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Downtown Boston office building sale signals warning

by Kianna Warburton

The recent sale of a pair of office buildings in downtown Boston for $4.1 million, a significant decrease from their previous sale price of $16 million seven years ago, has raised concerns about the distress facing older office properties in the city. The buildings, located on West Street, are currently 52 percent leased, and the sale was financed by private local investors and brokered by Boston Realty Advisors.

Mai Luo, a local real estate executive who purchased the buildings, acknowledged the challenging office market but expressed optimism for the future. He is considering various options for the property, including keeping it as is or exploring a conversion to residential units through the city’s office-to-residential pilot program.

While the significant decline in value may seem alarming, experts point out that the current situation is not indicative of Boston’s office market as a whole. Nonperforming properties, such as the West Street buildings, which are only half-occupied and not generating much rent, are valued differently from fully leased buildings with cash flow. Comparing recent sales to prior sales requires an understanding of the underlying performance of the assets.

Boston’s commercial real estate market is experiencing dual tracks of recovery. Some buildings are benefiting from a “flight to quality,” with companies opting for newly constructed or renovated spaces. On the other hand, older properties that have not seen much investment are struggling with high availability and sublease space.

Sales of office buildings in Greater Boston have been relatively scarce since the COVID-19 pandemic froze the commercial real estate market. Two recent transactions caught the industry’s attention: the $45 million sale of One Liberty Square in the Financial District, which resulted in a 17 percent loss compared to its previous sale in 2013, and the $41 million sale of 70 Federal St., which saw an 8 percent gain since 2016. The sale of the West Street buildings stands out as a stark example of the challenges facing certain properties in downtown Boston.

Factors weighing on the office market include high interest rates, which increase debt payments for buyers, and the shifting demand caused by the rise of hybrid work. Companies are reassessing their space needs and focusing on quantity and quality. Boston’s central business district office market experienced the greatest deterioration in the third quarter, with decreased demand and rising vacancy rates contributing to the decline.

Despite these challenges, Boston’s office vacancy rate remains relatively low compared to other major US markets. The city’s strong employment base and diverse economy contribute to its resiliency. However, the potential decline in commercial real estate values poses a concern for the city’s operating revenue, as approximately 72 percent of it comes from property taxes, largely from commercial properties. City officials are wary of the impact increasing vacancy rates and declining real estate values could have on essential services and city revenues.

In conclusion, the sale of the West Street buildings for a fraction of their previous price serves as a warning of the distress facing older office properties in downtown Boston. While it is not indicative of the broader office market, it highlights the challenges posed by high availability, rising vacancy rates, and shifting demand. The city’s commercial tax base, which contributes significantly to its operating revenue, is at risk if property values continue to decline.

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