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.
