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Tower Race: Developers vie for high-rise rewards
Boston Business Journal - June 15, 2007
by Michelle Hillman
Journal staff
At least five developers are in a shovel race to see who can build the city's first new office tower.
The winner gets a major tenant, rental income for the next 10 to 15 years and the potential for huge returns in the years to come. The losers? They may get a lot of heartache.
Just ask Dean Stratouly if being first matters.
In 2001, he missed the development cycle by about six months and has been paying for it ever since.
Stratouly struck a deal to build a 33-story tower that year, when the Boston office market's vacancy rate was about 10 percent. By the time he finished acquiring the site where 33 Arch St. would be built, the vacancy rate dipped to 5 percent. When he started construction of the 600,000 square-foot tower in June 2001, the vacancy rate in Boston was a startling 2 percent.
Then the terrorist attacks of 9/11 slowed the economy and caused Stratouly to build into a down market cycle. A recession hit, and the building opened with no tenants except for Stratouly's company, Congress Group Inc.
"The first guy in is always in much better shape than the last guy in, so there's definitely a race," said Stratouly, who still has three floors left to lease at 33 Arch.
John B. Hynes of the Gale Co. had a different experience entirely. He started construction of One Lincoln St. in 2000 and was able to open the building in 2003 -- a full year ahead of Stratouly. Hynes landed State Street Corp. and then sold the building for about $700 million, or twice as much as it cost him to develop.
Developers surveying the market today all want Hynes' experience: to time the market exactly right so their office tower opens when tenants are still desperate for large chunks of Class A space, as they are today. There are at least 3 million square feet of office space in Boston's development pipeline, with the first buildings scheduled to open by 2011.
Hynes is again vying for a first-place finish and is placing a bet on his project at One Franklin St. in Downtown Crossing. If all goes well, Hynes hopes to break ground this September.
"My experience is the building that's in the ground first is the one that's going to capture the most attention," said Hynes.
There are office projects proposed all over town, but only a handful have a serious chance of getting started this year, according to real estate executives. Developers are ratcheting up plans or at least moving as fast as they can to stay on schedule.
"Absolutely there's a competition, so we're advancing our planning effort," said David Perry, senior vice president of Hines Interests LP, which is developing the South Station project, which includes a 49-story, 1 million-square-foot office tower.
Perry said he will break ground by the end of the year and has "a lot of people working very fast" to make sure plans proceed according to schedule.
While Perry and his competitors don't have committed tenants, developers are confident once their buildings begin to take shape tenants will get more serious about signing leases.
That's the case at Fan Pier, where developer Joseph Fallon plans to break ground on a "spec" office building this fall. Fallon said he's building into a market that has been improving since the beginning of the year.
"The interest in the building has been very strong," said Fallon, president of the Fallon Co., which is developing Fan Pier. "A number of potential tenants have said they'd like to be here."
Fallon will break ground on Fan Pier's first 500,000-square-foot office building this fall. There's a chance that one or two towers could come out of the ground at the same time. If that happens, tenants will probably play the buildings off each other to achieve better deals, said John Miller of Lincoln Property Co.
A survey by real estate firm Meredith & Grew Inc. indicates the market has continued to improve since 2004, when the overall vacancy rate for Boston was 17 percent. Preliminary figures show the vacancy rate for Boston at the end of the second quarter will be 9.5 percent.
Asking rents for low-rise tower space are between $45 and $55 per square foot, while asking rents for high-rise space are between $55 and $75 per square foot.
If the market absorbs about a million square feet a year until 2010, the vacancy rate could drop to 6 percent, said Mary Kelly, senior vice president at Meredith & Grew.
"That shows there's a clear need for much of the office space that's in the pipeline," she said.
Miller is ready to go with permits, partners and money to build in hand. His project is much smaller and not considered a direct competitor for buildings twice the size of Two Financial.
Still, Miller will break ground on the 215,000-square-foot mid-rise building next week.
"When you get into single-digit vacancy, and it's so hard to get out of the ground in this city ... the timing becomes critical," said Miller. "It's a great timing play vis-a-vis the market. We're not Russia Wharf, 400 feet above the harbor, but it's well timed, well positioned."
Boston Business Journal - June 15, 2007
by Michelle Hillman
Journal staff
At least five developers are in a shovel race to see who can build the city's first new office tower.
The winner gets a major tenant, rental income for the next 10 to 15 years and the potential for huge returns in the years to come. The losers? They may get a lot of heartache.
Just ask Dean Stratouly if being first matters.
In 2001, he missed the development cycle by about six months and has been paying for it ever since.
Stratouly struck a deal to build a 33-story tower that year, when the Boston office market's vacancy rate was about 10 percent. By the time he finished acquiring the site where 33 Arch St. would be built, the vacancy rate dipped to 5 percent. When he started construction of the 600,000 square-foot tower in June 2001, the vacancy rate in Boston was a startling 2 percent.
Then the terrorist attacks of 9/11 slowed the economy and caused Stratouly to build into a down market cycle. A recession hit, and the building opened with no tenants except for Stratouly's company, Congress Group Inc.
"The first guy in is always in much better shape than the last guy in, so there's definitely a race," said Stratouly, who still has three floors left to lease at 33 Arch.
John B. Hynes of the Gale Co. had a different experience entirely. He started construction of One Lincoln St. in 2000 and was able to open the building in 2003 -- a full year ahead of Stratouly. Hynes landed State Street Corp. and then sold the building for about $700 million, or twice as much as it cost him to develop.
Developers surveying the market today all want Hynes' experience: to time the market exactly right so their office tower opens when tenants are still desperate for large chunks of Class A space, as they are today. There are at least 3 million square feet of office space in Boston's development pipeline, with the first buildings scheduled to open by 2011.
Hynes is again vying for a first-place finish and is placing a bet on his project at One Franklin St. in Downtown Crossing. If all goes well, Hynes hopes to break ground this September.
"My experience is the building that's in the ground first is the one that's going to capture the most attention," said Hynes.
There are office projects proposed all over town, but only a handful have a serious chance of getting started this year, according to real estate executives. Developers are ratcheting up plans or at least moving as fast as they can to stay on schedule.
"Absolutely there's a competition, so we're advancing our planning effort," said David Perry, senior vice president of Hines Interests LP, which is developing the South Station project, which includes a 49-story, 1 million-square-foot office tower.
Perry said he will break ground by the end of the year and has "a lot of people working very fast" to make sure plans proceed according to schedule.
While Perry and his competitors don't have committed tenants, developers are confident once their buildings begin to take shape tenants will get more serious about signing leases.
That's the case at Fan Pier, where developer Joseph Fallon plans to break ground on a "spec" office building this fall. Fallon said he's building into a market that has been improving since the beginning of the year.
"The interest in the building has been very strong," said Fallon, president of the Fallon Co., which is developing Fan Pier. "A number of potential tenants have said they'd like to be here."
Fallon will break ground on Fan Pier's first 500,000-square-foot office building this fall. There's a chance that one or two towers could come out of the ground at the same time. If that happens, tenants will probably play the buildings off each other to achieve better deals, said John Miller of Lincoln Property Co.
A survey by real estate firm Meredith & Grew Inc. indicates the market has continued to improve since 2004, when the overall vacancy rate for Boston was 17 percent. Preliminary figures show the vacancy rate for Boston at the end of the second quarter will be 9.5 percent.
Asking rents for low-rise tower space are between $45 and $55 per square foot, while asking rents for high-rise space are between $55 and $75 per square foot.
If the market absorbs about a million square feet a year until 2010, the vacancy rate could drop to 6 percent, said Mary Kelly, senior vice president at Meredith & Grew.
"That shows there's a clear need for much of the office space that's in the pipeline," she said.
Miller is ready to go with permits, partners and money to build in hand. His project is much smaller and not considered a direct competitor for buildings twice the size of Two Financial.
Still, Miller will break ground on the 215,000-square-foot mid-rise building next week.
"When you get into single-digit vacancy, and it's so hard to get out of the ground in this city ... the timing becomes critical," said Miller. "It's a great timing play vis-a-vis the market. We're not Russia Wharf, 400 feet above the harbor, but it's well timed, well positioned."
