When it comes to commercial real estate, you can bet your autumn dollar that the investment market is entering its busiest season of the year. But while there are plenty of properties to be had, and buyers are clearly clamoring to grab a stake in the region, industry specialists warn that the process is becoming increasingly convoluted on both ends of the table.
A combination of higher interest rates and rising prices for investment properties has made closing on a sale much trickier than in previous years. Lambert Smith & Hampton, for example, recently backed out of an agreement to buy 45 Milk St. in downtown Boston, while an investment group which had tied up the city’s 10/Ten Post Office Square office building also failed to get the trophy property across the finish line.
“There’s no question there’s a lot more retrading going on,” CB Richard Ellis/Whitter Partners principal Gary W. Lemire said last week. “It’s much harder to get deals done.”
Lemire estimates that investors – and sellers – have become especially cautious during the past six months. While the market’s strong fundamentals have lured a bevy of buyers, Lemire said many often get cold feet once they have been selected, prompting longer due diligence periods and creating the possibility they may ultimately retreat.
“Everything has to check out 110 percent squeaky clean, and if it doesn’t, they start looking for ways to adjust the prices,” said Lemire.
Lisa Campoli of Insignia/ESG concurs, adding that one ironic twist is the nervousness being generated by the city’s red-hot office market. With rents reaching levels previously unheard of in the Hub, sellers are understandably pricing their properties accordingly. To date, however, many underwriters remain skeptical that the rates will hold up over the long term.
“The big question is, what rents are sustainable rents, not what someone is going to pay today because supply and demand is so out of whack,” Campoli said. “The buyers might believe it, but the financial sources might not.”
That dynamic may have played a role in the 10/Ten Post Office Square roadblock, with a group called Alliance reportedly placing the property under agreement but then seeing its money source disappear. J. Brad Griffith, chairman of Leggat McCall Properties, declined to discuss specifics, but insisted that it is not reflective of the building’s popularity.
“We’ve had tremendous interest in the property,” said Griffith, predicting that a sale will be consummated shortly. Indeed, LMP and the broker, Trammell Crow, reportedly ousted Alliance once they realized the group was scrambling to find a new capital partner. While the estimated $119 million asking price might be a bit hard to swallow, Griffith said there are plenty of serious takers interested.
“This is a major office complex in the city of Boston,” Griffith said of the 440,000-square-foot property. Between 10 percent and 20 percent of the leases in the building should roll over during each of the next five years, he said, giving 10/Ten Post Office Square all the makings of being a “core-plus” property, one with a strong location, stabilized rental stream and solid upside.
‘Perplexing’ Market
Griffith, whose firm is also active on the acquisition front, does maintain that commercial sales are more difficult to complete of late, calling the investment market “more perplexing than I’ve ever seen it.” Besides the issue of future rental rates, Griffith said there are a flood of properties on the sales block, largely a result of the busy investment days of the mid-1990s. Those who bought at the bottom of the cycle have since stabilized their holdings and are now peddling them. But with cap rates rising and many properties locked in with long-term leases, Griffith said the upside often is difficult to achieve.
“Right now, there is a flood of investment property on the market, and not enough people to buy them,” said Griffith.
That is not to say that deals are not getting done, with most brokers stressing that they anticipate a hectic final quarter. Trammell Crow, for example, is on track to exceed $1 billion in sales for the third year in a row, and has completed some of the fastest transactions around during 2000. The company, for example, sold 215 First St. in Cambridge for $68 million barely a week after the marketing campaign began, and has selected a buyer for 40 Broad St. in Boston’s Financial District shortly after it was offered for sale. TMW Realty Advisors of Atlanta reportedly will pay about $65 million for that building, also owned by LMP.
“We have a bunch of things in the pipeline,” added Lemire. “Everybody’s busy right now.”
The same is true at Insignia/ESG, said Campoli, whose firm has a variety of downtown and suburban buildings that are receiving widespread interest. Still, Campoli said that most participants have an eye on where the economic cycle is at present. While LMP is generally upbeat about the market, Griffith said he is also closely monitoring conditions.
“I tell my people that I don’t want to hear any more brokers telling me how great things are,” he said. “I want to talk to the economists.”
