A Starwood Property Trust affiliate is swapping hats after closing a deal to purchase a distressed Boston office building, shifting the real estate investment trust's role from lender to landlord.
LNR Partners, an offshoot of the Miami Beach, Florida-based finance company, is now the owner of the Park Square property in the city's Back Bay area after submitting the winning $95 million bid at an auction held Tuesday. The firm, led by billionaire investor Barry Sternlicht, was the lender for the more than 507,700-square-foot building that — up until this week — was owned through a joint venture between Capital Properties and Madison International Realty.
The winning bid is a healthy discount compared to the Back Bay building's previous assessed value of $119 million. It is an even starker drop from the $245 million the property was valued at after Madison bought a stake in the building in 2020, when Capital brought the fellow New York-based investment firm on as a partner through its recapitalization effort.
The latest price denotes the challenges the building and its owners faced in the years since the pandemic's outbreak, as large tenants fled and financial concerns continued to mount.
Park Square was more than 90% leased in 2020, largely due to a long-term deal with WeWork for more than a fourth of the property. While the lease wasn't scheduled to expire until 2032, the coworking operator terminated the 136,500-square-foot agreement in 2023, a loss that dropped the building's occupancy to about 55%.
Bay State College, another mainstay Park Square tenant, shuttered several months later and pushed the property's occupancy rate even lower.
By 2024, LNR Partners became the special servicer for the roughly $160 million loan, as Capital and Madison faced worsening cash flow issues. The building's occupancy rate had fallen to just over 40%, according to financial records, and Park Square generated $5.46 million in revenue against $5.07 million in expenses.
Capital began missing payments on the loan, originally scheduled to mature in late 2027, and faced multiple liens that contractors had put on the property.
Starwood Property Trust declined to comment to CoStar News, and neither of the property's former owners immediately responded to inquiries.
Willing to wager
The REIT's interest in the Back Bay building marks a rare acquisition for Starwood, which has sold nearly two dozen properties across the country, including in Boston.
The auction purchase could signal Starwood's willingness to gamble on Boston's recovering office market as the region gradually rebuilds some of its pre-pandemic momentum.
Tenants over the past year alone have collectively signed nearly 3.7 million square feet of office deals throughout the area, according to CoStar data, the highest volume in more than three years. While there are still pockets of challenges and vacancy rates remain at a record high of about 15%, landlords and other regional stakeholders are pointing to large deals signed over the past few months as proof of Boston's improving trajectory.
JPMorgan Chase, for example, committed to about 251,160 square feet at the new South Station Tower high-rise in a deal that marked the largest to be signed in the city so far this year.
And for investors willing to place the bet, there are still deals to be had as office values have some room to recover.
Lagging sales volume has been driven by fewer deals and falling prices, with only three deals last year clearing the nine-figure benchmark. Pricing hit a peak in late 2021 when sales averaged nearly $500 per square foot, according to CoStar data. By late last year, that had fallen to an average of less than $350 a square foot, marking a roughly 30% drop.