Boston Developers Playing It Safe On Flashy Projects

The current economic cycle is 125 months old, and Boston is still booming with low office vacancies and high rents. That still isn’t enough for the developers of the first new office tower in downtown Boston in more than 30 years to go spec.

“It doesn’t mean that it can’t be done,” said HYM Investment Group founding partner Thomas O’Brien, who is speaking at Bisnow’s Boston State of the Market event Nov. 19. “But for a building like One Congress, you really need an anchor tenant.”

The HYM Investment Group, National Real Estate Advisors and Carr Properties are moving ahead with One Congress, a nearly $1B, 600-foot office tower, after getting State Street to commit to move its headquarters to the project.

O'Brien remains confident in where Boston is in the cycle. Job growth is strong, and Greater Boston’s 2.7% unemployment rate is below the 3.6% national average, according to the U.S. Bureau of Labor Statistics. Boston is also in the top five for overall inbound foreign investment to U.S. markets for the first half of 2019, according to CBRE. 

But that still isn't enough to move the needle for developers of the city's most ambitious projects.

For a project of such size, scale and cost — about $450M in equity — as One Congress, O’Brien said HYM and its partners needed an anchor tenant. The One Congress development team had been moving through the permitting and planning process for about a year before signing State Street, but O’Brien said landing the financial institution as a 500K SF anchor was what let them finally put shovels in the ground. 

Economists typically shy away from directly answering where in the economic cycle development is currently, but they usually agree it is closer to the end than the beginning. Despite the late-cycle timing, there isn’t a shortage of new projects in Boston just getting off the ground or through the approvals process. 

Accordia Partners is just beginning the planning and approvals process for a mixed-use development on the old Bayside Exposition property in Dorchester. WS Development is underway with several Seaport office projects, and Hines isn’t far behind around the corner on South Station Tower. 

But developer confidence isn't getting ahead of Boston's real estate fundamentals. 

“Costs are going up at a rapid pace, and it’s harder and harder for developers to move forward on a project. They’re getting squeezed more than ever,” O'Brien said. “There’s more room to run, but I think people are anxious because this cycle has been going for so long."

Despite all the global interest in Boston, developers are playing it safe because spreads between borrowing rates and yields are narrowing. Interest rates remain low, but the cost of construction is eating into returns. Construction prices in Boston increase between 6% and 8% annually, Colliers Managing Director Aaron Jodka told Bisnow earlier this year. 

“That spread remains the key marker and decision-maker for a developer on if they decide to move forward with a project,” O’Brien said.

Even as construction costs continue to rise, so has the demand for the most expensive office space. The city’s 7.9% office vacancy rate is its lowest since early 2001, and a scarce availability of large blocks of space make new construction like One Congress more appealing.

“What you seen in Boston and other intellectual capital markets like San Francisco and Austin is people will pay more for the right kind of space,” Accordia Partners co-Managing Partner Richard Galvin said. “If you have the right dynamics for the space, the entrepreneur is willing to pay more.”

Accordia and Ares Management Corp. are partnering on plans for a nearly 3.5M SF mixed-use project at the Bayside Expo property, where the developers formalized a 99-year, $235M ground lease with UMass Boston this summer. 

Galvin is optimistic there is still room to grow in Boston’s economy, but he also remains cautious due to rising construction costs and the labor shortage. A bigger labor pool is necessary, but so is affordable housing and infrastructure to move people around reliably to those jobs, Galvin said.  

Accordia and Ares will kick off Bayside’s formal approval process in the spring, but the partnership recognizes it will take years and likely another cycle or more to complete. Despite the caution, Galvin is confident Boston will still be humming along when the entire project delivers. 

“I’ve been around a long time and seen a few cycles,” he said. “Those that hang in there and invest through down cycles come out ahead.”