Is Vornado Realty Trust Playing The Waiting Game at Downtown Crossing?
Retail Traffic
By Elaine Misonzhnik
New construction projects ranked high on the list of casualties during the recent downturn. Some developers postponed building new centers because they were fearful that returns on investment would fall short of expectations. Others found they couldn't get financing, or had the misfortune of seeing previous commitments scrapped because of lender bankruptcies.
...When Vornado bought the 656,000-square-foot Filene's Basement building in downtown Boston from Federated Department Stores for $100 million in the summer of 2006, the commercial real estate market was booming.
Vornado formed a 50/50 joint venture with Gale International, a New York-based privately held development and investment firm, and quickly drew up plans to redevelop the property into a 1.2-million-square-foot mixed-use project combining retail, office, luxury condos and a hotel. JP Morgan and Mack-Cali Realty Corp. also invested in the development.
Renamed One Franklin Street, it was to contain 297,000 square feet of retail, 500,000 square feet of office space and 136 condos, in addition to a 225,000-square-foot hotel component and a below-grade parking garage.
Located in the midst of Boston's Downtown Crossing shopping district, within easy access to public transportation, the site fit all the requirements for a successful mixed-use development, says Richard K. Green, director of the Lusk Center for Real Estate at the University of Southern California and professor in the School of Policy, Planning and Development at the Marshall School of Business.
...The vacancy rate for office properties in Boston, however, will still average approximately 13.3 percent in 2011, Marcus & Millichap projects.
Vornado might need the profits from the condo and office components to make its numbers work. "Developers are in business to make money. It's not particularly shocking that Vornado wants to get the best return it can on its investment," says Green.
"I think it's a great mixed-use site," continues Green, "but it probably is not yet time to build on it. If I were a developer, would I start breaking ground right now? Probably not."
Green also believes that it would be a mistake for Boston city officials to take the project back through eminent domain in order to redevelop it themselves. Cities have a history of spending too much money on construction compared with private developers, and they often get things wrong, he points out...