Investors and Luxury Brands Bid Up Back Bay Market Newbury Street Retail Vacancies Shrink and Rents

Rise By Steve Adams March 24, 2014 Joseph Palermino has seen the ups and downs of the Back Bay real estate market over the decades, as successive waves of investors and retail tenants colonized the signature brownstone storefronts of Newbury and Boylston streets. Very few buildings have ever made (financial) sense on Newbury Street, but they always seem to appreciate in value, said Palermino, managing partner at Cabot & Co. real estate firm. Even though someone buys a building and they struggle for a while, the prices get crazy and they make money selling them. Now the neighborhood appears to be in another of its exuberant real estate cycles, seemingly unscathed by the ascent of online shopping and competition from suburban retail centers touting downtown amenities. Investors from out of state and overseas are paying top dollar for Back Bay properties, luxury brands are moving in or expanding, and vacancies have fallen into the low single digits, according to real estate brokers. Back After The Bombing Nearly a year after the Boston Marathon bombing ripped through the neighborhood, the business climate is buoyant. Local merchants filed claims approaching $2 million for business interruption, of which approximately $500,000 has been unpaid. But neighborhood activists and business owners say their immediate concerns are rising rents, difficulty finding good locations particularly for restaurants and the citys arduous permitting process. On the red tape front, they are seeing encouraging signs since Mayor Martin Walsh took office in January. Walsh is considering extending last call at restaurants and bars until

3:30 a.m. to make Boston more attractive to tourists and workers in the tech and hospitality industries. Meg Mainzer-Cohen, president of the Back Bay Association, said shes already seen a more business-friendly attitude under Walshs leadership. The group represents 400 neighborhood businesses, some of which chafe under the restrictions such as the current 2 a.m. closings. My sense about the Walsh team is they are very business-focused and collaborative, Mainzer-Cohen said. Theyre trying to look for ways to deliver the best possible services, including the business community. Back Bay appears well-positioned to thrive in an era of reenergized urban centers and flourishing luxury brands. Investors are paying top dollar for retail properties in the neighborhood, banking on their ability to attract tenants attracting a free-spending shopper demographic, including foreign-born students and residents of new luxury condos. In January, a Washington, D.C.-based real estate firm added four Newbury and Boylston properties to its portfolio, which includes holdings in luxury corridors including Hollywood and SoHo. ABSB Real Estate Investments paid $91.2 million for 51,249 square feet of retail space occupied by such tenants as Ralph Lauren and Fidelity Brokerage. The buildings are 100 percent leased. Some of these sales have been taking numbers that even by todays standards are pretty high, Cabot & Cos Palermino said. If their acquisition is higher, their rental income should be higher too. Whether that pans out depends upon the ability of the new wave of landlords to attract new and noteworthy tenants. Case in point is Atlanta-based developer Jamestown. Since acquiring 28 mixed-use buildings totaling 219,000 square feet for $226 million in 2011, Jamestown has spent nearly $5 million on improvements and secured dozens of tenants new to the Boston scene. Five new retailers are opening this year, including Blue Mercury spa, 3-D printing company MakerBot and New York-based burger haven Shake Shack. Other big-name arrivals are generating the sort of buzz that attracts the next generation of shoppers. Chanel relocated in December to a 10,000-square-foot space at 6 Newbury St., five times the size of its previous location in the Taj hotel. Daniel Boulud, owner of the Michelin-rated Daniel restaurant in Manhattan, will open Bar Boulud at the Mandarin Oriental hotel this fall. Asking rents on retail spaces in the neighborhood have increased by approximately 10 percent in the last year, brokers say.

The market has never been hotter. Office space is harder than ever to find, and retail space is very tight, said Tom Brennan, vice president of brokerage at C. Talanian Realty Co. Vacancy rates approached 20 percent during the Great Recession, but have now fallen into the low single digits. Of the scant vacant storefronts, some are already leased and in permitting, said the Back Bay Associations Mainzer-Cohen. Although terms are often bound by confidentiality agreements, brokers say recent leases for prime spaces have ranged from $130 to $200 per square foot, and few storefronts are available for under $80 per foot. Damage Done, Losses Unpaid The high rents have put added pressure on Back Bay merchants who suffered lost business and property damage during the Marathon bombings. According to the state Division of Insurance, only 12 of 27 claims for commercial property damage have been paid by insurers, and only 65 out of 133 claims for business interruption. Insurers have paid $1.4 million out of $1.9 million in business interruption claims and $286,897 out of $410,869 out of the commercial property claims, according to the agency. One shopkeeper has been stymied in her attempts to receive payment for an estimated $100,000 in lost business and merchandise. Robin Helfand opened her 1,000-squarefoot candy store six months before the bombings. Her insurance company contained clauses covering general business disruption, and civil authority coverage, which applies to losses such as curfews imposed by the government in an emergency. Law enforcement initially closed a 15-block area around the blast sites, while Boylston Street reopened to the public nine days after the attacks. Sales at Robins Candy dropped 60 percent in the two months after the bombing and were down 40 percent for the rest of the summer, Helfand said. Her insurer, whom she declined to name, notified her that they wouldnt cover lost sales or expired candy. Helfand said she has become more conservative in her buying practices and salary structure as a result. They dragged their feet and it really limited my ability to do advanced purchasing, she said. Her attorney, Jon Cowen, said he is contemplating a civil suit if the insurer doesnt change its position. We did provide a lot of documentation of what had to be replaced and what it cost to replace it. They say its not covered and the rationale was that its a type of loss that does not fall within the civil authority coverage, said Cowen, of Posternak Blankstein & Lund in Boston. Theyve drawn a line in the sand, but were not ready to go away.