Investor Appetite for Class B Keeps Growing in Boston

33-41 West St. in Downtown Crossing sold recently for $16 million.

BOSTON—With limited class A space available, the class B market in Boston continues to be a target for not only tenants looking for cheaper space, but for investors as well. A prime example of a heady class B market is the recent off-market sale of 33-41 West St., a class B multi-tenant office complex in Downtown Crossing, which sold for $16 million, which more than doubled the previous sale price of six years ago. NAI Hunneman represented the seller, Midtown West Street LP, an entity of SMC Management Corp. of Watertown, MA, and procured the buyer Back to Shul LLC, an entity of Bay Management Corp. of New York City. Robert Tito, EVP of the Capital Markets Group for NAI Hunneman, says the fully-leased property features approximately 34,000 square feet of rentable space, which therefore puts the sale price at a lofty more than $470-a-square-foot. The complex, which includes the five-story 33 West St. and the eight-story 41 West St. sold at a 4.2 cap rate. Cap rates in Downtown Crossing were averaging at or above 5.0, he notes. SMC purchased the interconnected buildings back in 2008 for $7.2 million, according to Tito. The brokerage firm was given an asking price of $16 million by SMC and the buyer matched the offer, Tito notes, something very rare in real estate circles, especially in the class B market. Tito says that Bay Management, which acquired the House of Blues building near Fenway Park several years ago and developed The Green House apartment building on Huntington Ave., was looking for a property in Boston and the 33-41 West St. complex fit its criteria. Liz Berthelette, director of research for NAI Hunneman, says the sale price of 33-41 West St. is indicative of a strong class B market throughout the City of Boston. “Class B office sales in the downtown markets, in terms of volume, have been growing exponentially since the end of the recession.” Tito adds that he does not expect the strong class B market in Boston to weaken anytime soon. Another notable class B property sale this year was the $224-million sale of the seven-building Clarion portfolio in the Seaport District to an affiliate of TIAA. The sale of the more than 408,000-square-foot portfolio calculated out to $493-a-square-foot as compared to the previous sale price of $318-a-square-foot in 2012. Since 2014, the class B market in Boston has recorded nearly $3 billion in transactions in sales volume. So far this year, the class B sector has seen more than $700 million in Class B office sales in the Downtown market. Berthelette says that a lack of available class A product, combined with strong fundamentals in the class B sector, including rising rents, are fueling investor demand for B product. She notes that many of the city’s trophy office towers have already traded in this current cycle and a majority of these new owners tend to hold assets for 10 or more years. Therefore, investors, including foreign investors, are looking favorably at class B product in Boston. According to NAI Hunneman, the median price-per-square-foot sale price topped $450 in 2015 and has averaged more than $400-per-square-foot in the first half of 2016. Cap rates have also compressed by nearly 300 basis points from 2011 to 2015.