Congress Group Ventures and Eastern Development are moving ahead with plans to develop the 31-story, 600,000-square-foot tower at 33 Arch St. in Boston’s Financial District.
He knows the skeptics are out there. In fact, developer Dean Stratouly acknowledges that some real estate veterans have openly voiced doubts that his 33 Arch St. office building in Boston’s Financial District can move forward amidst the deteriorating economic environment, one which has led to quickly rising vacancy rates and flattened rental growth throughout the region.
Despite such dour sentiment, however, Stratouly last week delivered the message loud and clear that his Congress Group Ventures and partner Eastern Development are moving full steam ahead on the 31-story, 600,000-square-foot tower, with a groundbreaking ceremony anticipated for sometime next month.
“It will happen,” vowed Stratouly, noting that the development team already has its financing in place, a $240 million package of equity and debt sources that include such heavyweights as Lend Lease Real Estate Investments, Fleet Financial Group and Wells Fargo. Indeed, 33 Arch St. may prove to be one of the last projects locally to obtain a financial commitment given the recent nervousness seen in the capital markets. Coupled with a scarcity of land, such limited resources should actually lend comfort to those projects either in progress or about to enter the construction pipeline, Stratouly said, in that it should prevent the glut of excess space seen a decade ago.
“At the end of the day, this is a business of supply and demand,” Stratouly said. “The supply Boston has is very restrictive, and that is not going to change very dramatically.”
Equally ebullient is Andrew W. Hoar, president of CB Richard Ellis/Whittier Partners. His firm is helping market another new office building at 131 Dartmouth St. on the border of the Back Bay and South End neighborhoods. While Hoar said there has been a drop-off in activity, he maintained it is more of a temporary situation than an indication that the market is about to slide even further.
“This is really just a moment in time, and I think people have to keep that in mind,” Hoar said. “From a long-term perspective, this is still a terrific market.”
The worst of the malaise may actually be behind the Hub, Hoar said, with interest in 131 Dartmouth St. on the rise again after a quiet beginning to 2001. Even as companies take longer to commit, Hoar said he believes progress will be made in finding takers for the 370,000 square feet of space to be yielded from the building, as well as at other properties throughout the city.
“I do think you will see some significant leases signed in the second quarter,” he said. “We have seen a resurgence of activity.”
Hoar would not comment on potential tenants, but sources said the ownership will entertain offers from single-floor tenants up to companies that could take the entire 11-story building. When steel begins rising out of the ground in a few weeks, Hoar said he believes companies will become even more focused on the property, which is being developed by a partnership including Edward A. Fish Associates, Sullivan Properties, Heritage Property Investment Trust and Weston Associates.
One critical “wild card” in the mix, according to Hoar, is the fate of One Lincoln St., the 36-story office tower about to sprout out of the ground across from South Station. If, as expected, developers Gale & Wentworth and Columbia Plaza Associates complete their lease with State Street Corp. for at least 600,000 of the 1 million square feet in the building, Hoar predicted the remaining projects will fare well. Otherwise, the market could see additional softness if such a large option again becomes available.
At this point, there is nothing to indicate the deal is in trouble, although negotiations have seemingly proceeded at a snail’s pace, with Banker & Tradesman first reporting the talks between the two sides last summer. Calls to Gale & Wentworth’s local point man, John B. Hynes III, were not returned by press deadline, but one source said it appears everything is still on track. Indeed, the source added that State Street could take the entire tower to fulfill overflow from nearby Lafayette Corporate Center and International Place.
Emotional Swings
Across the street from that project, Rose Associates is optimistic that a legal challenge to its proposed Two Financial Center will be wrapped up soon, with spokesperson Michael Vaughan saying last week that “we have every confidence we will be in the ground this year.” Scaled down from 20 stories, Rose did win support from both the city and an abutters’ group for its 12-story, 215,000-square-foot building, but other neighbors have since challenged the project’s go-ahead.
The imbroglio, centering around the tower’s impact on the historic Leather District, is particularly frustrating for Rose Associates given that tenants in the adjacent One Financial Center tower have expressed strong interest in absorbing the space once it opens. “I don’t think it is in anyone’s interest to let this drag out,” said Vaughan. “People want to get this thing in the ground.”
As for the rest of the market, it does appear that other projects with immediate delivery dates are being hit by the slower demand. At Independence Wharf, for example, developer Modern Continental lost one fish this week when the Wolf Greenfield & Sacks law firm decided against locating to the property. On the flip side, it did land an office suites firm, Regis, according to sources. Trammell Crow, brokers for the project, did not return phone calls to discuss the matter.
As for 33 Arch St., there does appear to be a level of skepticism among brokers as to a speculative launch on the office tower. One downtown broker, who asked not to be identified, said 33 Arch St. does have a chance of inking a significant tenant in short order, but claimed the building will not be started until that happens.
“I don’t believe they will go ahead without an anchor tenant,” said the broker. “It doesn’t seem that would make a lot of sense.”
Regardless of such opinions, Stratouly pledged the tower will begin sometime in May. He noted there was similar pessimism when he and Equity Office Properties gambled on the renovation of 28 State St. in the mid-1990s. The overhaul of that Financial District tower hit the market at precisely the right time, even though it was originally undertaken when the city’s future appeared shaky.
Besides the lack of competition in its wake, Stratouly said the advance of 33 Arch St. is also supported by the fundamentals, with the city’s vacancy rate still in the 5 percent to 6 percent range despite the addition of 1.5 million square feet of sublease space in the past few months. Maintaining that “most people would kill to be in a market with a 6 percent vacancy rate,” Stratouly advised that current negativism should be viewed in perspective.
“The market is never as good as people say it is, and it’s never as bad as people say it is,” he observed. “It is a business that is subject to incredible emotional swings.”
