Affordable Housing A Downtown Challenge, But Office Product Is Hotter Than Ever
Investors like the economic forecast of downtown Boston, but, like elsewhere in the city, affordability remains the neighborhood’s Achilles' heel.
“We really don’t ask our companies or our industries to contribute to the quality of life of their workers,” MassHousing Executive Director Chrystal Kornegay said Thursday at Bisnow’s Neighborhood Series: Downtown Boston event. “We ask the commonwealth to supply workers for them. Businesses ask the commonwealth to subsidize them coming here, but nobody asks where people are going to live.”
A blend of tech and startup companies increasingly backfill space in the neighborhood’s skyscrapers left by financial firms that moved to the Seaport. The new interest has developers and investors pouring capital into downtown assets to reposition and appeal to the changing clientele, but finding a way to give workers an affordable, high quality of life is often tricky arithmetic.
“Boston is so well-positioned for the future,” Equity Office Senior Vice President John Conley said. “We shouldn’t take it for granted. I’m concerned about transportation, I’m very concerned about housing costs and then I’m also concerned in general that the unemployment rate for talented college graduates is effectively zero.”
Boston’s numerous colleges give Conley some peace of mind regarding the unemployment rate. He referred to graduation season as the matriculation of Boston’s “Triple-A farm league” to pump new talent into the city’s workforce, but he stressed the importance of providing them more affordable places to live.
Boston is the fifth-most-expensive city in the U.S. for renters. That translates into an affordable housing market that might not seem affordable to outside observers.
“We’re seeing affordable housing projects that are coming in at $400K or $500K/unit,” Kornegay said. “That’s not sustainable. Nobody thinks we should be building $500K/units for low-income folks. Nobody’s getting rich off it, but nobody’s going broke. We have to figure out a way to do that, and why not in this marketplace with all these bright young things?”
Land cost, cost of construction and time spent bringing product to market drive building costs up, according to Kornegay. She emphasized the need for building innovation as well as government initiatives like one by Gov. Charlie Baker to sell excess state land as ways to bring costs down, but progress on either front has not been linear.
While Baker and Boston Mayor Martin Walsh two years ago touted SouthGate, two downtown parcels near South Station with potential for up to 2M SF of development potential, Nixon Peabody partner Larry DiCara noted developers are not lining up to redevelop the site as much as the two leaders had hoped. Others say Boston is not a market that has shown a willingness to bring technology into the construction sector.
“I almost call construction innovation an oxymoron,” Twining Properties President and CEO Alex Twining said. “For some reason, with all this brain power, this is the most parochial construction market on the planet.”
Despite the high prices, construction costs are not deterring investors. Companies like Boston Consulting Group and PwC are in the process of moving or have already left for the Seaport, but landlords are not panicked. Tech and startup companies are moving into the area, and the accompanying younger talent is changing the neighborhood into one that is activated beyond a 9-to-5 workday.
“Rents are rising — good if you are a landlord, not so good if you are a tenant,” DiCara said. “The vacancy rate is low. Restaurants are full. We just didn’t have very many 40 years ago. The population is younger, and we are close to becoming a 24/7 city. Younger people, often working variable hours, want more from their workplace.”
The younger workforce is causing developers to reposition more properties. Equity Office has reworked amenity space at 100 Summer St. in light of more tech tenants moving into the 32-story building. MetLife bought One Beacon St. in 2014 for $561M in a joint venture with Norges Bank Investment Management. While Boston Consulting Group may be relocating from the tower to Pier 4 in the Seaport, MetLife has seen positive results from capital improvements.
“We want to reposition that asset to create a lot more energy than what surrounds it now,” MetLife Real Estate Investors Director Ashleigh Simpson said. “We’re re-creating the lobby and retail fronting Tremont Street and seeing a lot more leasing activity today.”
Chicago-based L3 Capital and LaSalle Investment Management are underway with their own downtown repositioning. They closed on a $63.25M deal last year for the long-dormant Barnes & Noble building and are looking to bring new office and retail tenants to the 77K SF property.
“Dollars are better spent in a market like Boston, even though the perception is everything is expensive,” L3 Capital Managing Principal Timothy Phair said. “But it’s a thriving market with a runway that seems to have a lot longer to go than other markets.”
The developers see the continued stream of new companies into downtown as reason for why, even at this late stage of a positive economic cycle, they remain optimistic about such a pricy market. Others, like The HYM Investment Group, see the steady interest as also driving the neighborhood to expand its borders. The developer is moving forward with Bulfinch Crossing, a multiphased, 2.9M SF mixed-use project at Government Center.
“There is such a diverse pool of tenants that, if one sector is lagging, Boston has the benefit of other people and industries that suit us well in the event of a downturn,” HYM Vice President John Hurley said.