March 18, 2013

Boston booms as young workers say no to suburbs

Developers financed with cheap debt are seeking to profit from a growing work force

By NADJA BRANDT Bloomberg News

BOSTON - The South Boston waterfront was long a bleak area separated from the rest of the city by the Fort Point Channel, its docks and warehouses recalling a faded shipping past.

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A crane stands on the top of a high-rise building under construction on A Street in Boston. Developers and investors drawn to Boston’s expanding life sciences and technology industry, along with a growing work force of educated young adults, are fueling a boom in construction.

Bloomberg News photo/Kelvin Ma

Now construction cranes dot the landscape, rechristened the Seaport district, as builders put up high-end condominiums, offices and hotels in one of the biggest neighborhood transformations in Boston history.

"The waterfront is an overnight success that's taken nearly 30 years to come to fruition," said Brian Kavoogian, president and founder of Charles River Realty Investors, which has developed or acquired more than 20 million square feet of real estate in the Boston metropolitan area. "It finally reached a tipping point."

Boston's real estate market, often overshadowed by the skyscrapers of New York and government-fueled growth in Washington, is seeing a boom in construction as developers financed with cheap debt seek to profit from a growing work force of educated young adults and strength in the technology and life-sciences industries.

The office-vacancy rate is among the lowest of major U.S. markets and tenants are occupying new space at almost triple the national average.

Construction spending in Boston increased an estimated 37 percent in the year ended June 30 to $3.83 billion, the most since 2008, according to the mayor's office. The market is hot enough that some developers are considering building offices without having landed anchor tenants.

Work is planned or already under way on the $620 million redevelopment of the original Filene's department store property in Downtown Crossing, a $200 million office tower for State Street Corp., and the $800 million headquarters in the Seaport area for Vertex Pharmaceuticals Inc. -- at 1.1 million square feet, the nation's largest privately funded office-construction project.

"You have a city that has biotech and other thriving industries, and some big-name financial services," said John Garth, managing director at Pembrook Capital Management, a New York-based real estate investor looking to finance apartment construction in Boston. "It's a huge draw for young people, and that creates lots of demand for rental apartments as well as new office space and other construction."


The fourth-quarter office-vacancy rate in the Boston metro area was 10.9 percent, ranking it among the best-performing big markets in the country and less than the 15.4 percent nationwide average, according to brokerage CBRE Group Inc. Net absorption -- the increase in occupied space -- was 2.8 percent in 2012, compared with 1 percent nationwide. That's helping to spur building while construction in much of the rest of the country stagnates, said Arthur Jones, senior managing economist at the Los Angeles-based company.

"The fundamentals in Boston are favoring the move into another construction cycle," he said. "Vacancies are low, rents are improving and job growth is steady."

Boston has attracted major office owners including Tishman Speyer Properties and Blackstone Group. The largest U.S. office real estate investment trust, Boston Properties Inc., is based in the city and owns marquee properties such as the John Hancock Tower and the Prudential Center.

Greater Boston is home to 50 universities and colleges, among them Harvard University and Massachusetts Institute of Technology, which provide a pipeline for graduates into the job market. In 2010, Boston had the biggest ratio of 20- to 34-year-olds among the 25 largest cities in the United States, at 35 percent, according to a report from the mayor's office.

Boston's cumulative job growth, led by scientific and technical services, is projected to be 7.9 percent from 2011 to 2016, exceeding the state's 7.4 percent, according to the report.


The city is home to financial firms such as Fidelity Investments, the second-biggest U.S. mutual-fund company, and State Street, the third-largest custody bank.

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