Everybody knows Boston’s commercial real estate market is hotter than a pistol. But how can working stiffs like you and me get in on it?
One unusual opportunity to do just that — own a small piece of a gleaming downtown office tower — is expected to develop this week, when a real estate investment trust plans to go public.
Publicly traded trusts, known as REITs, normally own big portfolios of real estate. But the trust in this case, called ETRE, is offering the public shares of just one office building, the 36-story State Street Financial Center in downtown Boston — and not even the whole thing, at that.
If the typical real estate investment trust looks and acts like a mutual fund, the ETRE offering is more like an individual stock. A very expensive stock. As a real estate investment, ETRE is a badly undiversified option for most individuals: one building with a single tenant.
The idea of buying a building seems simple, but this transaction is not. The company offering the real estate IPO, ETRE Financial, has struck a deal to buy 48.7 percent of the building from its current owner and will pay for it with money from the sale of the public shares.
The executives behind ETRE hail from the real estate investment industry, and last year tried a similar IPO of a building in Washington, D.C., that was shelved.
The State Street building, on the edge of the Financial District on Lincoln, not State Street, is a top-shelf property. It’s the headquarters for the financial giant State Street Corp., and you can see the name atop the building at a long distance. The structure itself is just 12 years old.
ETRE is selling only a portion of the building to the public, about half. Each share is priced at $15.
Investors would have to read ETRE’s public documents closely to discover the actual price they are paying to own the State Street tower. It is based on an assumption the property is worth about $1.1 billion. That amounts to about $990 per square foot, excluding the parking garage.
What kind of deal is that? Consider some of the recent activity in Boston’s commercial real estate circles.
An April transaction valued the swanky office tower at 75 State St. at $605 million — or about $755 per square foot. This is the most expensive transaction in Boston so far this year.
But wait, there’s more: The owners of two other Boston office towers, at 500 Boylston and 222 Berkeley, recently put the buildings on the block, asking $1.5 billion. That amounts to an astonishing $1,200 per square foot.
Good luck with that.
These are numbers thrown around at the very top of the Boston office market for trophy buildings. The median sale price in Boston’s central business district was around $425 per square foot in the second quarter of this year.
One other bit of context: The sale of the Hancock Tower to Broadway Real Estate Partners at the end of 2006, the clear peak of a stupid-money real estate cycle, brought roughly $800 per square foot. That deal ended up in bankruptcy, and the property changed hands again at about half the price in 2009.
Within a week of Broadway’s purchase of the Hancock, Fortis Property Group bought the State Street building for $889 million. Today, the mortgage on the building amounts to $775 million.
Over the past year, Fortis was rumored to have been shopping the building. The Wall Street Journal reported in November that Fortis tried to get $1.1 billion but couldn’t find any takers.
Factoring in the mortgage on State Street Financial, the ETRE transaction would actually get Fortis to a valuation of $1.1 billion.
Despite the sticker shock, the State Street building generates income for owners at a reasonably good investment yield of about 5.2 percent a year. It’s completely leased into 2023 at an above-market rate of about $60 per square foot. Most other high-profile transactions this year have been priced to generate income of 4 percent to 5.5 percent.
But that’s not a good reason to buy the coming ETRE REIT. It’s a highly concentrated investment in an overheated market. Bets like that are not how rich real estate investors make money.