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Leather District office building sells for nearly $10 million less than it went for in 2015
By adamg on Fri, 10/27/2023 - 11:51am
City Realty, best known as a developer of residential buildings, moved into the office market yesterday, putting down $11 million to buy 186 Lincoln St., a nine-story office building in the Leather District.
City Realty, through its Lolastar subsidiary, bought the building from Brickman, which paid $20.7 million for the building in April, 2015.
The decline in value is another indication of the continuing erosion of the downtown office market 3 1/2 years after the start of the pandemic.
At one time, City Realty built and operated small apartment buildings, but in recent years has expanded its portfolio to include buildings as tall as 17 stories and life sciences.
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Comments
City Realty.
From small time slumlords to this.
They’ve been buying land all
They’ve been buying land all over in Eastie getting it approved for condo’s then reselling it for giant profits . One example , a new development called MIRA on 301 Border Street a 60 plus condo building sits on 5 parcels spanning almost a half city block bought by city realty for $3M sold a couple years later to another developer for $6M
Ebb and Flow
I remember in ~2009 the John Hancock building (the plywood tower one) was sold for less then $700M, about half of what it was bought for in 2006. People at the time also said it showed how Boston's office market had imploded, never to return.
Residential real estate has basically been on a never ending upward trend although there are decades when it just tracks inflation. But on the office side, values rise and fall like the tide. There's no reason to read much into any sale. If you have money (aka investors) buying out of fashion real estate at a discount seems to be lucrative in the long run.
Cycle versus phase change
The Hancock trade was a matter of overexuberance and bad luck as they set a new bar at the top of the market and then got forced out at the bottom of the financial crisis. Merely a year later Boston Properties paid $930M for the tower.
The issue downtown today is that demand has legged down in a big way as companies pivoted to remote/hybrid arrangements that require a lot less space. I used to lease most of a floor on the Hancock and let it go this month because on the average day each employee in the office had a few thousand SF to themselves. Kind of sad to leave, but huge waste of money.
I have 50% more people than I did in early 2020 but zero square feet of office and a lot fewer people in metro Boston as many moved away and new hires have been made all over the country. This has produced a flight to quality as the remaining tenants flee the Class B/C properties like this one for Class A towers and the like.
If you go around downtown during the day now, there's a lot less footfall, and there's a ton of "zombie space" in these buildings that's leased but effectively unoccupied, and would be impossible to lease at anything approaching pre-pandemic rents today.
It's going to take a couple more years to work through most of the pre-pandemic leases, but if demand doesn't come back in a big way (your guess is as good as mine) then downtown is going to go through a massive change in the next decade. Many of these buildings could become uneconomical because they won't rent as offices and conversion to residential will not be feasible.
Maybe
It certainly seems unlikely to be much of a market for older office space for the next decade. But in 10+ years, who knows? A lot can change.
Look at all those old mill buildings. For decades these sit languishing and were considered a useless eyesore, a painful reminder of better times. Cities wanted them demolished. Today they are considered totally hip and worth big money.
No one can say for certain what downtown Boston will be like in 10-20 years but it sure seems unlikely that the city's best days are over. If I was a billionaire, I'd be buying up these buildings that seem useless by current trends.
I disagree
The words “doom loop” are getting thrown around in cities across the country.
Less tax revenue from commercial, make it up on residential, schools suck so people leave, less revenue from residential. Less money for police and teachers, more people leave.
Boston enjoyed a bill run from 2000 till 2020. We are looking to leave for our home purchase.
I went to school here, worked the swan boats and work downtown. I’m a huge fan of Boston but I don’t see better days ahead. I could be wrong.
Residential property taxes in
Residential property taxes in Boston are so low that they could be gradually raised quite a bit and the vast majority of people would be fine.
Schools?
Boston needs more 1 and 2br units, not "family housing". Schools have been iffy in Boston for decades and it hasn't impacted the market in recent memory. People typically live in the central areas of the city to be close to work and activity, not to raise kids.
Schools rule real estate in the suburbs - not so much in the city.
I agree with both your points, you’re making mine
Pay less property tax and get the residential exemption and send your kids to parochial or private school until they can test into exam schools. Enjoy a short commute.
We think the residential exemption goes away and families will be paying suburbs level property taxes for no schools. Are there enough wealthy residential couples to make up for commercial? I guess we’ll see.
The problem with real estate as an investment
Is that the carrying cost is very high, particularly for commercial property in a market like Boston. The commercial property tax rate is right at 2.5% and you have to pay to maintain the property. Either you finance at rates that are 7% or more, or you have to balance the expected return on cash invested with other uses of the money. To compete with 5% rates on Treasuries you need to expect that the value of the property will double in ~15 years -- ignoring all the carrying costs, too.
It took a lot of years for those mills to reborn as (mostly) housing. I suspect that the purchase prices for the mills before redevelopment were fairly close to zero, too. That doesn't bode well for current owners of office buildings or the banks which hold the mortgages.
Not really comparable
Mill buildings of several stories are much, much easier to convert to other uses than office buildings dozens of stories tall; for example as you go higher, you need more mechanical space per unit of floor already, so where are you going to put all the extra plumbing for the 24/7 occupancy? Much easier to take a relatively open industrial building, make your changes, and enclose individual units.
Besides, office buildings are meant to maximize usable floor space so that you can sit at your desk under a fluorescent light until you go home. If you subdivided an office floor into residential units, a lot of that space would have no natural light at all—not exactly glamorous!
Plus, it's worth mentioning that the mills that made it to be converted have some real survivorship bias going; nobody had the chance to think of converting the Pemberton Mill, after all.
office to housing
It looks the perfect size to convert to housing, as per the new department in BPDA. It's also fairly old, so renovation for housing might not be that much more expensive than renovation for a modern office
I know this building pretty well
And it could be converted to residential given the floorplate size but the views aren't great. And it's only 9 stories so each floor would need multiple units to make the finances work, especially with the initial investment cost. Can't wait to see what happens with it.
But not city realty
Lmao I do not trust City Realty to make decent, livable housing.
property tax revenues
Deep discounts in commercial real estate downtown will lead to sharply reduced assessments by the city in the next couple years. This will lead to a drop in revenue. Where will it be made up? Nobody is saying and it's not that far off. Buckle up