Pappas Industrial Properties’ latest scheme for the Court Square Press Building in South Boston includes development of 127 market-rate condominiums.
The Court Square Press Building in South Boston is going home.
Responding to the rapidly changing commercial real estate industry, the owners of the former printing plant are switching gears mid-stream, quashing plans to convert the factory into modern office space in favor of developing market-rate condominiums. Pappas Industrial Properties last week gained Boston Redevelopment Authority backing to change the previously approved scheme, one that would have yielded 211,000 square feet of office space from the abandoned structure.
Calls to Pappas officials were not returned by Banker & Tradesman’s press deadline, but the latest proposal calls for 127 condominiums and ground-floor retail space to be constructed in the existing building. There would also be five separate townhouses developed adjacent to the property, as well as a three-level parking garage. Another 26 units of affordable housing would be created off site as part of a mitigation agreement hammered out with the city.
I think it will be a real winner, BRA Director Mark Maloney said last week of the altered concept. In fact, Maloney said his agency had always considered the Court Square property to be better suited for residential development, but Pappas opted to pursue its office concept instead.
In a Banker & Tradesman article late last year, company principal James Pappas acknowledged the property would be considered pioneering as an office use, but maintained at the time that the booming Hub economy was creating a need for additional supply to be added in fringe markets such as South Boston. Whereas the city’s Financial District was commanding office rental rates above $80 per square foot, Pappas was seeking rents in the $40 per-square-foot range.
In just a few short months, however, the local office sector has been turned on its ear, with companies now aggressively seeking to reduce their space requirements in the wake of the deteriorating business climate and the September terrorist attacks. That has led to millions of square feet of sublease space being dumped onto the office inventory, driving up vacancies and quickly eroding rental rates. In the heart of the Financial District, for example, Nortel Networks is offering the 38th floor at One Boston Place for just $49.50 per square foot, nearly half the $85 per-square-foot rate the struggling technology company paid for the space just 12 months earlier.
Along with reduced rental rates, 35,000-square-foot floorplates and ample parking, Pappas cited Court Square’s proximity to the MBTA Red Line subway as another lure for office users. In the end, however, the timing and recent negative events trumped all of the project’s supposed drawing cards.
The market turned on them overnight, one Boston real estate broker said of the Court Square developers. With the project already under construction, the broker said Pappas had reached the point of no return and ultimately was forced to come up with an alternate strategy.
Fortunately for the developers, their new proposal complements the BRA’s current agenda, with Maloney remarking, We have a housing crisis. We don’t have an office space crisis.
South Boston’s housing stock has been greatly taxed during the past few years. The surging economy has been driving up rental rates and home prices in the neighborhood to the extent that longtime residents were increasingly being priced out. Developing new units should help alleviate some of the pressure, Maloney said.
The BRA is doing everything that it can to encourage residential construction throughout Boston, Maloney said. One ongoing effort involves creating zoning relief and incentives that would allow developers to include a residential component in areas that have been traditionally focused on commercial functions. We’re looking for people to live [downtown], not just have it be their workplace from 9 a.m. to 5 p.m., Maloney said.
Multifamily Money
The changing commercial real estate market could help facilitate the BRA’s desires, given that lenders today are far more likely to finance a multifamily proposal than they are an office project. Fantini & Gorga/iCap Realty Advisors principal George J. Fantini Jr. estimated last week that there is at least five times as much capital available for multifamily ventures versus office development. Multifamily continues to be embraced by the investment and lending community, said Fantini, agreeing that could prompt other Bay State developers with an office project in the pipeline to consider switching over to residential uses.
There are a lot of lenders who have withdrawn from the office market, said Fantini. Boston, meanwhile, continues to have the supply/demand fundamentals that encourage investment in multifamily construction, with Fantini calling it one of the strongest markets in the country in that regard.
At the same time, Fantini stressed it is not a simple matter to change from one vision to another, given that many office sites do not fit the criteria needed to make them successful as a residential destination.
Certainly the Broadway area of South Boston is garnering plenty of attention from multifamily developers these days. Just up the street in Andrew Square, for example, another local real estate company is in the process of tying up a former junkyard in hopes of developing a residential complex there. The firm also had eyed the site for office space prior to the market’s recent slide.
A few blocks in the other direction, Beacon Capital Partners is pushing ahead with a mixed-use proposal known as Midway. Located along A Street, the $300 million project calls for both an office building and more than 200,000 square feet of residential space. Not only will the capital markets encourage the development of the residential component, Maloney said the BRA has mandated that the housing for Midway be developed first or at least simultaneous to the office function. Calls to Beacon for an update on their plans were not returned by press deadline.
