed-use aspect of 360 Newbury made this opportunity even more compelling, as there is a clear movement in the industry toward embracing mixed-use properties. With urban space at a premium, these properties offer cities an opportunity to minimize sprawl while providing maximized land use for developers. As more people search for residential areas that offer easy access to office and retail, as well as a sense of community, mixed-use development is becoming increasingly popular. Given these factors and the strong condo market in Boston, a mixed-use property with a condo component in a prime location like Newbury Street has a high chance of success.
Adding Boston Residential and Morgan Stanley to the mix strengthened our interest in the opportunity. Boston Residential brought several key abilities to this deal. Not only did they have intimate knowledge of the building – President Curtis Kemeny managed the original renovation project in the 1980s – but they also had previous experience investing in this particular neighborhood.
Morgan Stanley’s reputation, integrity and ability, combined with Boston Residential’s experience and knowledge, provided the kind of solid sponsorship we look for in transactions like these.
Boston is also a market upon which GMACCM is focusing its attention in 2005. In October 2004, Senior Vice President Scott Dow opened our Boston location to better serve a growing client base and help increase market share in the Northeast. In December, Claudia Piper joined the office as a senior vice president, and another loan officer was slated to join the office in January 2005. The condominium conversion funding opportunity at 360 Newbury fit into our strategy for this section of the country. With all these aspects in our favor, we reviewed the deal and opted to provide the construction financing for the conversion project.
In this particular transaction, our client was looking for competitive pricing, and we agreed to provide financing on a non-recourse basis. We decided on this course of action – despite the fact that there were no existing presales – because of the equity provided by the sponsors and our strong institutional relationship with Morgan Stanley. The GMACCM financing included approximately $12 million for the acquisition of the property and $18 million for the conversion project. The basic plan calls for construction to begin in early 2005 and for the conversion to be completed and sold out within 24 months.
Given the current overabundance of office space in Boston, converting the upper floors to condos will make good use of the space and fill a growing demand for urban residential properties.
“Despite the office market being soft, the Boston condo market has been quite healthy with projects selling out quickly and at record prices,” said Dow. “There continues to be strong demand for these types of projects, of which we have seen quite a few requests. If interest rates rise sharply, that could end the new condo boom in this market, but for the time being it seems to be going along well.”
Central Boston also has a number of other characteristics that make it a desirable market for multifamily development. The large student population and the high cost of single-family homes have helped maintain the demand for multifamily. Furthermore, unemployment is down and, according to research by Realpoint, the research and surveillance unit of GMAC Institutional Advisors, the Boston-area employment rate should increase by approximately 2 percent over the next year.
With the strong condominium market and many other positive trends in the Boston area, we anticipate that the popularity of mixed-use developments such as 360 Newbury St. will continue to grow and that these projects will meet with success.