The top four floors of the Virgin Records building at 360 Newbury St. in Boston will be converted from office to residential space, a move some industry watchers call aggressive but smart given the tepid office market.

"It's a numbers game," said Douglas J. Marr, senior vice president of Keliher Real Estate on Newbury Street. "They're probably banking on the fact that more people are looking for apartment space than office."

It's unclear why exactly the building's owner, Capital Properties, will transform floors four through seven into upscale residential units. President Richard Cohen of the company's main office in New York did not immediately return phone calls.

The Boston Redevelopment Authority will assist Capital Properties with the redevelopment process. The project, still in the initial stages, will include a total of 54 units. Five will qualify as affordable housing.

"We're happy to see this activity and the move to residential," said Mark Maloney, director of the Boston Redevelopment Authority.

While Maloney said he's unsure of the project's timeline, he noted that the BRA will help the property owner move through the permitting process as quickly as possible.

'A Great Idea'

The building sits at the corner of Massachusetts Avenue and Newbury Street, overlooking the Massachusetts Turnpike. Its location in the heart of the city's Back Bay area and its proximity to public transportation - there's an MBTA Green Line stop in its basement - make it a hot spot for residential units. Additionally, some of Boston's most popular shopping destinations, including stores like Armani, Lucky and Diesel, and a number of restaurants are less than a block away.

"It has a fabulous view, a great location, it overlooks Fenway [Park] and the Mass. Pike - it makes sense in the long-term hold," Marr said. "It's a great idea. It's aggressive, but better than holding office [space], which is softer than residential. Both are soft, but there are more people looking for the large floor plans that this building has."

Marr said that residential units make up about 35 percent to 38 percent of Newbury Street. While office space in the area is starting to be gobbled up slowly, it's the smaller retail spaces that are more popular, he said. Retail vacancy rates are still around 7 percent along the street, with office vacancy at 11 percent.

The building at 360 Newbury St. was on the selling block for months early last year, but Capital Properties ultimately decided to withdraw the building from the market, in part because of its decision to convert half the space to residential in an effort to reposition the building. Capital initially was seeking $52 million for the building.

Capital acquired the building in 1987 and shortly thereafter signed Tower Records for its retail portion. Tower left in 2001 when its lease expired and Virgin outbid the company. Virgin Records signed a 40,000-square-foot lease that will run until 2021.

Last year, industry watchers said that a New York family won an agreement over five other companies to purchase the building from Capital for somewhere in the mid-to upper-$40 million range, but the deal apparently fell through.

Newbury Street, on the whole, has been isolated from the overall local market slump with its steady commercial vacancy rate of 7 percent.

The street struggled in the 1970s and 1980s and then again during the 1990-1991 recession, when leasing activity halted almost completely. Since then, however, Newbury Street has more than bounced back, becoming one of the city's top attractions for both tourists and shoppers.

Recent deals along the strip include a 3,300-square-foot lease on Newbury Street for the Lawrence Martin Gallery, a 1,500-square-foot lease at 166 Newbury St. for Lush, a British women's cosmetic company, and a lease at 251 Newbury St. for Window Treats.

Kevin Kennedy of CB Richard Ellis/Whittier Partners said that landlords are still expecting premium rates, despite the fact that landlords in other parts of the city are dropping rents, offering incentives and, in some cases, offering free rent.

"They're trying to convert it into a Rodeo Drive," Kennedy said. "A lot of landlords are staying away from the mom-and-pop type of stores."

Kennedy said that the average retail rent along Newbury is around $100 per square foot. Kennedy said that the rates and the economy are bumping smaller businesses out of the neighborhood.

Published: September 22 2003