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Boston's Most Important Housing Trend Is in the Office Market

Boston's office buildings are once again hot commodities. As Casey Ross reports in The Globe, 11 traded last year—more than in each of the previous three years. Two buildings traded in 2011 were of particular resonance: $610 million for Exchange Place and $365 million for 33 Arch Street. But the resonance is not necessarily in the price tags, as high as those are for the entire New England region. Rather, it's about the buyers—in Exchange Place's case, the Swiss monster UBS and in 33 Arch's, the pension fund TIAA-CREF.

See, several years ago, well before the Great Recession, investors had begun approaching office buildings as if they were any other stock to be traded. That's where we get things like Real Estate Investment Trusts and the slow demise of family-run concerns—commodify a building, chop it up into shares, sell the shares. You're not so much selling bricks and mortar as you are expectations of profitability. And what makes an office building, in particular, profitable? The rents that can be charged for the space inside.

Simple enough, but since most office leases are for at least 10 years, the rents are not necessarily set by the current market conditions. Investors are projecting years down the road. They're following models and advice that says that office-based jobs will increase by X in Y time period, for a demand-for-office-space level of Z. That is why Boston's office buildings in the Financial District, Back Bay and other Downtown areas are seeing such interest by investors. The present job growth is all well and good; but it's the projected job growth that has them really writing the checks.

It's good news for the housing market, too (at least if you're an owner already or on the sales side of the industry). Why? Let's extrapolate a little further (stay with us now). The increased demand for Boston office space that investors project hinges, of course, on commercial tenants wanting to lease the space. That ups competition for it, especially given the area's anemic pace of fresh development, and allows investors to up the rent, making the building a more valuable stock should it ever be put up for sale again (and we're guessing a lot of these recent trades will be; pension funds and European financial houses do not make it a matter of long-term course to own office towers).

And what would attract commercial tenants (i.e. companies)? A safe city; a clean city; relatively low crime and relatively good schools; solid public transportation (say what you will about the T, try living in a similar-sized city that doesn't have anything close, like Charlotte, the nation's second biggest banking hub after New York—the buses don't even run on weekends and there's one light-rail line!). Oh, and a pool of available talent that itself wants to congregate in a safe, clean, educated city with solid public transportation. Boston has this—at least these recent office-building investors must think so. And the companies coming in will bring employees, who will, in turn, need housing. Call it a sort of confidence game. If one market's going to win, the other's halfway there.

· Market Heats Up for Office Towers [Globe]