The Perfect Storm – Is Opportunity Knocking?
The Perfect Storm – Is Opportunity Knocking?
Batterymarch Insider
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The Perfect Storm – Is Opportunity Knocking?
We’ve been pretty vocal about the negative impact that sharply higher interest rates are having and will continue to have on real estate prices. We’ve been even more vocal about what we see as a glut of new luxury downtown condominium units. We first rang the supply warning bell back in October of 2020, see “The Great Boston Building Boom (It’s Not Just the Seaport).”
The chart above captures both new downtown luxury developments and 30-year mortgage rates. Note that we’re only including large condominium developments in the core luxury downtown corridor that runs from the Back Bay out to the Seaport. We’re not including secondary areas, like the Ink Block or smaller redevelopment projects. Additionally, there are plenty of projects in the pipeline beyond 2023.
For the most part, development came to a screeching halt with the Great Financial Crisis. Thanks to the amount of time it takes to get large scale projects from permitting to the point of delivering finished units, there was an extended period of inactivity. Things really began picking up around 2016.
Even with the benefit of ultra low interest rates, the market has been slow to absorb all these new units. The developers at 1 Dalton (2019 vintage) would be happy to sell you a brand new unit today – years after completion. More concerning is how the values in some of these developments have performed. Even before interest rates climbed, we regularly saw units at developments like 580 Washington Street (2013 vintage) listed for less than the original sale price.
Assuming that the Federal Reserve stays the course with its hawkish stance on inflation, we can add to our list of worries the very real possibility of a meaningful economic downturn. That would spell disaster for developers looking to sell brand new multi-million dollar two bedroom apartments.
Opportunity Knocks
In light of the gloomy fundamental backdrop, some may wonder if buying anything now is akin to trying to catch the proverbial falling knife. While developers are clearly sitting in the crosshairs of what may be the perfect storm, we see pockets of attractive value in traditional blue chip neighborhoods. These properties routinely trade at deep discounts (greater than fifty cents on the dollar) relative to new construction and usually offer substantially lower fixed caring costs.
Feel free to reach out to us, we’d be happy to walk you through our analysis.
Property Spotlight
Batterymarch Group is focused on buyer representation, so the highlighted listings are not ours. These are our opinions, so take them with a grain of salt. We’re happy to set up showings of these properties, offer our valuation analysis, and assist with preliminary renovation budgets when needed.
49-51 Commonwealth Ave., unit B – This Price Can’t be Serious – Offered at $12.9 Million ($3,035/sf)
DOM – 5, Taxes $71,096/year, Monthly Condominium Fee - $5,500
Unit B at 49-51 Commonwealth Ave., is a 4,250 square foot, 4 bedroom parlor and basement level duplex. It was listed last week for an astonishing $12.9 million ($3,035/sf). The unit comes with parking for four cars and a top notch Back Bay location. Taxes and condominium fees will run you just shy of $12,000 per month.
Simmons College acquired 49 & 51 Commonwealth back in the 1940s and combined the buildings. Simmons used the property as part of its Back Bay campus until they sold it in 2002 to the late developer, Robert Beal.
Back in the 1930s and ‘40s, Back Bay property values had declined to the point that higher education institutions bought up real estate left and right. When properties fell into the hands of these institutions, the interiors were largely stripped of most of their original detail, and that is clearly the case with this property.
This property was converted to condominiums in 2002 and the finishes are on par with what you’d expect from a commercial developer at that time. As far as we can tell, not much has happened by way of improvements or updates over the last 20 years. The street level of the unit is nice, but it has a generic dated feel. It gets very good sunlight, has high ceilings, and one rather small bedroom.
Moving to the bedrooms - down in the basement things go down hill. Low ceilings, that unmistakable musty basement odor, dated bathrooms, and flooring that looked to have moisture damage. In the context of an asking price of nearly $13.0 million, the best we can say is that it’s a real disappointment.
Only a handful of properties in Boston have fetched north of $3,000/sf and in our view this one falls well short. We’re ok with brokers trying to get their clients the highest price possible, but isn’t there a point where the brokers have some moral obligation to be fair with the public?
The market may prove us wrong on this one, but we see fair value in the vicinity of $1,300/sf.
Unit B at 49-51 Commonwealth Avenue is offered by Keller Williams Realty..
Well Bought/Well Sold
98 Mount Vernon Street – A Solid Beacon Hill Home – Well Bought
98 Mount Vernon Street, a 4,957 square foot 5 bedroom single family, changed hands for $7.75 million. The houses on this section of Mt. Vernon Street have good sized rear gardens with additional frontage on Acorn Street. This provides for very nice sunlight.
The renovation work here was comprehensive and the roof and HVAC system are new. The kitchen, living/work area take full advantage of the sunlight and outdoor space. Most importantly, it’s equipped with a passenger lift.
We couldn’t help but notice that the buyer of 98 Mt. Vernon is currently trying to sell a similar size house at the top of Chestnut Street (9 Chestnut Street, offered at $7.995 Million). They bought 9 Chestnut last May for $7.695 million.
Without going into the details, we think that 98 Mt. Vernon is a more attractive property than 9 Chestnut. Apparently the new owner agrees with our thinking. Changing Beacon Hill houses like you’re changing underwear is tended to with a certain amount of economic risk. We’re keeping an eye on how the sale of 9 Chestnut works out.
With respect to valuation at 98 Mt. Vernon, $1,563/sf (which doesn’t include some finished area in the basement) is what we’d consider market correct for a nicely renovated south slope Beacon Hill home. This was a fair deal to both parties, we’re calling it – Well Bought.
88 Beacon St. – A Great Apartment, But Too Much Money – Well Sold
After 175 days on the market, unit 3 at 88 Beacon Street has a new owner. The final price for this 3,857 square foot 4 bedroom triplex came in at $6.9 million ($1,789/sf), a 13% discount from the $7.9 million asking price.
There are a lot of nice features here, including a functional private terrace with an outdoor kitchen, parking for three cars, some well preserved original detail, and views of the Public Garden. We think that the location is pretty ideal although that stretch of Beacon can be a bit active for some people.
This is a non-elevator building, so it’s a second floor walk up with two additional flights of stairs in the unit. The renovation looks to date back to the early 2000s and it’s getting a bit long in the tooth, so we’d expect that the new owner will do some updating. It’s worth pointing out that the City has the unit assessed at $7.5 million so the tax bill is a hefty $82,500 a year.
The seller paid $6.5 million for the unit back in 2014, so net after standard fees they’re just about breaking even after eight years of ownership. We think that hitting the bid was the right move for the seller. As we pointed out above, the luxury market has radically changed since 2014. This is a great apartment in a great location but for the reasons we’ve laid out, we think $1,789/sf was too much money, it was – Well Sold.
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About Batterymarch Group LLC – Batterymarch Group is an independent full service real estate brokerage and advisory firm focused on the downtown Boston high-end residential market. We represent both sellers and buyers with a sharp focus on valuation. We also offer sub-advisory and owner’s representation services to financial institutions, family offices, and trustees.
About Andrew Haigney – A 25 year Wall Street veteran, Andrew held senior positions at leading global investment banking institutions where he routinely valued and negotiated complex securities transactions on behalf of institutional clients. Andrew has been an outspoken advocate of a universal fiduciary standard. In founding Batterymarch Group, Andrew brings that same discipline and passion to real estate brokerage.