Older office buildings drawing higher rents
Class B office buildings, once in the shadows of modern structures, now command similar rents, thanks to startups seeking digs with character
For decades, most of downtown Boston’s older and smaller office buildings — recognizable by their familiar red-brick or granite exteriors — were usually a distant second choice for tenants and buyers. They were often seen as the vaguely dingy places where a small professional practice might hang a shingle, drawn by significantly lower rents than those charged by the gleaming office tower next door.
But now these so-called Class B buildings are enviable addresses in their own right, benefiting from an expanding economy and a renewed appreciation from some business tenants for the classic architecture and ornate details that define many of these period properties.
The result, local real estate specialists said, is a milestone in Boston’s office market: Rents at these low-rise buildings are now on par with the lower floors of Class A towers, which historically had commanded premium prices.
“It’s the first time I’ve ever seen this happen,” said Robert Griffin, president of the New England office of Cushman & Wakefield. “It’s a really unique trend — and I think it’s here to stay.”
Class B buildings are those smaller, older buildings that dot downtown Boston. They are typically shorter and narrower than Class A buildings, which are usually 14 stories or higher and have modern infrastructure and amenities.
What they lack in modern conveniences, the Class B buildings make up in character: Many have exposed bricks and beams or ornate stairways and other finishings that have caught the eye of young technology companies and other startups looking for more authentic digs.
Vacancy rates for those buildings have been consistently below those of the more modern, taller downtown towers, something unheard of in previous decades, according to JLL, a Chicago commercial real estate firm with offices in Boston.
Rents at Class B buildings in downtown Boston have increased about 32 percent over the past three years, compared with 18 percent for space in Class A towers, according to Cushman & Wakefield.
At 53 State St., a 40-story Class A tower built in 1985, the lower floors have recently fetched $40 to $45 per square foot in rent. At nearby 10 Post Office Square, a 13-story Class B building built in 1924, rents are hovering in the same range, industry officials said.
Asking prices for the upper floors at 53 State St., also known as Exchange Place, are $60 and up, as they are at other Class A towers throughout the city.
Some things haven’t changed: Larger companies are still willing to pay top dollar for the upper atmosphere of Boston’s office community.
Still, Class B spaces are not supposed to compete at any level with Class A properties. But now that they are, investors are noticing the shift.
Frank Petz, the managing director of capital markets in New England for JLL, said investors who once shunned Class B buildings are aggressively pursuing deals for them.
In May, Synergy Investments sold 100 Franklin St., a nine-story Class B office building constructed in 1908 and later extensively renovated, to Clarion Partners for $48.75 million, or about $400 per square foot. Synergy paid $33.8 million, about $280 per square foot, for the building in 2008.
Though still well below what a full Class A office tower will sell for, prices for Class B properties are up 50 percent or more in just the past few years, from $200 to $300 per square foot to $400 and more.
“It’s a new era of pricing in Boston,” Petz said.
Synergy Investments caught the wave early. President David Greaney said he started buying and renovating older mid-rise office properties in the early 2000s, believing there was a growing market among young firms for “urban buildings with character” that are located near transit lines.
“When we were convinced where the market was going, we doubled down,” said Greaney, who now owns about 30 Class B buildings in Boston and Quincy.
“Companies increasingly prefer to be in buildings that they believe more closely match how they view themselves,” Greaney said. “Class B buildings speak more to these companies. This is all being driven by demand.”