The $106.2 million deal for Boston’s Independence Wharf building did more than set a recent high-water mark in a moribund investment sales marketplace. It also created a badly-needed data point that should coax more activity out of an investment sales market that has been paralyzed by fear, and a lack of transparent information, for nearly a year now.
“The No. 1 winner is the marketplace,” said Richard Herlihy, a senior director at Berkeley Investments. “Any benchmark that’s created is going to encourage additional activity.”
“It gives people a data point,” added Frank Petz, an executive vice president in the capital markets group at Richards Barry Joyce & Partners. “Nothing has really traded [this year]. It’s a much better comp. It shows real activity at fair pricing, not vulture pricing.”
Over Or Under Paid?
At the property level, the sale’s implications are unclear.
Boston real estate insiders are divided as to whether Credit Suisse overpaid when it handed GE Asset Management $106.2 million for a 14-story, 337,000-square-foot building that most describe as an A- building with an A+ address on the Rose Kennedy Greenway. Strong in-place incomes and a solid lease base are producing healthy cash flows. But even with rents underwritten in the mid-$40s, the deal’s financials may be aggressive, given that Class A asking rents downtown have fallen by more than 26 percent over the past five quarters. They’re still falling, and are expected to stay on the floor until 2011.
GE set and achieved an aggressive price. It fared much better as a seller than did Les Marino, the Modern Continental entrepreneur who sold the building to GE in 2002, for $82.2 million. Still, GE had to perform a tremendous amount of leasing-up in the building. That lease-up required a significant capital investment. Some estimate that, with up to $25 million in tenant improvements factored in, the sale was a wash, excluding rental revenues.
But from an area market perspective, the deal carries huge importance: It’s a vote of confidence in the Boston market’s strength, and it provides a critical data point for buyers, sellers and holders of debt.
“It bodes well for the city,” said Yanni Tsipis, a senior vice president at Colliers Meredith & Grew. “It sends a strong signal that our real estate economy is faring better than our peer’s. Boston is not a distressed town in the way that Atlanta and Phoenix are.”
The identity of the wharf’s buyer, Credit Suisse, “Continues to show the desirability of the Boston market to foreign capital,” said Mike Smith, a managing director in Jones Lang LaSalle’s capital markets group.
Still, Smith added, “I don’t think the pricing is anything that will make an owner say, ‘Great, it’s time to get my asset out.’ Most owners aren’t selling if they don’t have to.”
‘Lenders Waiting On More Pressure’
There are owners who do have to sell, though, as well as owners who have not yet been forced into selling. The former category is filled with buildings with tumbling income streams, blown debt covenants, looming mortgage maturities, and, in the case of some pension funds, redemption requests; the latter, with lenders holding distressed debt.
Lenders, in particular, have invited the ire of opportunistic investors. Their regulators have not forced them to mark distressed assets to market, so they’ve been content to kick maturities down the street and leave underwater loans on their books.
“The lenders are waiting on more pressure to sell,” Petz said. “The owners with the most pressure to sell are the lenders that foreclosed. They’re involuntary owners.”
“There’s a fundamental structural issue being pushed off,” said Boston Properties President Douglas Linde, speaking at a recent industry roundtable. “Properties are overleveraged, values have come down, and there’s simply not enough capital to ever pay off the debt based on where the leverage is today. Banks have been allowed to perpetuate the situation. There is going to be a day of reckoning for banks and zombie landlords. It’s a question of when, not if.”
With Independence Wharf, suddenly, appraisers and underwriters have a sales comp for a large, prominent Class A building. That comp is added to the summertime sale of One Winthrop Square, a Class B property downtown that traded for $185 per foot. Together, the two non-distressed sales create sales comps that will guide the rest of the market.
“Lenders have been allowed to stand on the sidelines,” Herlihy said. “Their argument has been there’s no market, there are no comps. That argument starts to crumble when you have transactions. Once benchmarks are created, lenders with problem loans can no longer hide behind the curtain and say they don’t know the value.”
