Market Update – Inventories Remain Stubbornly High

“The Batterymarch Insider” is a brief snapshot of our current market thinking and some highlights of what we see going on in the downtown Boston market. As always, our “terms of use” apply. We encourage you to subscribe.

In this issue:

  • Market Update – Inventories Remain Stubbornly High
  • New and Noteworthy – $3,200+/sf in Downtown Crossing?
  • Mandarin Oriental, PH2B – “The Great Blight of Dullness” – Well Sold
  • 190 Beacon Street – Great Unit, Even Better Price – Well Bought  

What’s Catching Our Eye

Market Update – Inventories Remain Stubbornly High

The downtown real estate market has been robust. Year-to-date, Back Bay condominium sales are up 26% over the trailing four year average. Good quality, reasonably priced units are getting snapped up within days of listing. Are we looking at the same market mania the suburbs have been experiencing? We think not.

Unlike the suburbs, the strong demand for downtown properties is being met with increased supply. As of this writing, there are currently 145 condominiums for sale in the Back Bay, up 36% versus the trailing four year average. The supply of condominium units for sale currently stands at 5.8 months, a 53% increase over the average of the last four years.

What gives? Clearly the suburban market strength is largely driven by low interest rates. But to a large extent, the suburban market is a zero-sum game. People looking to trade up are faced with the conundrum of selling their primary residence for a fancy price and going into the market and buying a larger home at an even fancier price. Many of these would be sellers are sitting on the sidelines, which is exacerbating the tight inventory problem.

The Heart of Darkness

Contrast this to the high end downtown market where many owners have multiple properties and their city condominium may not be their primary home. We’ve previously commented on the underutilization of downtown condominiums. All one needs to do is walk down Commonwealth Avenue just after sunset and take note of all the dark units, often entire buildings. Unlike in the suburbs, most of these sellers aren’t upsizing or downsizing, they’re cashing out.

Demographics and new development are also playing a big role in the city market. Aging baby boomers, who years ago sold their center entrance colonials in Wellesley and bought two bedroom condominiums downtown, are moving deeper into retirement and have less need for their city properties. Add to this the wave of new supply coming from major developments that the market will need to digest (see our report “The Great Boston Building Boom”).

Downtown real estate market participants should keep a close eye on the supply/demand balance. As we see it, that balance is delicate.

New and Noteworthy

One Franklin

1 Franklin, unit PH4A – $13.5 Million in Downtown Crossing – This 4,200 square foot, 59th floor unit has stunning westerly views, but $3,214/sf in Downtown Crossing? The sad reality is that this area has been pretty hard hit by the pandemic. We think that there are better options for that kind of dough.

480 Beacon St, unit PH2 – After nearly 200 days on the market, the price of this penthouse triplex was cut for the third time. Now offered at $5.25 million ($1,556/sf), a 20% reduction from the original asking price. We can’t blame them for trying, but 20 year old (+/-) renovations should trade at a discount, not a premium, in our view.

We’re not big fans of triplexes, but with parking for three cars, good outdoor space, and an elevator, this one is starting to get interesting. Just don’t underestimate the cost of a comprehensive renovation.

Well Bought/Well Sold

Mandarin Oriental, unit PH-2B – “The Great Blight of Dullness” – Well Sold

Penthouse 2B at the Mandarin Oriental (776 Boylston Street) changed hands last week for $14.125 million ($3,809/sf), just shy of the asking price of $14.5 million.

Mandarin Oriental

If you’re looking to live in the lap of luxury, it really doesn’t get any better than this – top notch hotel service and even your own elevator to whisk you to your private rooftop terrace. The views are stunning and the finishes are top notch. Here’s our problem – we don’t love the building.

The Mandarin sits on the longest block in the Back Bay, it’s about three times longer than the average east west block. In her groundbreaking book, “The Death and Life of Great American Cities,” the late Jane Jacobs depicts long city blocks as non-pedestrian friendly and contributing to what she called the “great blight of dullness.”

We’re also not big fans of properties that are connected to shopping malls. Step out of the back entrance and you’re smack dab in the Prudential Center Mall, right in between Lulu Lemon and Under Armor. We suppose it’s nice that during a blizzard you can “walk the mall” without the need of an overcoat.

We actually don’t have a problem with the valuation. If you want high-end finishes, they don’t come cheap and we’d venture to guess that the cost of recreating this unit would be meaningfully more than the price paid. We also recognize that hotel service buildings are few and far between in Boston, but this location just isn’t our cup of tea, this was – Well Sold.

190 Beacon St, unit 3/4 – Great Unit, Even Better Price – Well Bought

Unit 3/4 at 190 Beacon Street has a new owner after just two days on the market. The sale price came in a $2.85 million ($1,160/sf) for the 2,455 square foot 3 bedroom mid-building duplex with one car garage parking. The unit features Bulthaup cabinetry, new high-end appliances, 14 foot ceilings in the main living areas, and new HVAC (air handlers and condensers).

190 Beacon Street

The catch is that there isn’t an elevator and readers of our work know that is usually a deal killer for us. We’re overlooking the lack of elevator on this one for a few reasons. First, the unit is located in the middle of the building, so you‘re not hiking to the summit with every trip. Second, the unit owners appear to have plans to install an elevator and have amended the master deed to reflect that. Third, valuation at $1,161/sf represents great value for this unit at this location. 

The seller on this one used a suburban-based sales agent and we can’t help but wonder if they left some money on the table as a result. In any event, the seller got a quick deal and the buyer got a great unit at an attractive price, this one was very – Well Bought.

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2 comments On Market Update – Inventories Remain Stubbornly High

  • Congratulations on the blog! Very well put together. Informative, precise, and straight to the point with clear messages. I have been a “follower” for a while and the knowledge you provide is rather interesting as a reader from foreign real estate developer. As for the “Inventories Remain Stubbornly High” how would you asses the impact of covid lockdowns on the supply? I am not familiar with the restriction that were imposed in Boston or the area but in Brazil where I am from construction did not stop at all, and the property developer delivery dates obligation remained the same, thus forcing an excess supply of now illiquid assets, such as downtown office spaces and commercial properties. In addition, we did also experience a growth in overall sales number, due to exceptionally low interest rates, but not necessarily an increase in sale price. Added to the vastly increased on the cost of production due to supply chain disruption it is looking to be a rather different situation with i. high inventories, ii. Large ongoing construction site, iii. Increase in construction price, iv. Likely increase in financing rates, v. move to suburbs trend. We see thought times ahead for downtown and better times for suburbs and townhouses. Again, congratulations on the blog. Keep up the great work. King Regards.

    • Thank you for your kind words. It’s good to get some international perspective. Just to be clear, our commentary is largely focussed on the high-end downtown Boston residential market, but we do keep a close eye on commercial activity.

      Covid Lockdown – All commercial activity came to a screeching halt last spring, including construction sites and the marketing of real estate. However, in Massachusetts construction and marketing were quickly deemed to be “essential services” and those activities resumed with restrictive guidelines.

      Despite the Covid issues, 2020 downtown sales were more or less in line with recent trends and real estate prices were fairly stable. Construction activity was, and to some extent continues to be, impaired by work rules, supply chain disruptions, commodity price increases, and slower permitting.

      Commercial/Office – It’s our sense that it will be years before we get a good handle on the impact of the pandemic on these properties. Boston is steadily coming back to life, but we expect that large commercial tenants will be re-assessing their downtown real estate needs. The risk here is clearly to the downside from a landlord perspective.

      On the positive side, the ownership structure of many of these properties, together with the long term nature of the leases, should cushion the blow. To your point about excess commercial supply, we’re seeing a lot of “lab space” in the Boston area pipeline.

      Suburbs vs City – We’re ardent fans of urban living, so take this with a grain of salt. The idea that people have been fleeing the City is a bit of a myth. Yes, some people have opted for the suburbs, but there really hasn’t been a giant exodus from Boston.

      We view it as a positive that the supply of downtown condominium units has increased with the demand. The Boston market is liquid and liquid markets are healthy markets. The market action in the suburbs is more concerning to us – “bidding wars” is code for text book inflation; too many dollars chasing too few assets.

      We are keeping a very close eye on municipal finances and demographic trends. Boston has a huge commercial tax base and as they say, what’s good for the goose is good for the gander. Boston is financially dependent on a healthy commercial real estate market.

      On the demographic front, economists have been debating the economic impact of aging baby boomers for years – specifically who will buy the boomers’ assets as they age. Many are owners of high-end downtown real estate which could create an inventory overhang and possibly keep a lid on valuations.

      Again, thank you for your comment.

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