That rate is well above the $186-per-sf Meritage paid for the asset in May 2005, with the accretion attributed to a series of capital improvements and the surging Boston office market, in which landlords are benefiting from the improving economy and a dearth of space. The B sector that includes 18 Tremont St. saw at least one million sf eliminated earlier this decade when a wave of residential conversions swept into the Downtown and Back Bay districts.
In a release acknowledging the purchase, which was first reported by GlobeSt.com on Sept. 28, BPG SVP Roy Perry concurs that the Philadelphia-based fund manager was attracted to 18 Tremont St. by encouraging fundamentals. The deal, he says, "provided us with the opportunity to acquire a proven office building in a highly desirable area of Downtown Boston that has experienced significant leasing and rental growth over the past year." The JLL Q3 overview puts the average asking rent for the city at $45.47 per sf, and $34.47 per sf for class B. Rates at 18 Tremont St. were not provided, but one document puts asking rents there in the high $20's to low $30's per sf.
Meritage founder Andrew Nathan predicts that BPG will fare well with 18 Tremont St. going forward despite the premium paid. "I think they will be looking to take it to the next level," says Nathan, whose firm acquired the building when the market's direction was less clear. Whereas many investors were hesitant to pursue older office product, Nathan says Meritage felt the resiliency of the Boston market would lead to a rebound, and was mindful that considerable space was being removed. "We thought that we were getting in a bit early, but always believed the recovery was inevitable," Nathan tells GlobeSt.com. The city's livability, deep pool of intellectual capital, and the limited chances to add class B space to the mix all factored into that upbeat assessment, as did 18 Tremont St. itself. "When we first toured the building, we knew we wanted to buy it," he recalls. Main draws included the location, strong physical foundation and bountiful stock of tenants.
Meritage as a rule prefers a multi-tenanted asset, Nathan explains, with the likelihood of internal growth enhanced. That proved to be the case at 18 Tremont St., with more than 140,000 sf--or about 71% of the building--filled by new and expanding tenants during the firm's stewardship. The retail space was overhauled, common areas were upgraded, and programs focused on improving tenant space and the building's performance environmentally. Occupancy at sale was up to 91%.
While the divestment was "a little bittersweet" given their fondness of the asset, Meritage was able to reach its seven-year investment goals in 30 months, Nathan says, leading to the decision. The fast-track revival reflected the firm's experience in repositioning older buildings, says Nathan, combined with a strong manager in Paradigm Properties and the leasing team at JLL, whose investment sales team brokered the transaction. That group of Cappy Daume, Scott Jamieson, Michael Smith and Gail McDonough was also involved in the sale to Meritage earlier. "They did a terrific job," Nathan says of JLL and Paradigm. "We're very pleased with the results we achieved."
The 18 Tremont St. property is the first in Meritage's Fund One to be harvested. Overall, the firm acquired 11 assets for that vehicle with a total value of $325 million, mostly located in Greater Boston, New Jersey and Washington. Locally, the fund owns the Shattuck Office Center in Andover and Executive Place in Southborough. The firm will also pursue deals in Greater Boston as part of Fund Two. That fund is now under way buying properties, and is infused with enough capital to acquire $600 million of product.
BPG made its purchase on behalf of a fully discretionary private equity fund sporting total equity investments of $850 million. Perry, who handled the sale along with BPG VP George Haines, says the firm will continue to upgrade 18 Tremont St. via its own multimillion-dollar investment campaign. Property management will be handled internally by Elizabeth Christopher, while Ben Heller and Patrick Nugent of JLL have been retained as exclusive leasing agents.
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