Market Overview
Market Analysis: 505 Congress Street, Boston
October 24, 2005
ReCreate
Prepared for
Real Estate Development
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Executive Summary
1. Market Overview
Boston[1] was compared to competitors San Francisco and Seattle which have similar strengths. We see that Boston has the highest total employment, second highest per capita income, and lowest vacancy rate positioning it well for future growth in the market.
• A decline in population growth began before the 2001 recession. The Big Dig nearing completion and recent opening of the underground central artery will have a significant impact on future growth prospects for the city.
• While population decline began before the recession, employment decline began with the 2001 recession. Growth has begun to increase for all three MSAs in 2003 but is still below the US average. 2 out of 3 of Boston’s greatest projected employment increases are in sectors projected for the greatest national growth in the next 5 years, suggesting that Boston is leading the national curve for these top industries.
• Personal income in Boston was severely affected by the recession, due to its reliance on business services and technology industries, but is showing marked improvement since 2002.
• Boston has the lowest vacancy. In 2003 there is a significant vacancy rate decline in all MSA’s except Boston, but Boston vacancy in 2004 at 4.9% is still significantly below the US average of 6.1%. Boston is close to a historic high in the cycle. We can expect downward pressure from interest rates slowly rising.
• Rent inflation rates are increasing, to 3.7% in 2010.
Fundamentals suggest the market is not good for office or retail industries due to increasing completions, decreasing absorption, and low rental inflation, but looks strong for multi-family. Rent inflation is projected to increase from 1.3% to 3.7% in 2010, with a decrease in completion rates. To hedge the remaining volatility in the Boston market, flexibility is the key, allowing a shift easily between Apartments, Condominiums, or Service Apartments, depending on the market at the time of completion of the project.
2. Demand Analysis
We have selected a 5-mile radius as our target market area, with approximately 20-minute driving time as the outer limit which also coincides with the extent of the Boston subway system. Demographically, the radius primarily consists of three market segments.Those groups are: Urban Achievers (19.74% of the population), Bohemian Mix (18.68%) and Young Digerati (13.16%). These groups are all generally young, educated, employed in service-based jobs, ethnically mixed and more affluent than average - the ideal segment for our proposed multi-family urban development. The most important demand driver, employment growth, will grow more during the next five years than the previous twenty-five years.
3. Supply Analysis
The Boston market will reach the peak of construction in 2005. After the peak, the nominal estimates of completed units will decrease starting in 2006, to just slightly over 3,000 in 2010. According to the BRA’s classification of the projects in the pipeline, there are over 1.2M square feet under review, 4.5M square feet approved by the BRA’s board, over 1.5M square feet
Executive Summary
permitted, and over 1.5M square feet currently under construction. These figures alone indicate that there is tremendous interest and activity in South Boston. It is also worth noting that most of the projects are described as high end or luxury units. Providing a mid-range project may provide another means of differentiation.
There is a group of sites near Central Square in Cambridge that provide a new image for apartments, offering wood floors, granite counter tops, loft layouts, wireless café, and a rooftop lounge. Rents are comparable to the Park Lane property, which is the subject site’s closest competitor. This design will appeal more to our target market of Urban Achievers, Bohemian Mix, and Young Digerati and will help differentiate the subject site in the market. However, a more affordable construction scheme will be needed, substituting granite countertops and wood floors with other visually modern and appealing components that cost less to build.
Further development of building design for the subject property will inform adjustments to the comparable rents to determine appropriate rent levels for the site, using Park Lane as a maximum threshold.
4. Regulatory Framework & Zoning
The BRA has also created zoning specifically for the Boston Harborfront District. The subject site is located within the Harborpoint: Fort Point Waterfront. The site has an FAR of 3.0, which translates to roughly 91,000 gross square feet and a maximum height of 155’. The site is also within a planned development area, which provides more flexible zoning. Article 42E describes several criteria which the project would need to meet in order to be permitted under a planned development area, such as affordable housing requirements and providing a pedestrian-friendly site. In the case of the planned
development area, the maximum FAR would be 4.25, with a maximum height of 155’ or possibly 255’. Permitted-as-of-right uses include multifamily housing, retail, office and hotel. Parking garages are listed as conditional. No separate parking ratio is identified for this area. Other relevant requirements include the 10% or in-lieu fee for affordable housing.
5. Site Analysis
Centrally located in South Boston Waterfront District.
• Owned by NStar (received in ‘Big Dig’ land swap).
• Most recently used as a staging area during ‘Big Dig’ construction.
• 0.70 acres (34,730 sq ft) “Football shaped” lot.
• Level site with minimal modifications required.
• Contains zero hydrological or vegetation considerations.
• The footprint of the lot is outside the adjacent tunnel
• Vent Building #5, a large 176’ structure that serves as an intake and exhaust point for the adjacent Fort Point Channel Tunnel is adjacent to the site.
• The entrance to the westbound Fort Point Channel Tunnel runs along the entire back length of our site.
• There are currently unobstructed views to downtown Boston and the CBD but we expect future development to block these views.
• Noise. Noise pollution may be a factor due to the adjacent tunnel entrance and vehicle traffic.
6. Next Steps
Next steps include development of building design, additional site analysis and zoning research, and creation of the projected cash flow pro forma.
Organization of This Report
1. Market Overview
a. National: US Economy & Boston
b. Regional: Boston, San Francisco, Seattle
c. Local: Boston Economy
d. Real Estate Product: Office, Retail, Multi-Family
2. Demand Analysis
e. Study Area
f. Demographics
3. Supply Analysis
g. Building Cycle
h. Existing in South Boston
i. Projected in South Boston
4. Regulatory Framework & Zoning
j. As-of-right
k. Planned Development Area
5. Site Analysis
l. Description/History
m. Physical Attributes
n. Zoning/Regulatory
o. Infrastructure/Linkage Attributes
p. Dynamic Attributes
q. Environmental
r. Site Suitability
6. Next Steps
Market Overview: National
Market Overview
The aim of the market overview is to forecast the Boston MSA economy over the next ten years. This was accomplished by first understanding the significance of the Boston economy within the broader US economy. This macro-economics study was done by addressing the following:
• National: The direction of the US economy and the position of Boston.
• Regional: Comparative study of Boston with other competing cities.
• Local: The direction of the Boston economy specifically.
• Product Specific: The study of trends and cycles of Boston’s real estate products.
National: The US Economy and Boston
With rapid globalization transforming the US economy, the spread of industries within the US has changed significantly. Manufacturing within the US has declined consistently, due to the off shoring of production to Asian countries, especially China. Outsourcing to countries, such has India, has also eroded the lower end of the service industries (call centers, data entry, software etc.). The US however remains strong in most hi-tech industries, research & innovation, education, financial services and tourism. Going forward these high value-add industries will generate an increasing percentage of US revenues.
Boston is strongly positioned in all these sectors. With MIT and Harvard amongst several other world class institutions, Boston
is a leader in education and hi-tech research and innovation. Boston is also home to some of the largest US Financial and Consulting firms. As a result of being at the crossroads of industry and research & innovation, Boston is an attractive destination for conventions which has positive impacts on the hospitality sector. As a city with historic significance in the US, tourism is also an important contributor to the Boston economy.
Regional: Comparative Study of Boston with Competing Cities
Although Boston[2] seems to be strongly positioned within the US economy, there are several competing cities that have similar strengths. To understand Boston’s position within a competitive market a comparative study was done. The cities selected were San Francisco and Seattle, based on similarities in the following:
• Population size between 3-4.5 million
• Employment profile between 2-3 million
• Strong industry research centers
• Strong educational institutions
• Strong tourist centers
• Waterfront cities – land locked, ports
• Many corporate headquarters or significant portions for large companies
Figure 1 offers a quick, static comparison of the cities.
Market Overview: Regional
Market Overview: Regional
A comparison of the cities’ significant demand drivers follows. We examined the historic changes in population, employment, income and vacancy rates (in terms of real estate). The comparisons, illustrated in the following graphs, demonstrate the cyclic nature of growth. All data is from the US Census and BEA.
Population
• The growth in all three MSA’s was below the US average in 2003, the most recent year for which data was available.
• A decline in growth began before the 2001 recession.
• Growth in San Francisco has begun to increase in 2003 but is still below the US average.
• Hit historic lows: We assume that we are recovering from the trough of the cycle.
• The Big Dig nearing completion and recent opening of the underground central artery will have a significant impact on future growth prospects for the city.
• Therefore, the only way to go is up !
Figure 2: Population Trends in Comparison
Market Overview: Regional
Figure 3 & 4: Employment Comparisons
Employment
• Employment has been declining in all three MSA’s since the recession, and is still below national average.
• While population decline began before the recession, employment decline began with the 2001 recession.
• Growth has begun to increase for all three MSAs in 2003 but is still below the US average.
• Since we have hit historic lows we can safely assume that we are recovering from the trough of the cycle.
• Again, the only way to go is up
Market Overview: Regional
Personal Income
• Seattle appears to have missed the technology peak, seen in Boston and San Francisco in the late 1990s. San Francisco has the highest fluctuation.
• Growth began to increase in 2003, the most recent year for which data is available, but was still below US average.
• Personal income in Boston was severely affected by the recession, due to its reliance on business services and technology industries, but is showing marked improvement since 2002.
Figure 5: Personal Income Comparisons
Market Overview: Regional
Vacancy
• Boston has the lowest vacancy.
• However, in 2003 there is a significant vacancy rate decline in all MSA’s except Boston.
• The Boston vacancy in 2004 at 4.9% is significantly below the US average of 6.1%.
• Boston, as an older and more mature market, has had smaller fluctuations.
• Boston is close to a historic high in the cycle. We can expect upward pressure on vacancy from the increasing number of new completions, but downward pressure from interest rates slowly rising.
Figure 6: Vacancy Rates Comparison
Market Overview: Local
Local: The Direction of the Boston Economy
A forecast of the Boston economy and its affect on the demand drivers for the real estate industry was collected from several data sources. The Torto Wheaton forecast was utilized in this study as it best matched our understanding of the industry. Overall, Boston appears to be in a strong position for economic growth in the next five years.
A brief representation of the projected growth in demand drivers have been tabulated below in Figure 6. most importantly, we see increasing rent inflation over the next 5 years.
Total Employment Level
As can be seen in Figure 7, on a national level employment experienced the greatest declines in the last 5 years in manufacturing and information, and Boston’s greatest declines were in these two industries as well. However. in the last 12 months the greatest increases nationally are in construction, and agriculture and mining, while 2 out of 3 of Boston’s greatest increase are in education and health, and professional and business services. Recall from Figure 7 here and Figure 4 above that these are Boston’s 2nd and 3rd largest industries. Most importantly, projection for national growth in the next 5 years is highest for professional and business services, hospitality and leisure, and education and health, suggesting that Boston is leading the national curve for these top industries. Note that in most cases the growth rate is below the US average, which may be due to the lower presence of such industries in the economies of other cities. In other words Boston may have a lower percentage increase but greater volumes.
Figure 6: Projected Growth in Demand Drivers for Boston
2004 2007 2010
Employment(1000) 2,896 2,995 3,079
Personal Income($ bil.) 256.8 269.9 282.6
Total Inventory (units) 410,107 426,125 435,582
Completions (units) 4,002 4,273 3,029
Vacancy Rate (%) 4.9% 4.7% 4.9%
Net Absorption (Units) 6,745 3,921 2,524
Rent Inflation (%) -2.2% 3.4% 3.7%
Data Source: Torto Wheaton Research Fall 2005
Figure 7:
Market Overview: Local
In our section on the current competitive state of regional markets, we showed comparative statistics for employment, personal income, and population growth for three regional markets through 2003. Here we focus on the Boston market, and project forward through 2008.
Employment Growth
TWR projects the total employment in Boston to grow at an average 1.1% over the next 5 years. At present Boston seems to be nearing a peak, however we are still well below historic peaks and this suggests that the TWR forecasts are conservative.
Personal Income Growth & Population Growth.
Similarly, in both these cases Boston is projected to grow at 1.7%(Personal Income) and 0.4% (Population growth) over the next 5 years. A conservative forecast, representing minimal risk.
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Figure 8:
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Figure 9:
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Figure 10:
Data sources, graphs this section: TWR
Market Overview: Local
Trends and Cycles of Boston’s Real Estate Products
To arrive at the ‘best-use’ product for the site it is important to analyze all the significant real estate products for the Boston market. The products analyzed include multi-family housing (apartments or condominiums), retail, and office. We have briefly analyzed each option and present multi-family housing in detail, which has the most potential for the site. We chose not to do in-depth analysis of hotel for two reasons. One, the hospitality market is still recovering from the post-9/11 shock. Two, over 1,600 hotel rooms are currently in the pipeline for South Boston which suggests the danger of oversupply. Our team used historical and forecasted data from the Torto-Wheaton Research (TWR) website to conduct our analysis.
Retail
The retail analysis indicates decreasing rates of rent inflation, significant decreases in net absorption, and significant increases in completions. Although the Boston retail market is not saturated at present, the forecast over the next 5 years is not encouraging and projects an over supply.
Retail itself is not an attractive option, however utilizing the high visibility ground floor for catering to the local retail market may be a possible option.
See figures 11 through 13 which illustrate the retail trends.
Figure 11:
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Figure 12:
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Market Overview: Local
Figure 13: Boston Forecast for Retail: 2005-2010
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Market Overview: Local
Figure 14: Boston Forecast for Office: 2005-2010
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Office
Although the long term trends for the office market seem to be improving, the high vacancy rates, decreasing net absorptions, coupled with increasing completions in 2008 onwards provides a poor outlook for the Boston office market. The market continues to be saturated with supply constructed in the late 90’s and due to the life of real estate products we feel this over-supply will maintain a pressure on rents over the next 10 years. Office is not a suitable product for our site.
Key Office Trends
• Rent inflation increasing form -1.7% to 6%.
• Completions decreasing to 2008 followed by an increase.
• Net Absorptions decreasing significantly.
• Vacancy rates decreasing but still at relatively high rates.
Figure 15: Office Trends
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Market Overview: Local
Multi-Family
The multi-family housing market in Boston is strong and is well placed for steady growth over the next 10 years. However, it is important to clearly identify a growing market segment as the customer base and create a niche product to further differentiate and ensure a faster absorption within this market segment.
To address the volatility in the Boston market, flexibility is the key. This can be addressed by providing a market strategy that can shift easily between Apartments, Condominiums, or even Service Apartments, depending on the market at the time of completion of the project. The following long trends will have a significant impact on the demand for multi-family housing in Boston:
• Vacancy rates are forecasted to increase from 4.2% to 4.9% in 2010. This is a minimal increase and well below the historic high of 5.5%.
• Rent inflation is projected to increase from 1.3% to 3.7% in 2010 – an attractive indicator for apartment development.
• Net absorption is forecasted to decrease significantly, but is coupled with a decrease in completion rates. This may support rents and vacancy rates.
Positives
• Low vacancy rates (compared to other MSA’s) could indicate strong demand for housing units. However further decline could fuel supply.
• Land-locked nature of the city provides for attractive development opportunities for permitted land near important employment centers.
• Growth in Boston demand drivers have only just begun to increase and are well below historic peaks. Only way is up.
Negatives
• Boston has shown significant sensitivity to economic recessions. Signifying increased uncertainty and risk in any investment.
• The cost of doing business is 40% above national average*, which deters the spawning of new companies and could result in flight of existing companies.
• Rental rates are well above the national average. Expensive living will deter ‘empty nest’ and ‘retired’ market segment.
Figure 17: Multi-Family Trends
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Figure 18: Multi-Family Trends[pic]
Market Overview: Local
Figure 16:
Boston Annual History & Forecast: 1996-2010
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Demand Analysis
Demand Analysis
Market Area Delineation and Target Users of Space
The 505 Congress Site is located in the South Boston Waterfront District. In delineating a market area, we used geographical, transportation infrastructure and demographic criteria. Our rough market area delineation appears below:
Figure 19: 5-mile radius of site with subway lines
Because the site abuts the downtown Boston CBD and generally consists of high-density urban infill structures, the target customer should place high value on living in proximity to employment, cultural and civic centers. Additionally, the target customer will be indifferent or only slightly averse to “city living.” Identification of this segment will simply rely on the consumer’s past behavior: those who have chosen to live in high-density areas with close proximity to the CBD will likely continue to do so in the near future. Generally, the five-mile radius shown above consists of higher density communities.
Since our target segment places high value on convenience of location, the transportation infrastructure and, more importantly commuting, convenience will further pinpoint our market area. Based on the average commute time of 26 minutes in the Boston Metropolitan Area, we have selected 20 minutes driving time as the outer limit of our market area, since, again, our customers value locational convenience more than the average commuter. This 20-minute limit also coincides with the extent of the Boston subway system, another common mode for city-dwellers. This further reinforces the validity of our selected five-mile radius.
Demographically, the five-mile radius primarily consists of three market segments, as defined by Claritas, a provider of marketing-relevant demographic data.[3] Those groups are: Urban Achievers (19.74% of the population), Bohemian Mix (18.68%) and Young Digerati (13.16%). While different in subtle ways, these groups are all generally young, educated, employed in service-based jobs, ethnically mixed and more
Demand Analysis
affluent than average - the ideal segment for our proposed multi-family urban development.
The demographic within the five-mile radius also indicates the largest proportion of jobs in services, with significant portions of jobs also in the retail trade, finance-insurance-real estate, and government sectors. Using data from 2004, the graph below shows that service-based jobs, combined with financial, insurance and real estate account for nearly 75 percent of total employment in the five-mile radius area.
Figure 20: Employment 5-mile radius of site
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The predominance of service-based jobs results in a relatively affluent population base, as shown in the figure below. While those earning below $45,000 a year comprise more than 50% of the surrounding population, nearly 40% of the households earn $45,000 to $125,000, indicating that our target demographic, in terms of income, is well represented in the five-mile radius surrounding the site.
Figure 21: HH 5-mile radius of site [pic]
Demand Indicators
Demand for multi-family housing generally increases with population growth, personal income growth and most importantly employment growth. Based on the data shown in the preceding section, multi-family development remains very attractive for this area.
After the downturn associated with the 2001-2002 Tech Market Crash, all three indicators have been positive and are projected to continue to grow for the next five years. The most important demand driver, employment growth, will grow more during the next five years than the previous twenty-five years. As a result: (1) Net Absorption will be positive for the next five years, (2) Rent Inflation will be above CPI inflation and (3) Vacancy Rates will remain below the critical 5% level, indicating that Boston will remain a “landlord’s market.” Based on our analysis of demand indicators, Boston, and more precisely the five-mile radius around 505 Congress Street, continues to provide significant opportunities for multi-family development projects.
Supply Analysis
Supply Analysis
Building Cycle
The purpose of determining the status of the building cycle is to determine where the local Boston market is headed in terms of gross supply of multi-family units. The building cycle is dependent on several factors, most importantly, employment growth, population growth, and personal income growth.
As illustrated in Figure 22, the trough of the recession that began in September 2001 occurred that following November and we have had slow, but steady growth in the overall United States economy since. This is a good sign for the building cycle because a growth in employment means more jobs. More jobs will require a larger workforce which will demand office space, housing and retail services. This will increase the rates of construction.
Specifically, in terms of the Boston market, the forecasted employment growth will remain steady around 1.0% between 2007 and 2010. As mentioned in the Boston economy analysis above, the largest employment growth sector across the United States will be in the professional and business services, which is a very large segment of the Boston employment profile. This is a strong indicator that Boston’s economy is stable and will grow steadily. More importantly, these professionals in the high growth employment sectors represent our potential tenants and customers.
Gross Supply
A critical step in estimating the building cycle is forecasting gross supply. The completion data from the TWR chart below is the most important factor used to forecast supply. According to the chart (see highlighted portion), the Boston market will reach the peak of construction in 2005. After the peak, the nominal estimates of completed units will decrease starting in 2006, to just slightly over 3,000 in 2010. The flattening of the completion rate shows that gross supply will tighten over the next five years, and also may indicate that the bottom of the building cycle will occur around 2010.
Figure 23: Boston Multi-family Forecast
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Supply Analysis
A tighter supply is a positive sign for our potential residential project. On the other hand, because we are developing in a high potential growth area, these numbers may not reflect the actual supply condition that will exist in and around our site. Thus, we made a close examination of South Boston.
In our analysis of the existing inventory and near term projection of new inventory surrounding our site, we looked at South Boston above the district of Saint Vincent, as it has been delineated by the Boston Redevelopment Authority. It encompasses a largely undeveloped portion of the city north of the neighborhoods of Roxbury and Dorchester, and just east of the Financial District. We believe that because of the comprehensive planning for this district and its fairly well-defined edges, it is most appropriate to consider this area in our analysis.
Existing inventory
There is markedly little existing inventory in this district, particularly in the category of multi-family housing. Figure 24 indicates by building footprint and use, the broad swaths of land that are currently undeveloped. Note that the map is the most recent available from the Boston Redevelopment Authority (BRA), but is not completely up-to-date. For example, the Park Lane residences are not shown on this map. However, in comparing this map with more recent aerials and site visits, we have concluded that the map provides a good look at the big picture: there is little existing office or hotel, and even less existing multi-family or retail.
Supply Analysis
Figure 24: South Boston Harborfront, Building footprint/use
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Supply Analysis
Existing projects of note include the World Trade Center (2.1 million square feet of office), the Seaport Hotel (426 rooms), Legal Sea Foods (200,000 square foot industrial space), Manulife Financial (470,000 square feet), and the convention center. The existing inventory of housing consists mostly of artist and live/work units. This is worth noting because Boston has one of the nation’s most progressive programs on artist housing. The preservation of space for cultural workers ensures their long-term presence, which in turn provides an attraction to the neighborhood for consumers looking for an urban experience. It is also worth noting that artist housing is a very specific product, and we do not think it would be a financially sound use for our site.
In contrast, Park Lane is a strong comparison for our potential development. It is a mid to high-end project with 150 units currently for rent, and an additional 350 units under construction. The project is mid-rise and has ground-floor retail space, likely for restaurants. Despite its “pioneering” risk, the project is 40% leased since opening two months ago.
Near Term Projection of Inventory
A quick look at an aerial photograph suggests South Boston is a desolate and forgotten neighborhood. Such an impression would be poorly founded, given that nearly 9 million square feet is in the development stage, and there are intimations in the industry that at least a million more is in pre-planning. A comparison of Figures 25 and 26 showcases the current state of South Boston’s real estate inventory with a local real estate firm’s projection of future development.
Figure 25: Existing Conditions
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Figure 26: Planned Projects [pic]
Source: Meredith & Grew flyer for 505 Congress Street
Supply Analysis
According to the BRA’s classification of the projects in the pipeline, there is over 1.2M square feet under review, over 4.5M square feet that has been approved by the BRA’s board, over 1.5M square feet that has been permitted, and over 1.5M square feet currently under construction. These figures alone indicate that there is tremendous interest and activity in South Boston.
A further distillation of the components of the development reveals that development is becoming rapidly urban neighborhood based with a strong response to the convention center’s presence. In other words, South Boston is set to become an urban center that includes conventions, hotels, office, retail, and residential. It may well be a blend of Financial District and Back Bay, and appears to be the neighborhood of development.
The following figures provide a sharper picture of the varied sectors in development, and a sense of the timing. It is critical in an area such as this, which easily appears as barren landscape of parking lots today, reach a critical mass of development in order to create a successful district for all of the projects. While the categories provided by the BRA give some indication of timing for projects, a closer look at completion dates will be completed as follow up to this market analysis. It is important to note that not all projects will proceed to completion, even those that have been permitted.
Figure 27: South Boston projects (north of St. Vincent)
|Under Review |
| |Residential: 336 units |
| |Retail: 554,000 SF |
|BRA Board Approved |
| |Residential: 1,100 units |
| |Hotel: 875 rooms |
| |Cultural: 18,900 SF |
| |Retail: 169,000 SF |
|Permitted | |
| |Residential: 320 units |
| |Office: 840,000 SF |
| |Retail: 1,100,000 SF |
|Under Construction |
| |Residential: 858 units |
| |Hotel: 790 rooms |
| |Cultural: 65,000 SF |
A brief review of the earlier market analysis for different real estate products in comparison with projected projects:
|Product |Boston Market |Existing |Planned |
| | |S. Boston (estimates) |S. Boston |
|Office |Not strong, |Less than 4 million SF |840,000 SF |
| |Improving | | |
|Retail |Not strong, declining |Less than 500,000 SF |1.2 M SF |
|Hotel |Not strong, improving |Less than 500 |1,665 rooms |
|Cultural/Civic |N/A |850,000 |65,000 |
|Residential |Strong, holding |Less than 1,000 units |2,614 units |
Supply Analysis
Given the market analysis and what is planned for the area, we feel that our strongest opportunity is residential. This product is also best supported by our site constraints and opportunities, discussed in the site analysis section.
A closer look at the residential inventory for South Boston indicates that there is an opportunity to insert our project into the pipeline at a point before saturation and after some pioneering projects have been completed to validate the area to our potential consumers.
Figure 28: South Boston Residential Projects
|Residential (d.u.) |2,614 |
|Under Review |336 |
|BRA Board Approved |1,100 |
|Permitted | |320 |
|Under Construction |858 |
|*North of St. Vincent | |
The vast majority of residential units in the pipeline are documented as for-sale. Because of anticipated changes in interest rates, we expect that some of these units may be converted to rental. At this point in our analysis, we feel it is critical to be flexible and to closely track rental and sale options. We are considering opportunities to structure a potential deal to support this need for flexibility. Ideally, we would be able to judge further into the development process whether for-sale or for rent better differentiates our project from competitors. It is also worth noting that most of the projects are described as high end or luxury units. Providing a mid-range project may provide another means of differentiation. This opportunity will be explored in follow up to this analysis.
Comparison with Other Products in the Market
Differentiation is not only important within South Boston. It is also critical that our product stands out or meets a specific need within our projected five-mile radial draw. We have identified twelve projects for the purposes of comparative analysis, which are all within the 5-mile market area. We chose competitors based on:
• Location – all sites except one exist in discrete, mildly-isolated neighborhoods similar to the south Boston waterfront area. These include the redeveloped Charlestown Navy Yards, the Quincy Marina, Revere beach, and Dorchester Bay.
• The comparison sites are also located on or near the waterfront.
• They are all accessible to downtown via the local subway.
• We included one site on the waterfront in the North End to test the difference in value for a site not located in a semi-isolated location.
Details of the comparative assessment are included in Appendix A. Our observations from competitor sites are:
• Park Lane is the most direct competitor to the subject site, because it is only 3 blocks away and is a new building with water views.
• All sites had attractive landscaping and were clean.
• All sites offer some combination of the usual amenities including pool, laundry, dishwasher, carpet, parking, fitness center, sports.
• Most appear to be within a short walk to grocery stores and the train station (the longest walk to a train station is 1.5 miles).
Conclusions
First, there is a group of sites near Central Square in Cambridge that provide a new image for apartments, differentiating from the old fitness center/ pool/ carpeted units model. These are all managed by Forest City and offer wood floors, granite counter tops, loft layouts, wireless café, and a rooftop lounge. Rents are comparable to the Park Lane property. This design will appeal more to our target market of Urban Achievers, Bohemian Mix, and Young Digerati and will help differentiate the subject site in the market.
Second, other comparison sites have unobstructed views of the waterfront and/ or skyline, and do not have the drawbacks of the vent./ exhaust building and tunnel adjacent to the site. This suggests that to remain competitive, rents will need to be set below those of sites like Park Lane to offset the negative aspects of the subject site. Thus, a more affordable construction scheme will be needed, substituting granite countertops and wood floors with other visually modern and appealing components that cost less to build.
Third, there will be a trade-off between construction costs and rent levels obtainable for the site. Thus it is important to predict rent levels for a given site design that are accurate and conservative, in order to produce the desired return. The existing comparable sites present several challenges:
• Several sites, though minimally rehabbed, are somewhat outdated and do not directly compare to a newer site like Park Lane.
• Larger sites, such as Harbor Point with 1,200 units and Water’s Edge, are hard to compare because of differences in economies of scale.
• Several have views of waterfront and city skyline, and we anticipate that by comparison, when fully developed, other South Boston properties will block views for the subject site.
• The subject site, at approximately 70 units, is smaller than all comparable sites.
Further development of building design for the subject property will inform adjustments to the comparable rents to determine appropriate rent levels for the site, using Park Lane as a maximum threshold.
Regulatory Trends
Regulatory Trends
Boston’s permitting process is known to be lengthy; two years to permit a large project is not atypical. Because of the risks associated with long entitlement processes, it is critical that we have a more complete understanding of the regulatory framework and trends regarding our site.
There are two themes that have emerged from our investigation of the regulatory framework, which we believe bodes well for our proposed development site. The first is that substantial planning and politicking has gone into development of South Boston in the last five to ten years. In a city like Boston, having the planning process well underway is preferable to stimulating that process through a pursuit of permits. We are in a better position than earlier developers in that we benefit from a clearer framework for development, a clear push on the part of the BRA and initial developers for creating a “24-hour vibrant, urban neighborhood,” and carefully crafted relationships with key community members and organizations. All immediate signs point toward support for development of the area by the majority of constituents. Over $20 billion has been spent in South Boston in recent years, as can be seen by the carefully selected street lamps that are currently illuminating parking lots, among other indicators. The BRA offers several studies and planning documents to guide our strategic planning for the site: the South Boston Waterfront Public Realm Plan, South Boston Waterfront Municipal Harbor Plan. Additionally, the Save the Harbor/Save the Bay’s Economic Impact Report and the Seaport Alliance for Neighborhood Design’s newsletters provide perspective. These reports describe South Boston as a 24-hour, pedestrian-friendly, waterfront-oriented, quick-to-grow neighborhood.
The BRA has also created zoning specifically for the Boston Harborfront District. Our site, 505 Congress Street, is located within the Harborpoint: Fort Point Waterfront, and is addressed in Article 42E of the Boston Zoning Code. The site has an as-of-right FAR of 3.0. This translates to roughly 91,000 gross square feet and a maximum height of 155’. The site is also within a planned development area, which provides more flexible zoning. Article 42E describes several criteria which the project would need to meet in order to be permitted under a planned development area, such as meeting affordable housing requirements and providing a pedestrian-friendly site. In the case of the planned development area, the maximum FAR would be 4.25, with a maximum height of 155’ or possibly 255’ if the project met the Large Project criteria. At this time, we anticipate pursuing the higher FAR but not meeting the Large Project criteria for the additional height.
Permitted-as-of-right uses include multifamily housing, retail, office and hotel. Parking garages are listed as conditional, with no discussion on whether this applies to below grade parking. No separate parking ratio is identified for this area. Below-grade parking is not counted in FAR.
Other relevant requirements include the 10% or in-lieu fee for affordable housing. “Affordable” is defined as: 30% or less of the household’s adjusted income is required to occupy the unit.
Design guidelines for the area focus on waterfront views, pedestrian experience, and stepping building heights down toward the water.
Site Analysis
Site Analysis
Our site analysis is based on several physical and proprietary attributes of the actual site on 505 Congress Street. The data for our site analysis was gathered from visits to the site and research done on regulatory issues. It is important to note that this is not the complete site analysis and a more intensive analysis needs to be conducted as we move forward. For instance, a detailed soil and environmental analysis was not done and needs to be completed in future steps. Overall, the purpose of this initial site analysis is to determine whether our site may or may not be suitable for development. Our team used the site analysis checklist provided in the course readings and is as follows:
A. Description/History.
1) Centrally located in South Boston Waterfront District.
2) Owned by NStar (received in ‘Big Dig’ land swap).
3) Most recently used as a staging area during ‘Big Dig’ construction.
B. Physical Attributes.
1) 0.70 acres (34,730 sq ft) “Football shaped” lot.
2) Level site with minimal modifications and/or improvements required.
3) The site contains zero hydrological or vegetation considerations.
4) The footprint of the lot is outside the adjacent tunnel footprint.
C. Zoning/Regulatory Attributes.
1) The site is located in the Fort Point Waterfront General Area Zone for permitting and regulatory purposes.
2) The site currently has a maximum height constraint of 155 feet. This may be re-designated if necessary with additional legal work.
3) There is no current development planned on the site. The site is not currently permitted for development (Boston Globe 9/21/05).
D. Infrastructure/Linkage Attributes.
1) The site contains the necessary utility infrastructure and capacity.
2) The vehicular traffic flow and traffic pattern around the site may affect both ingress and egress to our location.
3) Minimal walking distance to MBTA Silver Line (< 1/4 mile).
4) Retail services for the area are in the pipeline.
5) The site is located within close proximity to the convention center.
E. Dynamic Attributes.
1) Image/visual factors.
a) Vent Building #5, a large 176’ structure that serves as an intake and exhaust point for the adjacent Fort Point Channel Tunnel, has a negative affect on the visual approach to our site. This vent building severely limits views and visual images to the southeast of our site. The entrance to the westbound Fort Point Channel Tunnel runs along the entire back length of our site. This will negatively impact the visual impression of our site.
b) There are currently unobstructed views to downtown Boston and the CBD to the northwest.
Site Analysis
2) Noise. Noise pollution may be a factor due to the adjacent tunnel entrance and vehicle traffic. Political image. The waterfront district is undergoing enormous change which is supported by the majority of local politicians and community groups. Redevelopment plan calls for a 24 hr neighborhood that will attract both businesses and visitors.
3) Future developments may affect this current condition.
F. Environmental.
1) Soil conditions. The condition of the soil is unknown and may have been impacted by nearby tunnel construction.
2) Hazardous material. The status of hazardous material on site is unknown, but possible. An in-depth study is needed.
G. Site Suitability. The site analysis allows us to make a decision on what type of development is suitable for our existing site. This site suitability rating is based solely on the physical and proprietary attributes of our site.
1) Hotel/Residential/Mixed-use: GOOD. This rating is based on the proximity of the site to Boston CBD and the mass transportation network. The site is also very close to the BCEC. A drawback for both residential and hotel use is the visual hindrance created by the adjacent vent building.
2) Office: FAIR. Based strictly on physical and proprietary issues we rated the site as fair for office use. The positive attributes, in terms of office development, is highlighted by the proximity to mass transportation.
3) Retail (only): POOR. The poor rating is due mainly to parking constraints and ingress and egress considerations based on existing traffic patterns. The lack of pedestrian traffic around our site, even with future developments, is also a factor in making the site poorly suited for retail.
Next Steps
Next steps include development of the building design, additional site analysis and zoning research, and creation of the projected cash flow pro forma using our assumptions about absorption, rent inflation, vacancy, and development of reasonable cap rates.
Appendix A
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Appendix A
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Appendix A
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[1] For our study, the Boston MSA is defined as Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester counties in Massachusetts, and Hillsborough, Rockingham, and Strafford counties in New Hampshire.
[2] For our study, the Boston MSA is defined as Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester counties in Massachusetts, and Hillsborough, Rockingham, and Strafford counties in New Hampshire.
[3] Claritas report produced using Claritas iXpress based on 2004 data. More info:
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Population (mil.)* 4.43 4.16 3.14
Total Employment (mil.)* 2.97 2.69 2.01
Per Capita Income ($000) 43.14 46.96 38.01
Vacancy Rate (%)** 6% 6.9% 10.8%
Rent ($/unit)** $ 1282 $ 1341 $ 808
*Data 2003 Census
** Data 2005 Apartments Various sources
Seattle
San Francisco
Boston
Figure 1: Boston & Comparable MSA’s
Conclusion
At present the all the demand drivers in the Boston economy are well below historic peaks. The TWR projections are for steady growth over the next 5 years. Using the TWR projections in our subsequent demand analysis will provide a conservative estimate and any increase will provide a significant upside. Since we are just recovering from a period a negative growth we do not foresee a decline in growth rates over the next ten years.
Conclusion
As can be seen from the above comparative study Boston is favorably positioned for growth and is recovering from a period of slow growth. All the demand drivers seem to be trending upwards, a favorable position within the cycle.
• Boston clearly derives most of its employment first from education and health, and second from professional business services.
• San Francisco’s employment is comprised first of business services and second from education and health.
• Seattle is focused mostly in the government sector, with hospitality and leisure, education and health, and retail trade all tied for third.
We see that Boston has the highest total employment, second highest per capita income, lowest vacancy rate positioning it well for future growth in the market.
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