Hynes Loses Big Office Portfolio
By Paul McMorrow
Banker & Tradesman Staff Writer
Today
The public face of the stalled Filene?s redevelopment in downtown Boston has taken a major hit in the northern suburbs. Public records show Gale International recently turned over the keys to a seven-building office portfolio.
The size of the lost portfolio ? 667,000 square feet of Class A space spread between Andover, Bedford and Billerica ? actually eclipses the 600,000 square feet of office that Gale has planned for One Franklin, at the former Filene?s site.
The loss isn?t just another black eye for Gale and John Hynes, Gale?s beleaguered CEO. It?s also a powerful example of how this commercial downturn is turning even seasoned investors into unfortunate case studies.
In the summer of 2006, Gale, Mack-Cali Realty and JP Morgan scooped up the portfolio for $53.6 million, or $80 per square foot. (Mack-Cali and JP Morgan are also partners in the Filene?s project.) At the time, the properties were less than 60 percent leased. That was part of the draw. As rents exploded, investors scrambled to scoop up buildings with large blocks of vacancy. They valued vacancies over solid tenant rosters, betting that they could fill those empty suites while rents were soaring.
In fact, Gale, Mack-Cali and JP Morgan were never able to turn a profit at the Andover, Bedford and Billerica properties. Mack-Cali?s SEC filings show that in the 36 months the partnership controlled the office portfolio, it posted a net loss of $13.8 million ? a figure that?s more than 25 percent the portfolio?s original purchase price. Last year, the portfolio lost $5.1 million.
The markets around Route 495 North never fully recovered from the decade?s first recession, and the area has been hard-hit by the current downturn.
At their peak, before the dot-com bust, vacancies in some parts of the I-495 belt stood in the low single digits. The bust sent those vacancies soaring, to 40 percent in the north. The vacancy rate only rebounded into the 20 percent range. Rents in the area failed to bounce back as well. In January, Banker & Tradesman reported that some landlords in the submarket were only netting $2 or $3 a square foot. And rents have eroded since that time. At the close of the second quarter, Class A asking rates stood at $18.61, according to data from Jones Lang LaSalle. Availability stood at 22.5 percent.
The deal also featured characteristic levels of leverage. Though the portfolio only sold for $53.6 million, Gale and Mack-Cali took out a mortgage from UBS for more than $58.6 million. The deal also featured a highly leveraged bridge loan to finance tenant improvement allowances. When UBS took the keys back two weeks ago, $44.6 million of the first mortgage?s principal was outstanding. The mortgage on the portfolio matured in July.
Mark Hickey, an analyst at Property and Portfolio Research (PPR), said his firm is predicting that rent declines will hit the 495-North region the hardest. PPR is forecasting rents in the area to plummet an astounding 40 percent. Those drops fall directly on landlords? bottom lines.
?It?s particularly hard on anyone who bought after 2005,? Hickey said. ?There was less and less equity in those deals. They were underwritten with tremendous rent growth assumptions. If your debt service was based on 5- to 6-percent annual rent growth, with losses in rent, you?re underwater on debt service.?
