Thursday, March 25, 2010

How Not to Get Things Built--Kairos Shen, The Mayor, The Greenway, and Filene's

So the Mayor is worried about the Greenway. He’s also worried about Filene’s. He should be. Let’s start with the Greenway and the real world.

If anything is to be built along the Greenway, there must be a compromise between aesthetics and economics. Unless the public sector is going to construct buildings along the Greenway, which it is not, then only the private sector will do so. And the private sector will only do so if they can make a profit. Simple as that. There are 2 components to the cost of construction--the price of the land and the cost of construction. The land along the Greenway is among the most expensive land in the Northeast. Why--because it is on the Greenway and on the waterfront.

The price of land is usually measured in terms of the price per square foot of land per square foot of the development on the land. Right now, on a per square foot basis, land along the Greenway would easily carry a price of $150 per square foot of development. The construction cost for a Class A property, both hard and soft, is roughly $400.00 per square foot. The combined market “price” of land and building is therefore $550.00. But we need to account for profit. To achieve a 20% annual return on the land and building costs, a developer would need to carry a hypothetical purchase price, as opposed to market price, of $440.00. At 20%, this would enable the developer to receive a return at the $550 market price.

Let’s consider a real proposal. Don Chiofaro purchased the Aquarium Garage for $150 Million. This is a land purchase--not a garage purchase, unless the City feels Don can rent parking spaces for about $2,000 per day per space. The land measures 57,346 square feet, so Don paid $2,615 per square foot of land. Now he has to knock down the garage and construct income producing property large enough to generate revenue to justify the $2,615 purchase price per square foot of land. He also has to construct a building large enough to justify a $550.00 development cost. And he needs to profit. I have stated this at 20% per year.

So how much building does Don need? If Don built a property using every inch of the land area, the property would have to be at least 17 stories tall to justify the land cost ($2,615 / $150 market price).

Today's market net income per square foot of office space is $35.00. To get a 20% return, Don needs to carry a “purchase price” of building square footage of $28.00. At 20%, this “price” meets the market rent of $35.00. To justify the cost of construction alone, a hypothetical property would need an additonal equivalent of $35.00 in net income per built square foot. If Don utilized every inch of the site, he would need additional property height of a minimum of 14 stories of space ($400 of construction cost / $28.00 per square foot of net income.

So, at a minimum, Don requires a 31-story building which covers every inch of the site. The building would have 57,000 square foot floorplates. Nobody builds 57,000 square foot floor plates because they are not acceptable to the Boston tenant market. The City would never allow anyone to build to the entire perimeter of the site because it would leave a) no open space at ground level, and b) no open vertical space for views and light.

The building plate acceptable to the market is 35,000 square foot at the most. This would leave over 20,000 square feet at ground level as open space along the Greenway. The much more slender building would also allow better views of the water than the existing garage.

At 30,000 square feet, the tower would need to be at least 50 stories tall.

Now Kairos Shen can imagine all he wants about low rise buildings linking the Financial District to the sea. And because of a person like him and the Mayor and everybody else that is afraid of heights in the City, nothing will happen. The Greenway will remain as exactly what the Mayor fears it to be: "cold and boring." Maybe he’ll threaten eminent domain again. We’re a big city. It takes big buildings to justify big prices or else we end up with Big Nothing.

Speaking of eminent domain, let’s talk about the Mayor’s favorite project in the City—the Filene’s redevelopment. Remember the Mayor’s idea to move City Hall to a fish pier at the end of South Boston? That was right about the time he thought he could, by dictum, create a 110-story building on the sliver of land at 133 Federal Street. Well, space is available long-term now at the existing 133 Federal Street and nobody talks about South Boston City Hall.

So how’s this: a swap. Let John Hynes and his development team at Filene’s create a New City Hall right in the heart of the City. And, in exchange, extend a 99-year lease to Mr. Hynes and his team on the land under and surrounding City Hall. The former would certainly revitalize Downtown Crossing. And the latter would certainly bring long overdue life back to the brick desert. And there would be no need to tear down the existing City Hall. Just a thought.

Wednesday, March 24, 2010

There's still snow on the Himalayas and people are moving to Boston

High housing costs. Cold weather. High taxes. Bad traffic. Hidden politics.

How about:

High paying jobs. The nations's best universities and hospitals. 4 seasons. Taxes per capita below the national average. A 15% rise in home sales. A CBD office market with the 2nd lowest vacancy rate in the country behind only D.C. ( for obvious reasons.) Culture.

I hate to report that, contrary to the pending demise of Boston, we're not " de-mising."

By the way, year to date net growth in CBD occupied space is POSITIVE 290,000. Who woulda thunk it?

I love this town.

Saturday, March 20, 2010

Fear of New York, fear of heights, and Boston's Greenway--a fool's paradise of Menino's own making

"Mayor Thomas M. Menino said the height restrictions on these particular properties are intended to prevent shadows and strong winds thrown off by tall buildings from making the Greenway a cold, uncomfortable place."

I think the Mayor means well. But, Mr. Mayor, in all due respects, have you been on the Greenway lately? It already is a cold, uncomfortable place. In fact, it's also boring and utterly unused. Every proposed non-profit project has collapsed. I for one don't look over my shoulder at New York all day (“I don’t want to Manhattanize the Greenway,’’ the mayor said.) Why not? Manhattan is exciting. Or try the waterfront of Sydney, or Hong Kong, or any major, thriving city in the world that is not afraid of itself.

Now let's get to the economics. Columbus Center let out its final death knell on Monday. The project was not feasible from its inception due to height restrictions on air rights requiring decking. The pictures were pretty, but nobody ever believed in the project. And we gave money to the "developer" every time he whined.

On the south side of the Harbor, nothing is really happening in the private sector. One new office building in 10 years. We are a market of 72 million square feet. The total amount of space under construction and not already leased is 230,000 square feet in exactly 2 buildings--One Marina Park Drive and Russia Wharf. From the start of construction, it takes 3 years to construct a building for occupancy. The City is not prepared for the future demands of the modern tenant, because we are not allowing the construction of tall, modern, green, highly technical buildings which our companies will demand.

To connect the city to the sea, as the Mayor desires, we must provide a reason for people to approach the connection itself. Nobody uses the Greenway today because it is perceived as a curving linear path between South Station and North Station. It is shorter and far more interesting to walk up the streets of the Financial District, stopping at the Langham or Faneuil Hall for a beverage or lingering on the grass at Post Office Square, than it is to walk a barren stretch of disconnected parcels of grass.

If we want a thriving Greenway, we need to get over our fear of heights and our fear of the private sector.  Otherwise, we will end up with the country's most expensive dog-walking parks.