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

(Continued from page 2)

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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

"At this point we'd go ahead with a spec project," Hurley said in an interview at Skanska's Boston office. "The office market in East Cambridge is very healthy and has very little vacancy. This area becomes an alternative."

BUT EVEN PROSPERITY HAS RISKS

The risk of the accelerating growth in areas like the Seaport and Cambridge is that rising rents may drive tenants back into the suburbs, according to a fourth-quarter report by Cassidy Turley.

In the Seaport, office rents for top-quality buildings have risen to $54 a square foot from $48 a year ago, putting rates on par with the historic Back Bay area, the brokerage said.

"While tech companies and startups are primarily responsible for South Boston's renaissance, we are watching to see what happens when their leases are up for renewal," Cassidy Turley said. "The Seaport may no longer be the affordable option it was even just 18 months ago."

The construction isn't solely in the Seaport.

The Longwood Medical and Academic Area also has seen an increase in construction, driven by the expansion of medical facilities in the neighborhood. A partnership headed by local builder National Development broke ground in June on the $350 million Longwood Center, a research and development center with Dana-Farber Cancer Institute as anchor tenant.

New York-based AREA Property Partners LP and CV Properties LLC of Southport, Conn., are building One Channel Center, the 500,000-square-foot office for State Street in the Seaport neighborhood. AREA expects to complete the project by July 2014, according to Chief Executive Officer Lee Neibart.

Millennium Partners is slated to redevelop the Filene's department store property in Boston's Downtown Crossing into an office and retail structure and build a new mixed-use tower with about 500 residential units next to it.

The New York-based company took over the project from Vornado Realty Trust in 2012 after it had stalled for four years, and plans to start construction "before the summer," according to Anthony Pangaro, who is overseeing the project for Millennium.

"People want to be in diverse neighborhoods, with lots of activity," Pangaro said in his downtown office, filled with renderings of the project and maps of the area. "The waterfront is one of those areas, and downtown is incredibly diverse."

Pangaro said he is in talks with possible tenants in the "creative sector" for the 150,000 square feet of office space, which in turn would provide for construction funding for the rest of the project. He would proceed without a committed tenant, he said.

NOT JUST TYPICAL BOOM AND BUST

Companies are eager to finance new projects, according to Pembrook's Garth. His firm, which last year spent about $140 million to finance 16 real estate projects in the U.S., is actively seeking multifamily construction deals in Boston.

"A fully entitled development in this city tends to attract a lot of interest from potential lenders, including first-mortgage money and mezzanine debt, because of the strong and steady demand," he said. "The bottom line is lenders feel safe lending into this market."

John Drew, founder of Drew Co., said "the biggest national institutions" are looking to invest in Boston. He has been involved in projects in the city for 30 years.

"I've been through a few cycles and the robustness of the recovery and construction activity here today is more than I have seen in the past," he said. "It's all this money following projects here. The access to capital here today is pretty phenomenal."

 

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