The Economics of Building in Boston

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This is the moved conversation from the Columbus Center thread relating to the pros and cons of building towers in Boston.

InTheHood said:
To that end, Winthrop Square and SST might happen, but at this point they strike me as longshots, just like Columbus Center ... someone with very deep pockets needs to be prepared to take a big risk with more of a goal of "making a statement" than making money. That, after all, is how we got the Hancock tower. From an economic standpoint, JH would have been much better off sinking their 1970 dollars into a dozen five story office buildings in a park on 128 ... they realized this, of course, but they wanted to respond to the interloper (Pru) from New Jersey.

I am quoting this for truth. The Pru, Hancock, Sears Tower, Empire State Building, Chrysler Building, etc, were ALL built for ego. In fact a few years after the Sears Tower was built Sears built a larger, cheaper office park in the suburbs and moved out of the tower because it was so expensive.
 
The Hancock was sold by the company for ~$800M a few years ago while commanding rents 2x higher than the suburbs. It just sold for ~$1B, with rents near $60sq/ft. Very few, if any office parks have generated or retained that kind of value. The JHT as an investment made a lot of sense when it was built, and buildings like it still do. Skyscrapers are built on ego, but so are strip malls and apartment complexes. Someone has the ego, drive and confidence to take a calulated risk.
 
tocoto said:
Someone has the ego, drive and confidence to take a calulated risk.

Coming with the confidence to take the risk is also the cooperation from the town/city/state (whoever), that viable give and take will occur between the two parties.

Seriously, I doubt any developers feel that Boston is a helpful city when it comes to making concessions and working towards getting projects built. Boston is like the kid in the neighborhood with the new toy: You either play with it on their terms, or they take the toy and go home and you get nothing.
 
Tocoto, not to be snarky, but help me with your math.

As I understand it, the Hancock complex was built at a cost of about $200 million in the early 1970s. It sold for $910 million in 2003 and about $1.3 billion last year.

That sounds like great appreciation ... except ... the 2003 price barely kept pace with inflation over the 1970s entry cost, and the appreciation did not even keep pace with the 2006 building cost (more on that below). ($100 in 1973 was $880-$900 in 2003 depending on the index you use). In the meantime, the Dow index is up over tenfold. If all of the money in the 1970s had been thrown into risk-free annual securities, or even savings bonds, the return would have been better than on the Hancock complex.

Now let's take a local real estate comparison. Chase down the price of a townhouse a few blocks from the Hancock (any one will do - try the entire length of Clarendon Street in the South End) in 1973 and compare it to today. Up by 20x or more in nominal dollars. So in other words, if Hancock had scattered their money randomly into residential properties around the neighborhood they would have done much, much better.

Are rents at the Hancock more than double those of offices in the 'burbs? Absolutely! Unfortunately, that's irrelevant, because the cost to build per square foot is a much larger multiple. Do you have any idea how many office buildings on 128 you could have built for $200 million in the early '70s? And you would have done much better with your investment in those, too, probably even if you treated the buildings themselves as disposable.

Final points at the risk of overkill: when the Hancock was sold for the sky-high price last year, the local business journals noted that in some sense that was a bargain, because with current construction costs it would cost more than that to replicate today. (And that, indeed, is the point - even in a much stronger Boston office market, 35 years on, it still would cost more to build than it is worth). It was also pointed out that the real moneymaker in the complex is the squat garage, which is not a building that we on ArchBoston spend a lot of time photographing. If the numbers could be isolated for the tower alone, they'd be much worse. Sure, the recent 3-year flip made great money, but the long-term return is still terrible.

I'm happy to have my numbers challenged, but I say, extremely tall narrow towers were a crap investment then, and they are still a crap investment now. It's about ego, branding, something other than the return on the building and its rents.
 
And that is why people build in the 'burbs. It is cheaper. You only need to build in a city if you want to show off (or if you are building for people who themselves want to show off, i.e. condos).

I shouldn't buy this, but my ego demands it.
 
InTheHood said:
Tocoto, not to be snarky, but help me with your math.

As I understand it, the Hancock complex was built at a cost of about $200 million in the early 1970s. It sold for $910 million in 2003 and about $1.3 billion last year.

That sounds like great appreciation ... except ... the 2003 price barely kept pace with inflation over the 1970s entry cost, and the appreciation did not even keep pace with the 2006 building cost (more on that below). ($100 in 1973 was $880-$900 in 2003 depending on the index you use). In the meantime, the Dow index is up over tenfold. If all of the money in the 1970s had been thrown into risk-free annual securities, or even savings bonds, the return would have been better than on the Hancock complex.

Now let's take a local real estate comparison. Chase down the price of a townhouse a few blocks from the Hancock (any one will do - try the entire length of Clarendon Street in the South End) in 1973 and compare it to today. Up by 20x or more in nominal dollars. So in other words, if Hancock had scattered their money randomly into residential properties around the neighborhood they would have done much, much better.

Are rents at the Hancock more than double those of offices in the 'burbs? Absolutely! Unfortunately, that's irrelevant, because the cost to build per square foot is a much larger multiple. Do you have any idea how many office buildings on 128 you could have built for $200 million in the early '70s? And you would have done much better with your investment in those, too, probably even if you treated the buildings themselves as disposable.

Final points at the risk of overkill: when the Hancock was sold for the sky-high price last year, the local business journals noted that in some sense that was a bargain, because with current construction costs it would cost more than that to replicate today. (And that, indeed, is the point - even in a much stronger Boston office market, 35 years on, it still would cost more to build than it is worth). It was also pointed out that the real moneymaker in the complex is the squat garage, which is not a building that we on ArchBoston spend a lot of time photographing. If the numbers could be isolated for the tower alone, they'd be much worse. Sure, the recent 3-year flip made great money, but the long-term return is still terrible.

I'm happy to have my numbers challenged, but I say, extremely tall narrow towers were a crap investment then, and they are still a crap investment now. It's about ego, branding, something other than the return on the building and its rents.

I'm surprised that my comments sparked such a long, passionate reply considering we agree on the basic premise, developments are based on ego.

You disagree on the value of the JHT as an investment. A true comparison to other buildings, especially residential buildings is a major analytical task for which I am unqualified. However, I'll make a stab at it.

Some things I would consider are:

costs to upgrade the building
costs each time it is sold (brokers, etc.)
taxes
repairs

These would apply to both the JHT and a home. However in a commercial building, at least some if not most expenses can be written off as a business expense, generating value compared to the residential unit.

In addition, the JHT has other sources of value including:

rent - I don't know what rents were in 1975, but the JHT generates about 7.5% of its most recent sales price each year now based on rents as I under stand them, probably was about the same when built.

advertising - the iconic building provides the company with free advertising probably worth hundreds of millions or even billions of dollars over its lifetime. Think of all the times it was shown in in "Cheers" alone.

Corporate image and ensuing sales - while intangible, this building undoubtedly impressed clients and generated revenue for the company.

The Hancock company value grew in part because of its iconic building. I can't put a number on this but I believe it is not inconsequential.

None of these are true for residential. For suburban office parks the impact is certainly lower.

My conclusion: An iconic commercial building like the JHT is not a bad investment compared to other real estate.
 
And, seemingly, the only big ego left in Boston is Mayor Menino. A good amount of corporate ego has left the city. StateStreet, maybe the last big company anchored downtown has a new home, and as such we will not be seeing any proposals from them.
 
Liberty Mutual? And there's no reason why companies like Bose, Boston Scientific, or Staples couldn't be lured into downtown with a shiny new tower as bait :wink:
 
They would be lured by tax incentives which would help the city as much as if they were located on 128. Why not incentives to build smaller office buildings in Roxbury? Dorchester? Brighton? Those places could use the jobs, it would improve the area, and best of all it would mean that there aren't hundreds of new commuters rushing into downtown Boston every day.
 
I wouldn't say that Fidelity is very influential any more. They are still moving jobs out of the city to places like NC, FL and TX. They are less committed to Boston now than they ever have been.

That said, I'd love to see some of the other suburban companies that have been listed move to Boston. If Philadelphia can get a freakin giant Comcast tower, why not an equally impressive Staples tower?
 
Staples tower would be cool. So would Bose, they're out on some big warehouseish white building on 95 i think. And the guy who ownws Fidelity (or runs, or co-owns, or w/e) lives in my town. and he certainly gives to the town. so why cant he give to boston?
 
InTheHood said:
Tocoto, not to be snarky, but help me with your math.

As I understand it, the Hancock complex was built at a cost of about $200 million in the early 1970s. It sold for $910 million in 2003 and about $1.3 billion last year.

That sounds like great appreciation ... except ... the 2003 price barely kept pace with inflation over the 1970s entry cost, and the appreciation did not even keep pace with the 2006 building cost (more on that below). ($100 in 1973 was $880-$900 in 2003 depending on the index you use). In the meantime, the Dow index is up over tenfold. If all of the money in the 1970s had been thrown into risk-free annual securities, or even savings bonds, the return would have been better than on the Hancock complex.

Now let's take a local real estate comparison. Chase down the price of a townhouse a few blocks from the Hancock (any one will do - try the entire length of Clarendon Street in the South End) in 1973 and compare it to today. Up by 20x or more in nominal dollars. So in other words, if Hancock had scattered their money randomly into residential properties around the neighborhood they would have done much, much better.

Are rents at the Hancock more than double those of offices in the 'burbs? Absolutely! Unfortunately, that's irrelevant, because the cost to build per square foot is a much larger multiple. Do you have any idea how many office buildings on 128 you could have built for $200 million in the early '70s? And you would have done much better with your investment in those, too, probably even if you treated the buildings themselves as disposable.

Final points at the risk of overkill: when the Hancock was sold for the sky-high price last year, the local business journals noted that in some sense that was a bargain, because with current construction costs it would cost more than that to replicate today. (And that, indeed, is the point - even in a much stronger Boston office market, 35 years on, it still would cost more to build than it is worth). It was also pointed out that the real moneymaker in the complex is the squat garage, which is not a building that we on ArchBoston spend a lot of time photographing. If the numbers could be isolated for the tower alone, they'd be much worse. Sure, the recent 3-year flip made great money, but the long-term return is still terrible.

I'm happy to have my numbers challenged, but I say, extremely tall narrow towers were a crap investment then, and they are still a crap investment now. It's about ego, branding, something other than the return on the building and its rents.

I had to register to reply to this.

No one pays cash to develop a building. You have an equity investment (usually in the 20%-25% range) and the rest is financed (just like you would your house). Therefore, to compare a dollar to dollar investment in the stock market is way understating the return on investment in real estate.

To be conservative, John Hancock probably put it $50M in equity and financed the other $150M,....BUT, on top of that, they paid rent to themselves (remember, they would be paying rent to someone) and probably generating about a 5% historical return on investment.

So......at 30 years at a 5% return on $50M (not compounded) is $75, and the appreciation was $710M, plus the initial investment of $50 and their loan was probably amortized over 40 years, so after 30 years that would be roughly $65M.

That means, John Hancock would be getting a check for $775M plus their $75M in rental income (which I assume they would be investing)....assuming JH couldn't figure out how to invest the $75M and put it under their mattress, they would have $850M on a $50M investment.

That's about a 10% return....the DJIA on the other hand has returned just less than 8% since 1973.


Oh yeah, the John Hancock Tower is prettier than a certificate of stock shares.
 
Here's a list of fortune 1000 companies in Ma.
 
The geographic breakdown of the Fortune 500/1000 always make me cringe. A lot of people have no concept of how little we have in terms locally based businesses. If you really want to see something sad, take a look at the listing by city: http://money.cnn.com/magazines/fortune/fortune500/2007/cities/

In one regard I now wish we could me a little more like Omaha. Alas my soon to be new home has a solid 45
 
But if that list was ranking metropolitan areas, then Boston would be in the top 5.
 
atlrvr said:
InTheHood said:
Tocoto, not to be snarky, but help me with your math.

As I understand it, the Hancock complex was built at a cost of about $200 million in the early 1970s. It sold for $910 million in 2003 and about $1.3 billion last year.

That sounds like great appreciation ... except ... the 2003 price barely kept pace with inflation over the 1970s entry cost, and the appreciation did not even keep pace with the 2006 building cost (more on that below). ($100 in 1973 was $880-$900 in 2003 depending on the index you use). In the meantime, the Dow index is up over tenfold. If all of the money in the 1970s had been thrown into risk-free annual securities, or even savings bonds, the return would have been better than on the Hancock complex.

Now let's take a local real estate comparison. Chase down the price of a townhouse a few blocks from the Hancock (any one will do - try the entire length of Clarendon Street in the South End) in 1973 and compare it to today. Up by 20x or more in nominal dollars. So in other words, if Hancock had scattered their money randomly into residential properties around the neighborhood they would have done much, much better.

Are rents at the Hancock more than double those of offices in the 'burbs? Absolutely! Unfortunately, that's irrelevant, because the cost to build per square foot is a much larger multiple. Do you have any idea how many office buildings on 128 you could have built for $200 million in the early '70s? And you would have done much better with your investment in those, too, probably even if you treated the buildings themselves as disposable.

Final points at the risk of overkill: when the Hancock was sold for the sky-high price last year, the local business journals noted that in some sense that was a bargain, because with current construction costs it would cost more than that to replicate today. (And that, indeed, is the point - even in a much stronger Boston office market, 35 years on, it still would cost more to build than it is worth). It was also pointed out that the real moneymaker in the complex is the squat garage, which is not a building that we on ArchBoston spend a lot of time photographing. If the numbers could be isolated for the tower alone, they'd be much worse. Sure, the recent 3-year flip made great money, but the long-term return is still terrible.

I'm happy to have my numbers challenged, but I say, extremely tall narrow towers were a crap investment then, and they are still a crap investment now. It's about ego, branding, something other than the return on the building and its rents.

I had to register to reply to this.

No one pays cash to develop a building. You have an equity investment (usually in the 20%-25% range) and the rest is financed (just like you would your house). Therefore, to compare a dollar to dollar investment in the stock market is way understating the return on investment in real estate.

To be conservative, John Hancock probably put it $50M in equity and financed the other $150M,....BUT, on top of that, they paid rent to themselves (remember, they would be paying rent to someone) and probably generating about a 5% historical return on investment.

So......at 30 years at a 5% return on $50M (not compounded) is $75, and the appreciation was $710M, plus the initial investment of $50 and their loan was probably amortized over 40 years, so after 30 years that would be roughly $65M.

That means, John Hancock would be getting a check for $775M plus their $75M in rental income (which I assume they would be investing)....assuming JH couldn't figure out how to invest the $75M and put it under their mattress, they would have $850M on a $50M investment.

That's about a 10% return....the DJIA on the other hand has returned just less than 8% since 1973.


Oh yeah, the John Hancock Tower is prettier than a certificate of stock shares.

Your comparison still isn't apples to apples. What if you were to lever stocks instead of real estate? Historically the real estate market has not performed as well as large cap stocks, especially core properties such as JHT. And also, how is it that you can pay rent to yourself?

The reason why real estate has been so attractive in the last decade or so is that interest rates have been historically low. Low interest rates reduce the cost of borrowing and make financing large projects much more profitable. Also, the amount of equity needed to get a project off the ground is lower when the cost of capital is lower. Low interest rates have been the primary driver of Real Estate valuations, along with the seemingly endless amount of liquidity in the market.

We can only speculate about the profit that the JHT has made since its inception in the 70's. Though I wouldn't doubt that it performed in line with the local real estate market
 
i gotta mostly agree with atlrvr. about JHT not performing in line with large caps... even though large caps are generally a good investment, i would still have to think theres even less risk with the JHT.

You dont pay rents to yourself, but you do have to pay off your loans on the property. i think a good question to ask how long it took for the building to turn a profit. from that point on, rental revenue coming in can then be reinvested. compound that over the years, as well as the fact that depending on interest rates, you could borrow against the building itself, and reinvest THAT. You cant borrow very highly against your stock portfolio (ie 1929 stock market crash) but you can on a tangible asset.

If you really wanted to, you could get a good idea of what the JHT has made/ is worth over the years. i have to think this is a better investment than stock market.... lower risk. of course u need the capital and one thing everybody on here forgot about, is John Hancock's PORTFOLIO. what their needs were at the time... and im sure this is what the doctor ordered.
 
You do pay rent to yourself, because you are leasing that space...whether it is on an accounting balance sheet, or physically writing a check from CRE to a wholly-owned subsidy that owns the property.

Remember, if not occupying the building they own, they would be renting from someone else, which is a sunk-cost.

Also, leveraging to buy stock for long term holds would be somewhat silly. I would think your margins would be much tighter.

For my analysis, I assumed they had a loan at a 9% rate. In reality, it was probably lower, so they should have enjoyed a better return.

Also, what is the value of a hundred thousand people a day saying John Hancock Tower?
 

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