Seven years ago, the pair sold for $16 million. It sold late last month for just a quarter of that amount, at $4.1 million, a warning of the predicament that much of the city’s older, unfilled office stock may face.
“There’s no secret at the moment. The office market is difficult,” said Mai Luo, a local real estate executive. Who bought the building on West Street. “But I’m optimistic about the future.”
Luo, president of Kendall Capital, a luxury real estate investment firm in Boston, said in an interview that everything from keeping properties as they are to considering whether converting them to housing through the city’s office-to-residential pilot program would work. , said it is considering all options. (The pilot will open briefly this fall.)
The property is 52% leased, Luo said. The $4.1 million deal was funded by local private investors and brokered by Boston Realty Advisors.
When Bay Management Corp., a real estate firm with offices in Dedham and New York, purchased the property in 2016, the purchase price of $16 million was more than double the previous sale price. Bay Management Corporation did not respond to messages seeking comment.
A 74% drop in value is a difficult number to grapple with, but experts say it doesn’t necessarily reflect the office market as a whole. Aaron Jocca, director of U.S. capital markets research at brokerage Colliers International, said since the property is only half-full, it’s likely not generating much rent, and such “distressed” properties are , said the valuation is different from a fully leased building that receives cash.
“It is important to understand the underlying performance of an asset when comparing recent sales with previous sales,” he said.
One of the more puzzling elements of Boston’s COVID-19 recovery is that much of the city’s commercial real estate market is on a dual trajectory. While some buildings are benefiting from a “flight to quality” and companies decide to move into new or renovated space, others are Is receiving. In particular, older properties with less investment are struggling with record availability and sublease space.
Few office buildings are selling in Greater Boston, and professionals are selling since the once-hot commercial real estate market went into deep freeze at the height of the COVID-19 pandemic. A small number of office buildings are being closely watched. Two deals this summer caught the attention of the industry. The $45 million sale of One Liberty Square in the Financial District (a 17% loss compared to the previous sale in 2013) and the $41 million sale of 70 Federal Street for $8,000. . The 70 federal deal, which closed in August, was the first office sale in downtown Boston in 18 months.
Neither sale was as harsh as the property in the heart of downtown, a half-block from the Park Street MBTA station, was discounted by nearly three-quarters. Mr. Jocka sees the three deals on a spectrum, with half of West Street on the other side of a swinging pendulum.
“It shows part of the building, but that’s not the norm in Boston,” Giocka said. “This is not to say that in the broader market, you should expect the value to be 75% off. It’s asset-specific.”
One of the inevitable factors weighing down the market is the continuation of high interest rates. Most sales involve some form of debt or loan, and higher interest rates make debt payments much more expensive for buyers, said Phil Mobley, national director of office analysis at KoStar, a real estate research firm in Boston. said to mean.
And in a world where hybrid work is far more common than it was just a few years ago, demand is slowing. Gone are the days when growing companies would lease additional space where possible in anticipation of future growth. Now, tenants are evaluating how they will actually use the space and how much space they actually need.
“Both the quantity and quality of office space are in greater focus than ever before,” Mobley said. “Once you realize you don’t need as much, you can take the same amount (of investment) and invest in better space.”
Among large U.S. cities, the office market in Boston’s central business district worsened “the worst” in the third quarter compared to earlier this year, according to a Moody’s Investors Service report measuring stress in the commercial real estate market. That’s what it means. The quarterly decline was primarily due to weaker demand and higher vacancy rates, the report said.
Still, Boston’s office vacancy rates are among the lowest of any major U.S. market, said Darrell Wheeler, head of CMBS research at Moody’s Investors Service. He said Boston is more resilient than other large markets because of the city’s strong job base and diverse economy.
“I think we’re going to find out over the next three to four years how hybrid works. This is a real experiment for most companies,” Wheeler said. “So where do you stand? And how carefully do tax assessments actually track the value of these assets? It’s hard to say.”
Still, the prospect of deteriorating values in the commercial tax base is concerning, given that approximately 72 percent of the city’s operating revenue comes from property taxes, much of which is commercial. At last week’s City Council hearing, Councilman Michael Flaherty expressed concern about the impact of rising vacancy rates. The decline in real estate values that will likely follow, which will impact the city’s revenue.
“That’s how we pay for our schools. That’s how we pay for everything: parks, playgrounds, police stations, fire departments, public works, snow removal, tree pruning, snow removal, garbage collection. ,” Flaherty said. “That’s the vibe of Boston.”
And that’s a warning, he said. If property taxes start going down… “That’s a sacred moment for Boston.”
Catherine Carlock can be reached at catherine.carlock@globe.com.follow her @bycathcarlock.