For years following the pandemic, the uncertainty around the office sector left some of the most prominent towers in Boston stuck in limbo and unable to sell to investors that could give them new life.
But now, owners and lenders are ready to move on from buildings, even at substantial discounts, and they are being scooped up by buyers who say the price is finally right.
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"Owners and lenders are starting to really understand that their assets may be great assets but have a broken capital stack," Beacon Capital Partners Managing Director Meredith Majoch said this month at Bisnow’s Boston State of the Market event. "We're starting to see some real liquidity at that end of the market."
Majoch said the bidding pool for these types of assets has gotten more competitive. Her firm has sought these opportunities and has lost out on several bids for office properties, but ultimately, she thinks the sales are good for the market.
"Distress is finally trading, which is wonderful to see," she said.
Majoch was one of several office market players at Bisnow’s event who discussed the appeal of buying these buildings at such a low cost basis. While many institutional players remain on the sidelines — firms like life insurance companies and pension funds that want steady, predictable returns — opportunistic private investors and foreign buyers see these prices as a prime opportunity to buy low in a city they believe will succeed over the long term.
"If we were playing a drinking game where you hear ‘basis’ and drink, we'd all be drunk by now. But it's truly what's going on right now in Boston," North Colony Asset Management partner Drew Pepoli said. "Our investors are pounding down the door, saying, 'Let's buy more. Let's buy more.'"
In the third quarter, $2.2B worth of Boston office buildings sold, a 23.7% year-over-year increase, according to Avison Young.
Some of these buildings have been trading at well below their past sale prices.
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In June, Kendall Capital acquired an 11-story office building at 18 Tremont St. for $30M. The seller, Jamestown, had bought the building in 2019 for $103M.
In July, Synergy and New York-based alternative investment manager Axonic Capital acquired the 360K SF building at 265 Franklin St. for $116M from Clarendon Group — 32% less than the $170M Clarendon paid roughly 20 years ago.
This week, Rockpoint bought back its 1.1M SF office building at 100 Summer St. at a foreclosure auction, paying $260M, well below the $806M it initially bought the building for in 2019.
Young Park, the CEO of Berkeley Garbe, a joint venture formed this year by German real estate firm Garbe and Berkeley Investments, said he is seeing these discounts becoming more common. As lenders are no longer willing to extend loans in hopes an underperforming asset can be turned around, more properties are coming to the market.
"I'm encouraged because I see some opportunities. I even hear that some lenders are giving up on the pretend-and-extend and are kind of taking things to a more logical conclusion," Park said.
More opportunity is set to come down the pipeline as billions of dollars worth of loans come due.
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From this month through the end of next year, $78B of CMBS loans are reaching their hard maturity, meaning borrowers have no extension options remaining, according to Trepp. The office sector has the most CMBS hard maturities next year, at $7.7B.
Cambridge Savings Bank Executive Vice President Ian Brandon said next year's wave of loan maturities will "present a great deal of opportunity."
"I'm going to feel some pain as a result," the lender said. "But I think it's something that, in many ways, is going to be a good thing in the long term for the markets."
Of the buyers hunting deals now, there has been a lot of demand from foreign investors. These buyers accounted for 17% of the year-to-date investment volume among top U.S. markets, according to Avison Young.
"We're seeing the biggest demand is definitely from the international market," Pepoli said. "I mean, the majority of our equity is coming into the U.S., and it's because they're taking that higher-altitude look."
Pepoli said these international investors are more willing to bet on Boston because they are looking at the long-term fundamentals and aren't as focused on the near-term political issues that might keep other investors away.
He said he is also seeing more "smaller shops" like his going after distressed or semidistressed deals right now.
North Colony Asset Management has acquired at least three office buildings over the last year, including a 251K SF office building at 10-20 Channel Center St. in January for $52M. The deal is substantially less than the $119M LaSalle Investment Management bought it for in 2016.
Pepoli said the real recovery will occur when institutional investors become more willing to buy older office buildings that have been repositioned — helping drive up prices and creating profits for the smaller players investing in upgrades. While institutions are now willing to buy top-tier office buildings like One Marina Park Drive, which Oxford Properties paid $435M for in August, he said they still haven’t been active in the Class-B segment.
"Until the institutions start getting their feet wet again in there, there isn't really a huge exit market for when you've executed on these business plans," he said.
See more photos from Bisnow's Boston State of the Market event below.
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