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Developers cool to downtown Boston sites the state sees as hot properties

About 2 million square feet of development potential is available at state-owned parcels near the Veolia power plant on Kneeland Street.
About 2 million square feet of development potential is available at state-owned parcels near the Veolia power plant on Kneeland Street.(David L. Ryan/Globe Staff/File 2016)

The two largely empty parcels at the eastern end of Kneeland Street seem like prime targets for redevelopment: next to South Station, near the Financial District, and positioned squarely over the two interstate highways into Boston.

They cover more than five acres, with a 10-story state office building, a small park, and plenty of empty space just steps from a downtown business district that’s bursting at the seams.

Apparently, no one wants them.

After being unable to sell the properties over the years, the state Department of Transportation appears to be giving up on them for now, with no plans to market either parcel anytime soon.

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“Frankly, I’m surprised,” said Matthew Kiefer, a development lawyer at Goulston & Storrs. “They’re great development sites near a major transportation hub.”

Even a high-profile push two years ago by Governor Charlie Baker and Mayor Martin J. Walsh to package the properties with the adjacent steam plant hasn’t borne fruit. The project, marketed as SouthGate, with up to 2 million square feet of development potential and building heights to 300 feet, was supposed to be a signature part of a Baker administration effort to sell off surplus state land.

But by the time bids were due last spring, there were no takers.

State officials have subsequently floated the idea of selling the parcels without the steam plant, owned by the energy conglomerate Veolia. The facility provides heat to many office buildings in downtown Boston, and Veolia has no plans to shut it down or build a replacement on its own.

But developers apparently have not warmed up to that idea, either. So now they sit.

Development experts in Boston say a number of issues undermined the SouthGate proposal in 2016, including requirements that the existing steam plant be replaced, the Reggie Wong Memorial Park be preserved in some form, and a deck be built over one of the highways.

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The biggest factor, though, may have been the state’s minimum asking price: $167 million.

“The number they came out with was way too high,” said Michael Rubin, a real estate lawyer at Posternak Blankstein & Lund.

“The upfront money and the tentacles that came along with it made it much more expensive. . . . By the time you’re done as a developer, it’s not economically viable.”

State officials eventually waived the minimum bid, but developers and investors had already been scared away by then.

Still, some local real estate experts found it surprising that the state couldn’t work out a deal, given the parcels’ prime location.

“To see something that’s right in the middle of the city that didn’t have 30 offers is not the way things have gone recently,” said Brendan Carroll, director of intelligence for Perry Brokerage Associates. “I see that as legitimately curious.”

Chris Froeb, a real estate lawyer at Nixon Peabody whose firm represented an investor that considered the project, said developers realized they would have had a hard time turning a profit under the state’s conditions.

Still, he said, it was understandable that state officials were leery of having “someone come around five years from now and . . . hit a grand slam at our expense.”

Removing the requirement to replace the steam plant could make the adjacent property easier to develop. But then, Froeb said, developers face the unenviable prospect of building next to a steam plant.

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“It’s a big ask,” Froeb said.

He suggested that state officials decide whether it’s more important to get rid of the properties quickly, at a certain price, or to wait to find a developer willing to address the infrastructure issues.

Most developers, he said, would rather pay a fixed sum with no strings attached and not have to worry about potential cost overruns from infrastructure improvements.

Lately, there have not been many properties available in Boston that would serve as a comparison.

The City of Boston sold its old parking garage in Winthrop Square for more than $150 million to Millennium Partners, which is building a 700-foot tower on the site. While just over one acre in size, that property has a significantly higher height allowance and is positioned in the thick of downtown.

State officials considered the two Kneeland Street parcels for another option: the location for a second headquarters for Amazon.

Scott Pollack, a principal at the architectural firm Arrowstreet, proposed combining the Postal Service’s Fort Point facility, which is next to South Station, with the Kneeland Street parcels to develop a single campus for Amazon. (Pollack is the brother of the state’s transportation secretary, Stephanie Pollack.)

The idea could potentially include a 51-story tower above the tracks at South Station that’s proposed by the Houston developer Hines. A spokeswoman for Hines said it expects to be able to start work soon on the tower, but declined to comment on the Amazon idea.

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Meanwhile, despite years of prodding by state officials who want to expand South Station, the Postal Service shows no signs it will be relocating.

It’s unclear if the Kneeland Street properties will be part of future discussions about Amazon; the Walsh administration has put its weight behind Suffolk Downs as a home for the company.

Froeb said the Kneeland Street parcels should become more attractive as the commercial real estate market continues to heat up. But the good times may not last forever.

“I’m rooting for the site,” Froeb said. “The state is correct in [trying] to sell it. The question is going to be: Are they able to go back out to market soon enough with pricing that makes sense, or at least a process that allows folks to be diligent and creative . . . in this cycle?”


Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.