CASE STUDY. New England Center Boston, MA

Transcription

1 CASE STUDY New England Center Boston, MA April 2004

2 Stacking Plan: Tower One

3 Stacking Plan: Tower Two Floor Low Rise Mid Rise High Rise 14,107 7,357 5, ,085 19,085 19,085 19,085 19,085 19,085 18,661 Tenant 3 5 Tenant Tenant 3 Retail 720 Major Tenant Other Tenant

4 Property Description Property New England Center Boston, MA Size & Vacancy Tower One Tower Two Total Vacancy Office 1,035, ,025 1,800, ,293 (23.1%) Retail 22,792 8,437 31,229 1,791 (0.1%) Total 1,058, ,462 1,831, ,084 (23.2%) (1) Includes 10.1% of Pending Leases. (1) Tenancy Office Tower SF % of Total SF Lease Exp Date (Financial Firm) Two 378,490 21% 5/2009 Tenant 2 (Law Firm) One 322,754 18% 12/2010 Tenant 3 (Financial Firm) Both 94,230 5% Various (6/2004-6/2007) Tenant 4 (Financial Firm) One 88,279 5% 4/2005 Tenant 5 (Law Firm) One 39,929 2% 11/2013

5 Existing Note Summary Opportunity To purchase Note from Lender at a discount in order to gain control of the asset through workout with Borrower or through foreclosure process. Existing Loan Terms Outstanding Balance $622 MM Maturity 2023 Prepayment Open in 2008 Interest Rate 7.3% Amortization 30-Year Schedule Debt Service Payments (est.) $53.1 MM Property Financial Summary (in $MM) FY 2005 FY 2006 FY 2007 NOI $30.9 $36.0 $47.9 CapEx (net of Escrow) ($1.8) ($31.1) ($3.4) Cash Flow after CapEx $29.1 $4.9 $44.5 Debt Service ($53.1) ($53.1) ($53.1) Cash Flow after DS ($24.0) ($48.2) ($8.6)

6 Proforma Assumptions Market Rent Growth Rates & Beyond Office High Rise $45 0%, 3%, 10%, 10% 3%+ Mid Rise $40 0%, 3%, 10%, 10% 3%+ Low Rise $35 0%, 3%, 10%, 10% 3%+ Retail $45 0%, 3%, 10%, 10% 3%+ Expenses 2004 Growth Rate Operating Expenses $ % Real Estate Taxes $ % Total $24.00 Tenant Improvements Office Retail 2004 & & Beyond New Leases $55 $40 Renewals $30 $15 New Leases $30 $30 Renewals $15 $15 Pending Leases Assumes all pending leases to be executed. New Law Firm largest pending lease. Tower High-Rise of Tower Two Area 155,324 Sq Ft Term 10 Years Rent (Average) $45.00 PSF TI $62.00 PSF Rent Abatement 8 Months

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8 Contents Reis Observer 3 Metro Analysis Section 1 - Current Metro Rent Details 14 Section 2 - Rent Growth Comparisons 14 Section 3 - Current Metro Vacancy Details 15 Section 4 - Vacancy Rate Comparisons 15 Section 5 - Metro Inventory Detail 16 Section 6 - Inventory Growth Comparison 16 Section 7 - Construction/Absorption Change 17 Section 8 - Submarket New Construction Project Tally 18 Section 9 - New Construction Listing 19 Section 10 - Market Data by Building Class - Class A Properties 25 Section 11 - Market Data by Building Class - Class B/C Properties 26 Section 12 - Submarket Snapshot 27 Section 13 - Economic and Demographic Trends 28 Section 14 - Submarket Boundaries 29 Section 15 - Metro Data 30 Submarket Analysis Section 16 - Current Submarket Rent Details 32 Section 17 - Rent Growth Comparisons 32 Section 18 - Current Submarket Vacancy Details 33 Section 19 - Vacancy Rate Comparisons 33 Section 20 - Submarket Inventory Detail 34 Section 21 - Inventory Growth Comparison 34 Section 22 - Construction/Absorption Change 35 Section 23 - Market Data by Building Class - Class A Properties 36 Section 24 - Market Data by Building Class - Class B/C Properties 37 Section 25 - Submarket Data 38 Rent Comparables Sale Comparables

9 Reis Observer

10 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston THE ECONOMY Economic conditions in metro Boston continue to cause unease. Jobs continued to disappear from this once-bustling economy at an alarming, albeit slowing, rate, and unemployment is up. Total employment per September 2003 is down 1.8% from one year ago (representing a loss of 35,500 jobs), continuing a declining trend that began in 2001, when employment decreased 2.5%, which was then followed by another loss of 2.1% in 2002, according to the US Department of Labor, Bureau of Labor Statistics (BLS). While nearly all employment sectors are feeling the pinch, Boston s blue-collar workers are being hit the hardest. In the past year, roughly 6.4% of jobs in the Construction sector and 5.0% of jobs in the Manufacturing sector were lost. Meanwhile, the Boston unemployment rate has risen slightly from one year ago, increasing 10 basis points, to 5.3% per September 2003 (though this rate is unchanged from the previous month). Statewide, the employment picture is even worse. The BLS reports that unemployment in Massachusetts has risen to 5.7% per September 2003 from 5.5% a year ago. With unemployment on the rise, word has come from Massachusetts Governor Mitt Romney s administration that the state expects to borrow hundreds of millions of dollars from the federal government to cover jobless benefits in 2004, because its unemployment insurance fund will be drained by year-end 2003, according to the Boston Business Journal. The total borrowing could reach several hundred million dollars, and the state could be borrowing for quite a while unless the Legislature passes an administration plan to overhaul the jobless benefits fund and raise more cash, according to sources in the administration. Massachusetts last borrowed from the federal government in 1994, at the tail end of the last recession. This time around, state officials and Beacon Hill observers insisted the unemployment trust fund would not go broke, even after its onceseemingly comfortable $2.1 billion cushion dwindled to $800 million by the end of last year. But the fund was thrown into crisis by a recession that has lasted longer than state officials and many economists expected, resulting in greater payouts than anticipated and smaller payments into the fund by employers. As 2003 rolls to an end, prospects for a rebound in job growth in the near future have dimmed substantially following a number of highprofile announcements. This time, Boston s once-reliable financial sector is the center of attention. In October of 2003, Charlotte-based Employment: The unemployment rate is unchanged from August, at 5.3% per September 2003, according to the BLS. Annual growth in average non-agricultural employment has been slow in returning, with the BLS reporting a 1.8% decrease in overall employment in metro Boston per September The average median income for Boston is reported at $106,580, according to Economy.com. By contrast, the national average is $95,907. Leisure & Hospitality 8% Boston Employment by Sector Governm ent 12% Services 42% Construction 4% Mining 0% Manufacturing 8% T/PU 3% FIRE 9% Source: BLS Trade 14% Copyright 2003 Reis, Inc. Page 3 1

11 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston Bank of America announced it was taking over FleetBoston Financial Group, creating the nation s second largest bank. There is widespread concern that the purchase could result in layoffs to reduce duplicate jobs. Meanwhile, Providence-based Citizens Financial Group Inc. (one of the twenty largest US banks) has laid off 45% of the 203 employees of Port Financial Corp., the Brighton-based holding company for Cambridgeport Bank, which it acquired in April of Meanwhile, a number of layoffs, battered share prices, and shareholder lawsuits have plagued the metro s biotech sector, reports the Boston Business Journal. In the past few months alone, Millennium Pharmaceuticals Inc. in Cambridge revealed plans of a layoff totaling 600 jobs from their offices in Boston, San Francisco, and England. Further, Cambridge-based Vertex Pharmaceuticals Inc. said it would lay off 111 employees 55 of them in the company's Cambridge operations as part of a corporate restructuring to focus its resources on more than a dozen drugs already in its pipeline. Most recently, Cambridge-based Biopure Corp. said it would cut almost one-third of its jobs and replace its regulatory officer amid attempts to gain U.S. Food and Drug Administration approval to introduce its Hemopure product into the US, a hemoglobin-based oxygen therapy previously used in South Africa. With the metro s once-highflying industries temporarily grounded, Governor Romney has proposed a number of economic development programs to jump-start job growth. According to the Boston Globe, Romney has offered a $125 million economic plan that would give tax cuts to companies that create new manufacturing jobs, provide additional aid to localities that increase affordable housing, and offer incentives for the rehabilitation and development of urban brownfields. The manufacturing tax credit would target biotechnology, life sciences and medical device companies, which are currently in transition from the research and development phase to manufacturing, according to Romney. By allowing the companies to keep half of the new income tax revenue Office Employment (% change) Jobs Added (000's) Population Growth (% change) 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% % 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% Boston Non-Farm Employment Growth Jobs Added Population Trends Rate of Growth Office Employment Trends Source: BLS -2% -4% -6% % 6% 4% 2% 0% Rate of Growth Boston Northeast US US Source: Economy.com Boston Northeast US US Source: Economy.com Copyright 2003 Reis, Inc. Page 4 2

12 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston generated by these jobs, Romney said, the state will encourage the industries to remain in Massachusetts after the research is complete. Despite its New England charm, population growth in metro Boston is weak compared to the rest of the nation, growing just 0.3% in 2002 (compared to an average of 1.2% for the nation s top 50 metros), due to the metro s high development costs, expensive cost of living including staggering home prices, and slow job growth. Any new residential development that is taking place occurs around the I-495 highway, where land is less expensive and relatively plentiful, and into neighboring states such as New Hampshire and Rhode Island. Closer to the city, the shortage of housing has led Boston to become one of the most expensive places to live in the nation. The median home price reported for the Boston area by the National Association of Realtors rose to $432,700 in the third quarter of 2003, up 41% from one year ago, making it the third most expensive metro in the nation after the California s Bay Area and Orange County. Outlook Any Boston economic recovery is expected to lag the rest of the nation, as initial job growth most likely will occur in the low-cost, Sunbelt locales. Still, Boston retains its enviable position as a worldclass education and research center, which should provide it with a solid foundation for future growth. Moreover, recent developments, such as being awarded the Democratic National Convention and the near-completion of the Big Dig, are steps in the right direction toward stimulating this local economy. Copyright 2003 Reis, Inc. Page 5 3

13 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston THE REAL ESTATE MARKET The dour local economy has the Boston office market in a strangle hold, despite an improving national economy. According to Grubb & Ellis, landlords will have to wait at least one more quarter before general economic conditions translate into flat adsorption and stabilizing lease rates. According to Reis, after a promising start this year, leasing activity fell in the second and third quarters; developers found themselves delivering new buildings at the same time tenants were returning previously leased space to the market. Consequently, per third quarter, vacancy rates continued to climb, prompting significant losses in both asking and effective rents. OCCUPANCY Occupancy levels continue to dwindle in the Boston office market per third quarter 2003 though at a gradually diminishing rate. Vacancy rose 1,460 basis points over the two-year period 2000 to 2002 (1,020 basis points in 2001 and 440 basis points in Average Vacancy 25% 20% 15% 10% 5% 0% Office Vacancy Trends Boston Northeast US US Source: Reis, Inc. 2002), culminating at a rate of 18.5% per year-end Along with the completion of approximately 1.7 million square feet of new office space thus far this year, declining demand has caused vacancy to grow 120 basis points since year-end 2002, to 19.7% per third quarter 2003, according to Reis. (Of the 24 million square feet of vacant office stock in the metro, roughly 35% is accounted for by sublease availabilities, far above the 23% national average.) However, on a sector basis, the demand for Class A space has improved over the quarter, falling 20 basis points, to 18.5%, at the expense of Class B/C space, which saw a 40-basis-point increase in vacancy over the same time period, to 21.1%. Reis believes overall vacancy will remain steady at 19.7% through the end of 2003, and then peak next year at 19.9%, before gradually heading downward over the remaining years of the forecast period. Special Real Estate Factors: One of the largest Boston real estate deals in decades is in trouble, as New York-based Tishman Speyer Properties is balking at buying 44 Boston Wharf Co. buildings in the Fort Point Channel area for an estimated $400 million. Tishman Speyer tentatively said in July it would buy all of Boston Wharf's industrial-style brick buildings on the edge of the South Boston Waterfront, the city's new development frontier. But after inspecting the huge real estate portfolio, Tishman said it realized there may be less usable square footage in the buildings; it is worried about liabilities if underground water problems recur; and it cannot add floors for structural reasons to some of the aging buildings. The properties for sale include most of the buildings in an area from the Fort Point Channel east to West Service Road, and from Seaport Boulevard south, along Congress and Summer Streets, to the Gillette Co. complex on A Street. One person close to the negotiations told the Boston Globe it is unlikely Boston Wharf would put the buildings on the market if this sale falls through. Instead, Boston Wharf could wait for the economy to improve and property values to increase before talking with another possible buyer. An effort is being made to recapitalize a trophy office complex in Boston that is saddled with a $630 million mortgage from Teachers Insurance. The 1.8-million- Copyright 2003 Reis, Inc. Page 6 4

14 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston According to CB Richard Ellis, third quarter suburban Boston vacancy is reported at 26.3%, up from 24.7% last quarter, while CBD vacancy is reported at 13.8%, up from 13.1% last quarter. Cushman & Wakefield reports a direct vacancy rate of 16.4%, up from 16.0% per second quarter Meanwhile, Grubb & Ellis reports office vacancy has risen to 19.6% in the third quarter, excluding a large potential shadow space overhang. (These sources report on slightly larger inventories than Reis.) SUPPLY AND DEMAND Growth in demand Boston Office Supply and Demand Trends from the financial and high-tech sectors had 8,000 25% driven vacancy rates to 6,000 4,000 20% record lows and rent 2,000 15% gains to record highs, 0 which, in turn, -2,000 10% -4,000 prompted -6,000 5% development. -8,000 Between 1997 and -10,000 0% , roughly 22.7 Completed Absorbed Vacancy Rate million square feet of Source: Reis, Inc. new office space were delivered to this market, including last year s delivery of 2.7 million, increasing the volume of office inventory by 21%. Reis anticipates the completion of 1.7 million square feet this year, all of which has been delivered per third quarter. Fortunately, annual delivery totals are expected to continue to decline in the coming years: Next year, Reis anticipates the delivery of just 945,000 square feet, followed by just 80,000 square feet in CB Richard Ellis estimates that over 2.6 million square feet are under construction in the CBD in five buildings for delivery between now and 2004 (only 51% of which are preleased), while construction activity in the suburbs is nonexistent. Square Feet (000's) Vacancy Rate Special Real Estate Factors: Continued square-foot property, called International Place, is owned by a partnership that includes developer Donald Chiofaro and Hillman Properties of Pittsburgh, reports Commercial Mortgage Alert. The two-tower complex, considered one of Boston's finest properties, is virtually fully occupied, with a roster of blue-chip tenants. But the size of Teachers' mortgage exceeds the complex's value, so the insurance company would be the key player in any recapitalization. It's presumed that Teachers would end up with a sizable equity interest in the property under any arrangement. The goal is to line up both equity and debt. Secured Capital, which is overseeing the effort, has sent out packages to prospective lenders. Teachers would desperately like to get out from under the loan, which it originated in the early 1990s after the real estate market tanked. Net absorption drastically outpaced new supply for much of the 1990s, driving vacancy below 4.0% by However, recent economic turmoil caused the demand for new space to plummet: In 2001, Reis reports the negative net absorption of 7.5 million square feet, followed by the negative net absorption of 2.9 million square feet in Following a brief surge into the positive territory early this year (175,000 square feet of net absorption were reported by Reis for first quarter), net absorption had fallen back into negative territory by Copyright 2003 Reis, Inc. Page 7 5

15 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston second quarter, and remained there through the third quarter, bringing the cumulative year-to-date total to negative 262,000 square feet. Grubb & Ellis reports that a decline in net space usage by a number of large space users mostly the result of relocations contributed to 330,000 square feet of negative net absorption this quarter. Meanwhile, CB Richard Ellis reports year-to-date absorption (not net) of negative 2.7 million square feet. Reis expects modest improvement in the leasing climate over the remaining quarter of this year, resulting in a net absorption tally of negative 255,000 square feet for this year still, this is quite an improvement from last year s negative 2.9 million square feet. More tangible improvements in leasing are expected beginning with 2004, when the metro is forecast to see the positive net absorption of 513,000 square feet. However, net absorption activity will not be strong enough to overtake construction levels until 2005, at which point vacancy levels are expected to begin trending downward, according to Reis. RENTS Prices for Boston Office Rent Trends office space have 25% been declining at a 20% 15% troublesome pace 10% since the market 5% began to tank in 0% That year, -5% -10% asking rents fell -15% 6.2%, while -20% effective rents fell %. In 2002, Boston Northeast US US Source: Reis, Inc. the situation deteriorated further, with Reis reporting a drop in asking rents of 15.7%, while effective rates fell 19.7% a far cry from the 22% annual gain seen in both rent categories during Landlords have yet to get a break. Per third quarter 2003, Reis reports average asking and effective rents of $30.62 psf and $25.55 psf, respectively, down 1.8% and 2.5% from last quarter, and down 12.6% and 16.3% from one year ago. The wide gap between the asking and effective prices continues to indicate the large role being played by landlord concessions, such as free rent, high tenant improvement allowances and moving allowances. Class A space, in particular, is being offered up at bargain rates (relatively speaking), as landlords combat negative net absorption. In the third quarter, Reis reports that Class A asking rates fell 1.7% to $36.20 psf, while Class B rates decreased 1.9% to $23.86 Rent Change Copyright 2003 Reis, Inc. Page 8 6

16 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston psf. Per third quarter 2003, CB Richard Ellis reports an average CBD rental rate of $34.01 psf and a suburban rate of $18.14 psf. Reis expects overall average asking and effective rents to have fallen a total of 11.9% and 14.3%, respectively, by year-end Continued losses, albeit comparatively minor (around 2.0% for both rent categories) are expected next year, followed by very modest rent growth in SUBMARKETS CBD/Back Bay Sherin and Lodgen signed a lease for 35,700 square feet of office space at 101 Federal St. The 55-year-old firm, which specializes in transactional law and litigation, is relocating from 100 Summer Street to the top two floors of the 31-story office building, reports GlobeSt.com. The Boston waterfront is the place to be if construction activity and developer interest is any indicator. While the sluggish economy and the challenges of rebuilding the well-entrenched neighborhoods nearby have stalled some big projects, parts of an old elevated highway that walled off the water from the Downtown area are being demolished and replaced by a network of new roads, bridges, rapid transit and tunnels, reuniting the city and its waterfront, reports the New York Times. New sections of the Massachusetts Turnpike, Interstate 93 and the New Northern Avenue bridge have led to several projects being built in South Boston, including Manulife Financial s $140 million glass-clad office tower, a $700 million convention center with an adjoining 1,150- room Westin hotel, the Silver Line subway station, historic warehouses and a new building with 120 condominiums that is the first phase of Beacon s $350 million Channel Center mixed-use complex. And while rising vacancies and falling rents afflict this district, as well as the rest of the Boston area, investors and developers are still betting on the future of the almost 400-year-old waterfront. In recent weeks, two development teams submitted proposals vying for permission to build a 1.5-million-square-foot mixed-use project on a harbor parcel dubbed the Core Block by city planners. According to Reis, third quarter 2003 average vacancy in the million-square-foot CBD is estimated at 14.5%. The 12.7-millionsquare-foot Back Bay submarket s vacancy rate is reported at Copyright 2003 Reis, Inc. Page 9 7

17 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston 17.8%, while the growing 6.8-million-square-foot South Station area s vacancy rate is reported at 19.2%. Per third quarter 2003, Reis reports an average asking rent of $40.61 psf in the CBD, $38.62 psf in Back Bay, and $32.57 psf in the South Station submarkets. In 2004, even more building is expected here, including the 330,000-square-foot Manulife Financial Center at 601 Congress Street in the South Station area and the 600,000-square-foot downtown office tower at 33 Arch Street. However, after more than a year of trying to pre-lease the 600,000- square-foot 33 Arch Street office tower, one tenant has yet to be signed. Congress Group Ventures and CB Richard Ellis/Whittier Partners, the property's new leasing agent, will launch an aggressive marketing campaign to emphasize the advantages of this smart building, which has advanced technology systems, elevators and enhanced security and safety systems. The campaign will also emphasize the fact that this building is likely to be the last Class A office tower to be completed in the city s financial district during this decade, reports GlobeSt.com. Berkeley Investments has acquired the 111,600-square-foot, 343 Congress Street from Intercontinental Real Estate Corp. for $26.8 million. Berkeley purchased the building on behalf of an undisclosed European investment group, reports GlobeSt.com. Cambridge For its 14.2-million-square-foot greater Cambridge submarket, Reis reports an average asking lease rate of $30.51 psf. An abundance of sublease space (primarily from technology companies) has contributed to this submarket s third quarter vacancy rate of 21.1%. Architects from around the world have presented proposals for North Point, a giant mixed-use development planned for a former rail yard mostly in East Cambridge near the Lechmere MBTA station, reports the Boston Globe. Over the next 15 years, the site is to become nineteen city blocks containing 5.2 million square feet of office and laboratory space, 2,700 condos and apartments, as well as retail space. Three proposals will be chosen one for each of the first three blocks with construction to start early next year. Copyright 2003 Reis, Inc. Page 10 8

18 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston Route 128 North At the end of the third quarter of 2003, Reis reports an average asking rent of $20.30 psf in the 20.2-million-square-foot North Shore/Route 128 North submarket, which includes Andover, Woburn, Burlington, and Malden, among other towns. A second quarter average vacancy rate of 28.2% is reported by Reis for this market the highest metrowide. West Per third quarter 2003, Reis reports an average asking rent of $27.45 psf in the 8.1-million-square-foot West/Mass Pike submarket. This submarket, which includes Weston, Waltham, Needham, and Natick, among other towns, currently has an average vacancy of 17.7%, according to Reis. For the 5.6-million-square-foot Framingham/West Suburban submarket, vacancy is reported at 23.8%, with an average asking rent of $21.57 psf. A partnership bought 265 Winter Street, an 89,500-square-foot office building in Waltham, for $11.5 million. An unidentified client advised by LaSalle Investment Management sold the property to a partnership led by the Cresset Group along with partners Hennessey Enterprises and Rye Development, reports GlobeSt.com. South Shore An average asking rent of $21.49 psf the South Shore submarket, which includes Braintree, Quincy and Dedham. Vacancy in this 10.7-million-square-foot submarket is 16.7%, according to Reis. Unable to lease the 183,000-square-foot BlueView Corporate Center on Route 128 in Canton for nearly a year, its owners sold the building for $24.7 million, reports the Boston Globe. Copyright 2003 Reis, Inc. Page 11 9

19 Q Office - Asset Advisor Reis Observer Reis Observer BOSTON OFFICE MARKET 2003 Q3 Metro: Boston Outlook This market is expected to continue to be vexed by an overabundance of office space availabilities. Despite the market s high rate of vacancy, office development is expected to continue, including next year s completion of the 600,000-square-foot 33 Arch Street office project, pushing the average vacancy rate to a peak of near-20.0%, while lease rates are forced lower. A marked slowdown in construction activity in 2005, however, should give the market some much-needed breathing room. Coupled with resurgence in demand, vacancy levels should begin to decline in 2005, while rents more-or-less stabilize. For additional metro and submarket level information on the top 80 markets for the four principal property types, visit or call Reis at: (800) 366-REIS. Unless otherwise indicated, economic and demographic data provided by Economy. com Copyright 2003 Reis, Inc. Publication Date: November Reis, Inc. Page 12 10

20 Metro Analysis