Digital Federal Credit Union purchased the former Kronos headquarters in Chelmsford last month for $12.4 million. Brokers and economic development officials are promoting other office parks on the Route 129 corridor as redevelopment opportunities for housing, retail and hotels
Chelmsford isn’t the only Boston suburb struggling to fill vacancies in aging office buildings, but this Merrimack Valley community of 34,000 has been more responsive than most in positioning commercial properties for quick and flexible redevelopment.
Last year the town rezoned 623 acres to allow developers to build hotels, retail and multifamily housing in place of the single-use office parks that line its main commercial district on Route 129. This week, brokers will get a better sense of how that strategy affects investor interest, as properties that formerly housed tech company Kronos Inc. and defense contractor Mercury Systems hit the auction block.
The 21-acre former Mercury Systems property on Riverneck Road contains two office buildings totaling over 185,000 square feet. The property has visibility from I-495 and approximately five acres that could be suitable for new development.
“We’ve received a very good amount of activity from a wide range of developers and investors,” said Anthony Hayes, a vice president for Colliers International Boston which is working with a special servicer on the online auction. “It’s not just office. Almost all of the food groups are looking at it.”
And after moving earlier this year to Lowell’s CrossPoint towers, cloud computing firm Kronos Inc. left behind more than 300,000 square feet of vacancies on Chelmsford’s Omni Way. The 19-acre campus at 2, 4 and 6 Omni Way, currently 50 percent occupied by disposable dinnerware manufacturer WNA, is headed to an auction this week. The loan with special servicer CW Capital Asset Management has a current balance of $20.4 million, according to a report by debt researchers Trepp Inc.
In past rising real estate cycles, Chelmsford’s 6-million-square-foot office market has benefited from spillover demand from the 128 belt, said Greg Klemmer, an executive vice president who leads Colliers’ North suburban leasing team. But that hasn’t been the case in this cycle. Office users with big requirements have gravitated toward amenity-rich markets such as Burlington and Waltham that have retail, restaurants and fitness clubs near or within office parks in recent years, Klemmer said.
One prominent exception is Marlborough-based Digital Federal Credit Union, which snapped up Kronos’ 128,000-square-foot former headquarters at 297 Billerica Road on Sept. 26 for $12.4 million, or less than $97 per square foot. The building will be renovated for occupancy next year, providing additional administrative space to join DCU’s existing two buildings in Marlborough, a call center in Lowell and fintech division in Boston.
While there’s some demand for flex manufacturing space in the suburban market, the conventional 1980s-era office buildings in Chelmsford don’t have the ceiling heights needed for such uses, Klemmer said. Many of the other office buildings will be converted into mixed-use complexes, he predicted.
“You’re looking at buildings that would be knocked down, and Omni Way is a perfect opportunity for that,” he said. “Somebody could buy it and try to rent them as offices, but they’d be competing with a lot of other buildings. To me, the highest and best use of the sites is redevelopment.”
Redevelopment of the Route 129 corridor also is the goal of Evan Belansky, Chelmsford’s director of community development, who was active in a multi-year study that culminated with voters approving the mixed-use overlay district. Chelmsford’s approach follows the lead of towns like Waltham and Burlington, which have revitalized commercial properties with recent mixed-use projects such as 1265 Main St. and 3rd Ave.
“We believe that because the overlay is in place, it has served some role in these two auctions happening as quickly as they have,” Belansky said. “With the challenges this submarket has faced over the last three to five years, the overlay is expediting a long-term solution.”
The town is also seeking legislative approval for 10 additional liquor licenses to encourage retail growth.
With its potential for additional development, the former Mercury Systems campus could be suitable for a large corporate headquarters, Belansky said.
The Omni Way property, close to a Route 3 off-ramp, is ideal for a hotel or retail development, he said. The online auction begins Oct. 17 with a minimum bid of $5 million.
Vacancies in the Route 495 North submarket have actually decreased from 24.6 percent to 21.3 percent over the last 12 months, with 440,000 square feet of positive absorption, according to Transwestern Consulting Group’s third quarter OfficeSTATus report. But that mainly reflects Kronos’ 500,000-square-foot lease in Lowell, while its leases at Omni Way haven’t expired yet.
“Chelmsford is a market that for good reasons has had quite a lot of cachet, whereas some places along Route 495, you’ve had long periods of stagnation without a history of recovery,” said Brendan Carroll, director of intelligence for Boston-based Perry Brokerage. “When you see assets that present a really good deal, it’s something you want to look at if you’re tired of valuations that strain your investment models.”
Yet despite their lower rents, suburban office properties face the same headwinds as their downtown counterparts: companies shrinking space requirements per employee.
“We continue to see a fairly resounding trend toward lower space utilization,” Carroll said. “Companies are generally improving the quality of the spaces they’re occupying, while taking less of it.”
