Office Buildings for Sale
Among seasoned property investors, the general consensus seems to be that investing in commercial real estate--especially office space--is a risky endeavor. While this certainly holds true in many markets, the exact opposite can be said about Boston these days. With some of the lowest office vacancy rates in decades, now is a terrific time to invest in office space in the city and outlying areas. Whether you have invested in commercial real estate before or are breaking into it for the first time, Boston City Properties can help. First, get the lay of the land regarding Boston area office buildings for sale, including the pros and cons of investing in them, by reading on below.
Current Market Conditions
Before attempting to invest in office buildings in the city, it is helpful to understand how the market is currently doing. Put simply, it is on fire. As with residential real estate, office space is at a premium in most parts of the city and surrounding areas. It is especially sparse in the Central Business District and in Cambridge. Meanwhile, the Seaport District is quickly becoming a new hot-spot for commercial real estate, so it is well worth it to set your sights in that area as well.
Collier's third-quarter report for 2016 regarding commercial real estate in Boston offers a lot of eye-opening information, including:
- Vacancy Rates and Absorption Rates - According to the report, the vacancy rate for commercial space in downtown Boston rose by 0.7 percent from the second quarter to 11.1 percent, which is around 2 percent higher than it was at the end of 2015. This is largely explained by companies that are relocating to the Seaport. Of course, an 11.1 percent vacancy rate is still very low. Meanwhile, downtown experienced a third straight quarter of negative absorption.
- New Projects - Collier's points to many projects around the city that have had a major impact on vacancy and absorption rates. For example, the new tower at 888 Boylston Street, which is currently under construction, will add 14 million square feet of office space. Several Seaport projects, including 121 Seaport and Pier 4, promise to bring more robust office space to that part of the city. GE is planning a 389,000-square-foot headquarters in the neighborhood at the moment. All told, current proposed and planned projects are expected to add millions of square feet of commercial space around downtown Boston. The problem, though, is that it will be a long time before it becomes available.
- Rental Rates - As an investor, one of your top concerns will be collecting the most profitable rents possible. You're in for some good news in that department because rental rates continue to climb in neighborhoods around the city. Downtown, a high-rise Class A building currently fetches $65 to $85 per square foot. Mid-rise Class A buildings get $55 to $65, and low-rise Class A buildings get $48 to $60. Meanwhile, Class B office buildings are currently garnering between $38 and $55 per square foot.
- Cambridge - The report highlights the incredible commercial real estate market that's happening over in Cambridge at the moment. Right now, there is essentially no available office space in Cambridge. Lab space is especially hard to come by, so rental rates for lab space are through the roof. Not surprisingly, many building owners have been converting office space into lab space to meet increased demand and to fetch higher rents. Many construction projects are happening or are in the works for the city, but as with Boston, it will be some time before their impact is felt.
- Seaport District - As mentioned previous, the Seaport District is quickly becoming another commercial and business hub for the city. Several shiny new office buildings have gone up in the past few years, and many companies are abandoning downtown and the Central Business District for them. In fact, this is almost certainly why vacancy rates have been creeping up downtown and in Back Bay, where they currently sit at 16 percent for Class A office space. The vacancy rate for Class B space in Back Bay is just 8.6 percent, which reinforces the idea that big, established companies are moving out of downtown and Back Bay for Seaport.
Office Building Classifications
For the purposes of commercial real estate, there is a classification system for different types of office space. The system categorizes office space and office buildings based on their amenities, age, infrastructure and aesthetics. It is much easier to make sense of listings for office buildings for sale when you have a firm grasp of what the different classifications mean. Most investors naturally prefer Class A space, but the truth is that there is money to be made across all classes--especially in a hot real estate market like Boston's.
Here's a quick rundown of the three main office space classifications:
- Class A - Class A office buildings represent the cream of the crop. They are typically located in highly desirable areas, which is why you will find most of Boston's Class A space downtown, throughout the Central Business District and, increasingly, in the Seaport. Class A buildings are typically high-rises and skyscrapers, but low- and mid-rise buildings aren't unheard of. They are often iconic or landmark buildings, and companies are drawn to them for their prestige. Unsurprisingly, they are usually newer and tend to have top-of-the-line systems, fixtures and amenities. Typical tenants include law firms, real estate companies and banking firms. Class A space commands the highest rent.
- Class B - Think of Class B office space as a step down from, or compromise to, Class A space. Such buildings can typically be described as "average." They usually offer average to above-average systems and facilities, and they are located in decent--but not amazing--locations. Although they aren't quite as nice as Class A buildings, Class B buildings are generally nice and tend to be in good working order. These buildings are usually under four stories in height, and they are typically found on the edge of central business districts, as is the case in Boston. Rents tend to be more competitive than with Class A, and that is typically what keeps these buildings in business.
- Class C - Class C office space is the least desirable type for a few reasons. For one thing, most Class C buildings are at least 20 years old. Even if they have been properly maintained, they are generally deteriorating, and it is apparent. Such buildings are usually in need of renovations and repairs, and they tend to be located in less desirable areas. With all of that being said, rents are very competitive, so many businesses are still drawn to them. Investors should note that many Class C buildings can be upgraded to Class B with the right upgrades.
The Benefits of Investing in Office Buildings
Before investing in any type of real estate, it is crucial to be aware of the pros and cons of doing so. Conventional wisdom regarding commercial real estate investment isn't overwhelmingly positive, but it's important to remember that Boston really is special. If there's any city in the world where investors can reap the benefits of investing in office space, it's Boston.
A few especially compelling reasons to invest in office buildings include:
- Long-Term Leases - Tenants in office buildings usually sign long-term leases. These are a double-edged sword, but they mitigate one of the biggest risks in commercial real estate investing: volatility. Companies can go out of business, of course, but those that are locked into long-term leases generally stay put. The downside to this is that many tenants will keep paying lower rents that they signed into several years ago, and it can take a while to start collecting higher rents.
- Income Potential - If you can find a stable office building to invest in, you are almost certain to generate far more income than you would from a residential property. Indeed, the average annual return for investing in office space runs between 6 to 12 percent. The average annual return for investing in residential real estate is only around 1 to 4 percent. The income potential for office buildings can be further enhanced by attracting clients who are willing to sign leases that require them to maintain their own facilities, which is something that a qualified real estate broker can help you achieve.
- Hours of Operation - Anyone who invests in residential real estate knows that it is often a 24/7 commitment. Even if you have a property management company handling it for you, you're going to be taking calls and conducting business at random times fairly regularly. A major perk of investing in office space is that such buildings are typically only in use during regular business hours. Tenants are usually away throughout the evening, overnight and early morning, so you are less likely to be disrupted by tenants when you invest in this type of real estate.
Potential Drawbacks to Keep in Mind
Investing in office buildings in Boston right now is a winning proposition. Still, nothing is perfect. While odds are that you will have a positive experience, it is important to be aware of the potential pitfalls. When you consider the potential return that you will enjoy from investing in commercial space, you will most likely decide that the benefits far outweigh the risk. These pros and cons also vary depending on the property in question, as some buildings--particular Class A buildings downtown or in the Seaport--are among the safest bets around.
A few potential drawbacks of investing in office space include:
- Volatility - When asked what their biggest concern is regarding commercial real estate, investors overwhelmingly point to its volatility. However, this is usually only a big problem in cities and areas that are experiencing high vacancy rates, which is decidedly not the case in Boston right now. The volatility that investors refer to involves the revolving door phenomenon that sometimes occurs in office buildings. All too often, building owners struggle to keep offices filled. Tenants don't renew their leases, relocate or go out of business, and filling the empty space can be difficult. In the meantime, rental income is lost.
- Big Initial Investment - As you are certainly already aware, you usually need a very large down payment to secure something like an office building. Most banks and lenders require at least 30 percent, but many insist on even more. When compared with investing in residential real estate, this is significantly more expensive. Not surprisingly, it edges many investors out of the market. However, if you have some liquidity and are willing to invest cash in an office building, you won't be disappointed in Boston.
- Professional Assistance - Investors who strictly deal with single-family residential properties can usually handle basic maintenance and the like themselves. Commercial buildings are a whole different story, as they have much more involved maintenance needs. In addition to hiring a property management firm to manage everything for you, you are going to need to set up professional maintenance services. Property management companies that specialize in commercial real estate like office buildings often offer maintenance services too, so that is something to consider. Just make sure that you factor in the added expenses that are involved in owning and operating a bustling office building.
Should You Invest in Boston Office Buildings?
At this point, you may already know for sure whether or not investing in office space in Boston is right for you. If you're still on the fence, it may help to talk to someone who has experience in this area. Boston City Properties can connect you with experienced and talented real estate professionals in the neighborhood where you are looking to invest. We can put you in touch with someone who has in-depth knowledge regarding office space investing in the city. With their insights, you will have a much easier time making an informed decision.
How Boston City Properties Can Help
Navigating your way around Boston's complex commercial real estate market can be overwhelming even for seasoned investors. If you are new or somewhat new to this type of investing, it can be downright impossible. The first step in doing so successfully is arming yourself with the right help and the right information. You will get all of that and more by connecting with Boston City Properties. We understand the city's real estate markets well and have tools and connections that will benefit you enormously during your endeavors.
A few ways in which Boston City Properties can help include:
- Listings - Boston City Properties maintains one of the largest online databases of Massachusetts real estate listings around. It is updated continually, and it is largely populated by the MLS. You can easily search our database with our handy search tool, which allows you to filter your results based on location, size, price and other attributes. Access is free; you just have to sign up using a quick and easy form. Once you do, you can quickly check to see which office buildings are currently for sale in the city, town or Boston neighborhood of your choice.
- Information - The team at Boston City Properties is here to help answer any questions that you may have along the way. For example, if you see a listing in our database and need more information about the property in question, just give us a call. If we don't have the answer, we will find it for you. We can also provide guidance and insights regarding office building investing and other investment- and real estate-related activities. Think of us as your one-stop Boston real estate shop.
- Agents and Brokers - Finally, Boston City Properties has connections with experienced, skilled real estate professionals around the city. They include seasoned real estate agents and brokers who have in-depth knowledge and experience with Boston's commercial real estate market. If you are interested in a particular building, we can probably connect you with someone who knows all about it. When you are ready to take a look at properties in person, we can connect you with an agent who can assist you. Our brokers and agents can be there for you all the way through closing and beyond, so you never have to go it alone.
For many reasons, investing in office buildings in the city of Boston is the thing to do in a hot commercial real estate market like Boston's. By getting in on the action now, you could reap the benefits for many years to come. Experts predict that rental rates will continue to rise for the next 12 to 24 months or even longer, so this is a great time to secure a terrific office building somewhere in the city. Boston City Properties has tools, experts and resources that can help enormously, so give us a call today.