Boston's Financial District: An Empty QuarterA 1997 article offers another perspective, and suggests just how slimy and odious the world of high-roller real estate is:
Paul McMorrow
Dec 2012From a distance, the Financial District looks as if it is the very core of Boston's commercial might. The office towers rising confidently from the edge of the old Shawmut Peninsula are tall, dense, and emblematically urban. They are what the convergence of power and money have always looked like in the modern city.
But behind its solid granite walls Boston's downtown is resoundingly hollow, with vacancy rates near a 15-year high, at 14 percent, which translates to 5 million square feet of empty office space. Law firms and financial houses have deserted this commercial core in droves for livelier neighborhoods like the Back Bay and the new South Boston waterfront, and the trend shows little sign of reversing. The Financial District, constructed as a temple to money, is now being undone by the very free market it has long celebrated.
Part of the problem is that much of what we know as the Financial District was built in a relatively short period of time under a single mayor, Kevin White, and was based on a now-archaic business model. During his 16-year reign, White exercised vast urban renewal powers to revitalize the waterfront, Quincy Market, and downtown. He approved many of our iconic towers and triggered the development of 75 State Street and International Place by selling off the public parking garages that had occupied those sites. Three banks—Shawmut, First National, and State Street—made White's vision largely a reality when they built One Federal Street, 100 Federal Street, and 225 Franklin Street, respectively.
Other major deal gives State Street Bank site new ownerBesides the other high-rise buildings that sprouted up in the 1990s and 2000s, changes of ownership took place and extensive renovations were undertaken in buildings around 225 Franklin St. (as the State Street Bank building became known after the Bank relocated).
May 12, 1997In a deal rife with speculation about ulterior motives, the State Street Bank & Trust Co. two weeks ago blocked the sale of 225 Franklin St., where it is the major tenant, to a German buyer in order to flip the purchase rights to Boston-based Beacon Properties Corp.
The sale price of the 941,445-square-foot Financial District office high-rise, now owned by Hexalon Ltd., a Dutch-based real estate investment firm, is just under $290 per square foot for a total of more than $270 million, the highest price paid for a downtown high-rise in the last decade, sources say.
The deal is expected to close within the next 10 days, according to sources close to the transaction.
In a related development, reports this week suggested the Franklin Street deal may be a forerunner of an even bigger transaction down the road in which Beacon Properties will purchase State Street South, State Street Bank's 2 million-square-foot office complex in Quincy.
According to this scenario, State Street would use the cash raised by the sale to drive up the price of its own stock in a defensive maneuver to ward off the predatory actions of the Bank of New York, which has made little secret of its interest in acquiring State Street.
Representatives from both State Street Bank and Beacon Properties refused to comment on any aspect of the transaction.
Sources who confirmed the Franklin Street sale insisted that the sale of State Street's Quincy property is not part of the downtown deal. Nevertheless, other real estate sources close to both parties say the sale of the Quincy property is under discussion.
"State Street wants to get out of the real estate business, and use the additional capital to buy back its own stock. That would put a takeover out of reach of just about everyone," said a real estate analyst who requested anonymity.
The series of events surrounding 225 Franklin St., which was not widely marketed, was set in motion by a purchase offer tendered to Hexalon by Cornerstone Properties Inc., a Germany-based real estate investment trust. Cornerstone had made a nonbinding offer to Hexalon for purchase of the property at the $290-per-square-foot price that was provisionally accepted.
But on April 25, Cornerstone learned that State Street had exercised its right of first refusal contained in the bank's lease.
"The right was triggered by the signing of a non-binding letter of intent by Cornerstone Properties to acquire [225 Franklin St.]. Cornerstone Properties was in the process of completing due diligence on 225 Franklin St. and had not yet received formal board approval for the acquisition," according a report issued by Cornerstone.
One State Street source said the Franklin Street transaction was done primarily for "tax purposes."
The real estate move may or may not be tied to State Street's attempt to fend off Bank of New York, but that hasn't stopped widespread speculation that the two are linked.
Although BONY officials say publicly they are not involved in a hostile takeover, analysts say the actions of both parties indicate a battle is in progress. "[State Street CEO Marshal] Carter is said by an analyst to be spending 100 percent of his time fending off Bank of New York's unwanted advances," according to an article in the May issue of American Banker.
Both banking and real estate sources say it makes eminent sense from a tactical standpoint for State Street to divest itself of real estate holdings and bolster its already nearly impregnable financial position.
"State Street is selling at 411 percent of tangible book value," said James Moynihan, analyst with Hartford-based Advest Group Inc. "Anything they do to improve that puts them beyond the reach of virtually anyone."
According to a Wall Street source, State Street sold its purchase rights to Beacon Properties a fee said to be under $2 million.
The advantage to State Street, analysts contend, is that it now has a reliable local landlord, removing any risks involved with an unknown foreign owner.
But other analysts contend that State Street's modest broker fee indicates that other deals are in the works, and that State Street South is the logical next step.
For Beacon Properties, the purchase of 225 Franklin St. is its first transaction in Boston in more than a year.
Although the $290-per-square-foot price is the highest paid for a downtown office tower in more than a decade, local analysts say the price is not out of line.
State Street, these analysts point out, is a solid tenant that has 18 years remaining on its lease at above-market rates. This means that demands for tenant improvements will be minimal. Moreover, State Street occupies the lower floors of the 33-story building, leaving the higher priced upper floors available for other tenants.
"Beacon looked at 225 Franklin St. in two ways: With State Street in place there is a long-term credit lease. With the other portion of the building you have a multitenant, market rate situation. The combination of the two more than justifies the high price," said the Wall Street source who has advised Beacon in past transactions.