Developers poured $50 million into Boston’s 250 Boylston St., transforming it from R.M. Bradley & Co.’s main headquarters into high-end condominiums.
Demolishing a building isn’t the only option for commercial developers plagued by climbing vacancy rates and falling rents, Paul Ayoub told a group at a Real Estate Finance Association event in Boston last week.
“People who bought buildings and thought they’d make lots and lots of money, they’re frustrated,” said Ayoub, a partner in Nutter, McClennen & Fish’s Real Estate and Finance Department in Boston and the moderator of the REFA event. “There are other alternatives to demolition. Don’t get desperate.”
According to Ayoub, people aren’t panicking – at least, not yet.
“There’s a general sense that things aren’t getting worse but that it may be a while before it gets better,” he said. “The challenge is for those with significant issues like high vacancy; they’re in a tough position. They need to see if they can weather the storm or if they have to readjust their strategy.”
‘Gem in the Rough’
Industry professionals outlined a new, entrepreneurial approach: converting commercial buildings into residential space. With the right property and guidance, the transformation can mean the difference between vacant buildings and cash flow, according to the panelists.
Converting commercial property in some cases provides for highly desirable architectural details, the ability to develop grandfathered properties in areas with heavy restrictions, the ability to avoid some affordable housing requirements that can affect cost, and the benefits of tax credits and incentives.
There’s another driving factor for conversion: the inexpensive cost of capital.
“There’s an oversupply of equity,” said Peter Palandjian, chief executive officer and chairman of Intercontinental Real Estate Corp., which has offices in Brookline and Brighton. “There’s been a lot [of equity] on the sidelines for two to three years on [the] office [side]; it’s pent up and ready to go on residential.”
The market looks ripe with opportunity – while the Boston office market availability in the third quarter 2003 hit 17 percent, the Boston residential market rose to 4.8 percent. The average price of condominiums in the Greater Boston area increased almost 6 percent from the third quarter of 2002 to the third quarter of 2003, from $326,371 to $345,787, according to the Massachusetts Association of Realtors.
Charles Norton, president and owner of Franklin Realty Advisors, said that two office conversions in which his company is involved have yielded residential units that are selling well above the average selling price.
Developers poured $50 million into Boston’s 250 Boylston St., transforming it from R.M. Bradley & Co.’s main headquarters into high-end condos. Eight out of nine units were sold at about $1,200 per square foot. The penthouse unit sold for $1,500 per square foot.
Franklin Realty also converted floors two through seven of the Wyndham Hotel, located at 99/105 Broad St., into residential. The resulting units, designed more for the entry-level buyer, sold at $600 per square foot, or between $400,000 and $700,000.
Winthrop Square in Cambridge, a mixed-use develop Intercontinental Real Estate played a role in, sold its penthouse unit to a Massachusetts Institute of Technology graduate who paid $1,440 per square foot after selling his company in 1997.
While the residential market looks tempting, those in the business urge a cautious approach.
“It’s not the easiest thing in the world, it can be difficult,” said Richard Cohen, founder of Capital Properties, which owns 6,000 residential units and 2 million square feet of office space from Boston to Atlanta.
For example, depth and column grids can be obstacles. It happened to Capital in the mid-1980s with 360 Newbury St., now home to the Virgin Megastore. At that time, the narrow residential units that would have resulted on the top floor would have been unacceptable to buyers, so Capital pursued it as a straight office building, according to Cohen.
That has changed. Now, with a soft commercial market and the gaining popularity of loft housing, Capital is taking another look. The “edgy” neighborhood at Newbury Street and Massachusetts Avenue also makes it a very desirable option, Cohen said.
Capital is now carving the top floor into long, narrow apartments that open up onto a large living room, complete with 12- to 13-foot ceilings, stainless steel accents and exposed duct work that give it an industrial, contemporary feel. Cohen expects that the location and style of the apartments will make it popular with buyers.
On the other hand, a second Capital property also in the Back Bay neighborhood, 29 Commonwealth Ave., has remained a well-leased office building.
“It paid to keep it as office [space],” he said. “That shows that there’s no easy formula.”
Not every conversion goes as smoothly as 360 Newbury, 250 Boylston and the Wyndham Hotel property. One developer had big hopes for the former Italian Embassy in Adams Morgan, a hip, up-and-coming neighborhood in Washington, D.C. The property had large rooms that could be easily carved up for apartments and plans for an additional 40,000 square feet. The developer missed the budget by 25 percent and after two years of ownership, it still has not yet been converted.
“A lot of folks see a gem in the rough and think that they can turn it around,” said Wesley Boatwright, vice president of capital markets at the Washington, D.C., office of Spaulding & Slye Colliers. “But it’s true that you never know what you’ll find when you tear down a wall.”
Boatwright said the dangers also include schedule delays, historic preservation requirements, parking, liability for construction defects and the prohibition of pre-sales in some states.
Pros and cons aside, industry professionals wanted more details about the supply-side impact on the future of the condo market.
With many larger projects of 100-plus units coming on line, some panelists warned of market saturation.
“The issue is that the condo market is so hot that the prices people are paying for shell buildings is going up and up,” Boatwright said. “There are a lot of people out there paying at high prices. They may not be able to handle the debt service.”
Kristie DiSalvo may be reached at kdisalvo@thewarrengroup.com.
