Developers of Boston’s Winthrop Center office-condominium tower are offering some units as rentals in response to declining sales activity across the condo market. Image courtesy of MP Boston
Boston’s biggest new luxury condominium building contains all of the high-end designer finishes and premium amenities intended to lure buyers to a property where penthouses have sold for more than $14 million.
Winthrop Center also offers a low-commitment alternative in a local condo market with plummeting sales activity: a rent-to-own program starting for as little as $5,000 per month.
“It’s a sign of the times,” said Michael Carucci, executive vice president of Gibson Sotheby’s International Realty in Boston. “When you see interest rates rise as quickly as we have, you’re going to see more of it.”
Recent sales data paints a picture of a Boston luxury condo market that’s struggling in the wake of the Federal Reserve’s anti-inflation interest rate policy and last year’s failure of First Republic Bank, bringing an end to the era of “cheap money” for financing expensive real estate purchases.
Other developers of newly completed projects are responding to the sluggish market, following steep declines in sales volume in 2023, including raising commissions for brokers who deliver buyers to their doors.
Market Has Become ‘A Challenging Place’
The rent-to-own program is developer MP Boston’s strategy to accelerate sales at the $1.3 billion office-condo tower at 240 Devonshire St. Since Winthrop Center opened last spring, buyers have closed on 52 of the 317 units, according to data compiled by The Warren Group, publisher of Banker & Tradesman.
The building has more than 50 additional units under agreement, according to MP Boston Partner Richard Baumert.
Known as Millennium Equity Advantage, the program gives participants a chance to rent in downtown Boston’s tallest building with an option to purchase at the end of the 12-month term. Sales prices are negotiated at the outset of the agreement, Baumert said.
If participants exercise the option to buy, their accrued rents are subtracted from the purchase price. They also have the ability to customize some finishes, an advantage over a typical rental.
Some participants have signed on for a second 12-month term, said Baumert, who did not give specific numbers on the size of the rent-to-own segment. The firm, part of Millennium Partners, previously offered the rent-to-own option at its Millennium Tower in San Francisco which opened amidst the financial crisis in 2009.
“It was the right thing at the time,” Baumert said. “We just realized the market was a challenging place, and we’ve been there and done that before.”
MP Boston disclosed the “rent-to-own” option as well as a switch from condos to rentals in 2020, when it received approval from the Boston Planning & Development Agency to shrink the size of the project after COVID-19’s impacts delayed the project’s $775 million construction loan.
As construction wrapped up at the 1.4 million-square-foot behemoth last spring, developers wanted to generate not just sales but a sense of vibrancy to energize common areas such as The Collective, its amenity level that spans over a half-acre on the 35th floor.
“We have an active club and monthly social programming, so to have those events populated brings tremendous life to the building,” Baumert said.
The developer of the newest luxury tower in Boston’s Seaport District, the St. Regis Residences, has increased the commission share offered to brokers who deliver two or more deals as a way to boost sales of the building’s 73 unsold units. Photo by James Sanna | Banker & Tradesman Staff
Rental Option Carries Risk
Despite the short-term financial benefits for developers, there are risks associated with adding a rental element in a premium building, residential brokers say.
“When you put somebody in these programs, the condo is no longer new,” Gibson Sotheby’s Carucci said. “If they don’t buy, now you’re not selling a brand-new condo to somebody, so that is typically their risk.”
Developers also run the risk of diminishing the property’s image by adding a rental segment, said Andrew Haigney, principal broker at Boston-based Batterymarch Group.
“When you load a building up with renters, it’s a different feel. Tenants tend to have a different relationship with the building,” he said. “They are not necessarily committed to it long-term, and they tend to treat the property differently.”
In a market where condo prices continue to rise but sales volume is declining, there are risks and potential rewards for buyers committing to a purchase price a year in advance.
“I guess if you think the market is going to scream higher, you’ll be in the money on this thing,” Haigney said.
Luxury Rentals Pose Competition
Condos in the sub-$1 million range saw the biggest decline in sales – at 22 percent – during 2023, according to a recent report by The Collaborative Cos. of Boston that tracks transactions in the urban core including portions of Boston, Brookline and Cambridge.
It’s a segment of the market that has fewer cash buyers and is more sensitive to mortgage rate increases, brokers say.
The segment also faces competition from luxury apartments that now represent a significant monthly savings over comparable condos, as 30-year fixed-rate mortgages rose from below 3 percent in 2021 to nearly 7 percent in early February.
“People are sitting on the sidelines waiting for a little bit more capitulation in the market and a good opportunity to purchase,” said Sue Hawkes, managing director at The Collaborative Cos.
Overall, condo sales in the urban core dropped 17 percent from 2022 to 2,940, according to the TCC report, which predicts condo developers will need to offer heavy concessions to move inventory.
Sweetening Broker Commissions
One strategy adopted by some developers of recently-completed buildings is sweetening the incentives for brokers who deliver buyers to their doors, Haigney said, offering commissions ranging as high as 5 percent.
In the Seaport District, Boston-based developer Cronin Group sought to ignite sales activity at its St. Regis Residences tower by hosting a limited bid auction for 10 units in November, orchestrated by TCC. The Haseotes Trust submitted high bids on seven of the units.
To date, 41 of the 114 units in the 22-story tower have closed, according to public real estate records.
Steve Adams
In a statement, developer Jon Cronin said the St. Regis has increased its commissions offered to brokers who deliver two or more deals from 2.5 to 3 percent. It’s also “more engaged than ever in negotiations with buyers and pleased to see a strong pick-up in traffic over the past number of weeks.”
Cronin predicted that potential interest rate cuts – not expected by most observers until May or June, following the most recent, disappointing inflation data – will accelerate sales in the next nine to 12 months.
