Real Deal: 480 Arsenal Street, Watertown
Convergence of Market, Emerging Uses, and Low Site Coverage Offer Opportunities for Value Creation
When global developer AMB Property Corporation first looked at 480 Arsenal Street in 1998, it was a 25-acre site with two primary commercial buildings leased to Boston Edison through 2010. Today the Watertown, Massachusetts, property is a vibrant business center, thanks to a creative multi-phase redevelopment that showcases the advantages of infill real estate.
Bruce Freedman, executive vice president of AMB, presented the project as a “real deal” case study on Thursday, September 29, capping the first day of the MIT/CRE Alumni Reunion Weekend 2005.
The Arsenal Street site, part of a portfolio purchase with an allocated purchase price of $5.6 million, posed exceptional opportunities for creative development. It also required adroit management of a host of development and finance issues. “There were many drivers of opportunity with this property,” said Freedman. “It was an infill site. There were few alternative sites in this heavily developed area. Site coverage was only about 17 to 18 percent, so there was property that could be built upon. The market was strong. There were emerging uses for which the property could be developed. And the tenant wanted to vacate.”
To make the project work, AMB needed a development partner. “We selected Campanelli,” said Freedman. “They were very experienced in the market.” Indeed, at the time of the acquisition, Campanelli had developed more than 10 million square feet in Massachusetts.
With Campanelli’s assistance, AMB developed the project in three phases. The first phase focused on a 95,000-square-foot building used only partly by Boston Edison. By allowing Boston Edison to terminate its lease on the building, AMB was able to accommodate a potential tenant seeking to consolidate several facilities in one location. A restructured lease, favorable to the new tenant, Verizon, produced a net rental gain of $465,000 annually.
Of the three phases of the multi-component project, this was by far the easiest to manage and, said Freedman, represented significant value creation. The current value of the Verizon building is $16.2 million at a 6.25 percent capitalization rate.
Equally important, the change in tenant freed eight acres of land adjacent to the Verizon building. On that parcel of land, the focus of the multi-year development’s second phase, AMB built what became known as the AT&T building. Phase Two quickly became a model for how unexpected difficulties can delay, and sometimes derail, development projects.
As excavation began, contractors found 13 large underground naphthalene tanks left by an old rubber manufacturing plant that had once occupied the site. Despite extensive pre-development core testing, the tanks had not been detected. The project was further delayed by problems with a system of innovative panels that were part of the new precast building. When one of the 45-foot high, 30,000-pound panels collapsed, in March 2001, inspection soon revealed that the mechanism for attaching the panels was defective, requiring protracted reengineering and retrofitting.
Both problems drove up costs and significantly delayed the project. To exacerbate the matter, the telecommunications market took a dive during the delay, making it more likely that AT&T would exercise its right to terminate the project.
Yet AMB escaped unscathed. How? “Luck,” says Freedman, not entirely facetiously. When AT&T sold its Manhattan headquarters the corporation was saddled with a huge gain. The Watertown project presented a convenient way to defer much of that gain.
By 2002, the comprehensive project was known as the Watertown Business Park. That was the year AMB completed the third and final phase of the development. Phase Three involved the second of the original large buildings on the site; that 136,150-square-foot edifice was still leased to Boston Edison.
AMB approached Alexandria Real Estate, which had a successful biotechnology project in a building next door to 480 Arsenal Street, to explore their interest in the building. When Alexandria said they were, indeed, interested, AMB was able to negotiate the right to terminate Boston Edison’s lease. In the process, said Freedman, AMB considered several development scenarios, including developing the building speculatively for biotech, developing it for office space, or selling it as it was. In the end, they simply sold the building to Alexandria.
And what is AMB’s original $5.6 million investment worth after seven years? Compared to investments in treasuries, S&P, or NCREIF Industrial, all of which would have yielded an internal rate of return between approximately 4 and 12 percent, 480 Arsenal Street today is valued at an estimated $77 million, representing a better than 93 percent return. In addition to the financial payout, the project also yielded valuable lessons, which Freedman summed up for the appreciative audience as he ended his presentation. (See sidebar: “Five Important Lessons from 480 Arsenal”)