December 11, 2024

Developer Puts 27-Story Back Bay Station Tower on Hold; Cites High Interest Rates and Construction Costs

Amidst the booming construction market in the Greater Boston area, one of the challenges that many developers have had to deal with is the rising construction costs. The latest developer to feel the impact of the rising costs has been BXP Inc., a publicly traded real estate investment trust. The company recently put out a statement stating that it does not anticipate breaking ground on a Back Bay office due to high interest rates from financial institutions and increasing construction costs.

Back Bay Office Tower is part of the Back Bay/South End Gateway Project that was approved by the Boston Planning and Development Agency Board in 2017. The project design was later revised to feature 80,000 square feet less of commercial space. The developers signed a 90 year lease with the MBTA, the owners of the land where the project should be developed.

This development project has been viewed as a landmark project in the area. Ideally located between the intersection of Columbus Avenue, Berkeley Street, and Stuart Street. The new Back Bay Office Tower will transform the southeast corner of Back Bay into a futuristic modern space from the outdated and underutilized that it is. This single modern structure was poised to become a natural extension of the city's high line. Featuring 27 floors and 660,000 square feet of office space, the Back Bay Tower is one of the projects that could transform the entire look of the area. However, amidst the setback, it is unlikely the project will be completed soon.

According to BXP president Douglas Linde, the borrowing and building costs of the project could outweigh the returns that the project makes in terms of rent once it is completed. The construction costs are projected to be about $1400 to $1600 per square foot, considering factors such as the value of the land. With these construction estimations, BXP will have to charge significantly higher rates compared to other buildings in the area that are under construction or were recently completed in the financial district as well as other properties in Back Bay.

While the project has not been postponed indefinitely, Linde stated that the project would only be considered if there were to be a dramatic fall in construction costs or major changes in the cost of debt. Current financial projections show that for the project to be feasible, the interest rates will have to fall to about 3 percent from 5.5 percent, while the premium lenders charge will have to drop to about 150 basis points from the current 350 to 400 basis points. Additionally, construction costs will have to drop drastically in terms of materials and building costs.

This decision comes after the company considered the rents of other properties that it owns around the area. For example, monthly rent at 200 Clarendon is about $84 per occupied square foot, while for the Prudential Center property, rent is about $70. This puts the company in a precarious position, considering the existing rents for the said properties are amongst the highest in the region. Linde added that "at the moment, new development in Boston doesn't really pencil in relative to where existing rents are now."

Despite the decision to halt the construction of the Back Bay Office Tower, data from commercial brokerage company Colliers show that the availability rate of the property was just about 18 percent, with a submarket average asking rent of $68.49 per square foot, which is among the highest rate in the Greater Boston region. Even after the completion of new office spaces around the area, tenant demand for new space still remains high. However, it is imperative that said spaces match the value that tenants are willing to offer.

BXP's decision to halt the construction of the Back Bay Office Tower leaves a major gap in the market with very little prospects of Class A offices being available in the central business district in Boston. The only available offering that could match the swagger and class of the halted project is expected to be complete later next year. The deficit in the supply of such offices may have been made worse by the fact that there are few permitted development projects in the area.

Other Challenges Affecting The Boston Construction Market

The holdback on Back Bay station tower due to the mismatch of financing, construction costs, and expected returns on the project are just the tip of the iceberg on the challenges that property developers have had to endure in the Greater Boston Area. Here are some other crucial factors that are impacting construction projects.

Labor Shortage

The rising construction costs in the region have in part been exacerbated by the shortage of labor. Just like the national trend Boston is experiencing a drastic shortage in the number of skilled construction workers. This has in turn translated to high labor costs which has pushed the construction costs through the roof.

Complex Permitting

The process of obtaining a construction permit in the region is highly complex, which may have demotivated some developers. With considerations such as historical preservations and regulations, the permitting process is lengthy and time-consuming, adding to the complexity of already complex projects.

Community Concerns

One of the key concerns of developers has been balancing community concerns with new and upcoming projects. Oftentimes, developers have to consider the impact that the projects will have on issues such as traffic, social disruptions, and how new projects may impact existing neighborhoods. While finding common ground between developers and the community is not impossible, it is not always easy to achieve this, which may delay projects.

Limited Space

Just like in many urban areas the dense population and urban environment often means that construction projects have limited space to maneuver. As such, these projects have to be executed with intricate planning and specialized equipment to ensure that they remain within the given boundaries. This can, in turn, translate to increased construction costs.

Sustainability Requirements

Sustainable construction practices often have positive impacts on the environment, but implementing sustainable policies in a project while still adhering to the building standards and regulations in the city can be hard and sometimes almost impossible. This is because while such construction methods may have a positive impact or, in most cases, a net-zero impact on the environment, they may compromise the structural soundness of a building, which may, in turn, cause an even greater risk in the future.

Charting the Way Forward

In light of these revelations, stakeholders must understand what such market conditions point to. On the one hand, developers cannot risk investing in projects that will make no returns on their investments, while on the other hand, tenants cannot afford to pay more than the existing market prices for such units. As in any market, it is important to find a balance between supply and demand in order to ensure the stability of the real estate market in the Greater Boston area. With that in mind, there are several approaches that may be used to address the prevailing situation.

As a high-end property, the Back Bay station tower will have higher construction costs as compared to other development projects. To this end, BXP may revise the project's design to ensure that the cost matches the expected returns. However, it is important to note that this will be the second time that the project has been revised, and the company may face challenges in obtaining a permit for the revised project.

In the view of BXP president Douglas Linde this is the easiest solution to the problem. Waiting for improved market conditions where the constructions costs have dropped and interest rate of financing is lower will allow the company to Complete the project as is and charge favorable rates that will allow it to make a return on investment.

If none of the previously mentioned solutions bear fruit, then the forces of supply and demand may always balance out the market. Currently, it is estimated that there is a shortage of class-A offices, and with projects such as the Back Bay Station tower being halted, this supply is likely to get even lower. As such, more people may be willing to pay premium prices for office space in the business district, which will play right into the hands of BXP.

The tough economic times have been hard for many industries, and construction is no exception. The indefinite hold on Back Bay Station Tower is a testament to how the prevailing financial and market conditions are affecting the construction industry. It is important to bear in mind that the halt of this project may just be the beginning of what could be a worrying trend in the Greater Boston area construction industry. While there may be ways to salvage the situation, it remains to be seen whether the market conditions will improve and pave the way for such projects to be completed with few mishaps.