Boston Properties Partners on $385M Virginia Complex

Boston Properties entered into a joint venture to own and operate the Fountain Square complex in the heart of Reston Town Center, a preferred area for office development. The REIT contributed $87 million for half the stake in the properties.

Boston Properties is expanding its footprint in Reston, Va., forming a joint venture to own and operate Fountain Square, a mixed-use office and retail complex valued at $385 million located in the middle of the 1.8 million-square-foot Reston Town Center. The REIT paid $87 million for its 50 percent stake in the properties consisting of about 811,000 rental square feet.

The REIT did not identify the joint venture partner but the Washington Business Journal reported that it is Boston-based Beacon Capital Partners. Boston Properties, also headquartered in Boston, noted in its 2012 second-quarter filing with the U.S. Securities and Exchange Commission that the JV partner is contributing the properties and about $211.3 million in mortgage debt. Boston Properties stated that the mortgage has an annual 5.71 percent fixed rate and matures on Oct. 11, 2016. The proposed deal, which is expected to close late in the third quarter, would allow Boston Properties to acquire the partner’s stake for $102 million in January 2016.

Boston Properties owns more than 1.5 million square feet of office space in Reston, most of which is in Reston Town Center or close to it. One Fountain Square and Two Fountain Square are both 11-story buildings that were completed in 1990. Located nearby are buildings Boston Properties has developed over the years, including One Freedom Square, an 18-story Class A office building completed in 1999, and Two Freedom Square, a 16-story Class A office building, also finished in 1999. Boston Properties developed those in a JV with Terrabrook but acquired full ownership of both properties, which also have ground-floor retail, in August 2003. Also in Reston Town Center, Boston Properties developed and owns the South of Market buildings – two 10-story and one six-story office building containing about 650,000 square feet of retail and office space. On an adjacent block, the REIT completed Democracy Tower, an eight-story office building, in August 2009. Combined the South of Market properties contain over 850,000 square feet.

The REIT is also developing The Avant at Reston Town Center, a 15-story, 359-unit rental apartment building on Block 16, the last undeveloped parcel in the mixed-use complex. Construction is expected to be concluded by late 2013. The site will feature also a multi-level, 770-space parking garage and about 27,000 square feet of ground-level retail.

As of June 30, Boston Properties’ portfolio consists of 150 properties, comprised mainly of Class A office buildings as well as one hotel, three residential and three retail properties for a total of 42.8 million square feet. It has 2.2 million square feet under construction.

For the last several years, Boston Properties executives have cited Reston, which is located in Fairfax County about seven miles from Dulles International Airport, as a preferred area for office development. The Class A office market in Northern Virginia has continued to “be a solid performer” because of overall unemployment rates at about 4 percent, according to Cushman & Wakefield’s second quarter 2012 Marketbeat Office Snapshot report. The services firm expects the market to weaken a bit over the next 12 to 18 months, mostly due to federal government cutbacks, but should begin a long-term recovery after that as more technology firms move in or expand. In the Reston/Herndon submarket, Cushman & Wakefield states inventory of 24.6 million square feet and an overall vacancy rate of 19.1 percent with a direct vacancy rate of 16.2 percent.

The report notes average office space gross rents were $29.79 for Class A and $27.27 for all classes. Those numbers were nearly identical to rent stats for the Reston submarket in a Colliers International second-quarter report. Colliers noted that the Reston Class A office rents for the second quarter were $29.69 and $27.18 for all classes.

A second-quarter report by services firm Cassidy Turley found overall rents in the suburban Virginia markets averaged $31.53, up 5.2 percent from the second quarter of 2011.