New Construction for Greater Boston?

At the recent NAIOP/SIOR Annual Market Forecast, there was talk about the possibilities of speculative commercial development in Boston.  There was a consensus that we will continue to see new construction in the suburbs, Cambridge and Boston due to falling CONSTRUCTION_BLOGvacancies, raising rents, building obsolescence, and limited blocks of space available for large users.

The key stumbling block is whether tenants will pay a premium price over the rents available with existing vacant spaces (especially in areas where rents have not grown as quickly, like Boston’s Financial district.) The new buildings will have the greatest challenges in holding down rents due to the rapid rise in construction costs (with Boston having one the highest union labor wages.)

It is said that “time is money”, so a possible solution is to accelerate the speed of construction. Take a look at the following YouTube video of a 30-story tall hotel built in 360 hours (complete with room furnishings!)

Patience for a 1,000 Foot Tower

In a recent BBJ article by Thomas Grillo, there seems to be some interest from the BRA to renew its search for a developer of the city-owned Winthrop Street Garage site on Devonshire Street between Winthrop Square and Federal Street. The previous proposal was to build a 1,000-foot tower with 1.3 million square feet of office space on the approximately one acre parcel.

It’s always exciting for a city to talk about the prospects of having the tallest tower in the city built. However, historically, this city sometimes lacks the patience to allow the marketplace to support the new venture.  It is difficult enough to build an office building a quarter of the size of this dream project without substantial pre-leasing at rents that justify the expense of constructing a tower. A delay in development does not equate with a lack of expertise or, even, capital. It just means that there are economic cycles that affect these decisions. To ignore market demand would be at the owner’s financial peril.

If we want to attract serious interest from developers in this site, the BRA and the new Mayor will have to understand that giving a permit to build a project of this magnitude will require the patience of Job!

Grim Optimism for Real Estate and the Economy

Goodwin Procter’s Real Estate Capital Markets Conference was recently held in New York City in partnership with Columbia Business School.  GP-REConferenceAn exceptional group of speakers discussed the real estate markets, investments, and the economy.

The keynote presentation was delivered by Austan Goolsbee, former chairman of President Obama’s Council of Economic Advisers, and now a Professor of Economics at the University of Chicago’s Booth School of Business. Goolsbee spoke with “grim optimism” about the US economy.  The US has the most productive work force in the world and low energy and new-energy sources will benefit our growth.  Relative to the rest of the world, our fiscal imbalance is manageable. All in all, he believes that the next six to twelve months will be a bumpy ride, but prospects in the long-run look good.

The following are a few interesting observations made during the panel discussions:

  • Demographics are playing a key role internationally, especially in the US. Effects of this will be seen in an increased demand for apartments, senior housing, and retail.
  • With accounting standards likely to change in the future, as relating to corporate leasing and ownership, more businesses will likely choose owning large amounts of their space.
  • Retail sales continue to be impacted by online competition, but retail is still a growing market. The future may move towards more hybrids that have both online and storefront locations.
  • Office space needs are dropping in terms of space requirements per new job. However, there is a sense that over time businesses will start to swing back towards a need for greater space.
  • Multifamily housing rents are back to pre-recession highs and it is likely that rents will experience slower growth going forward.
  • Record amounts of capital were raised both in the public and private markets last year. With less growth worldwide, real estate is very attractive to investors.  Investor interest is focused on yields and risk management. Where in the past, “cash is king”, now, “cash flow is king”.
  • Rates should not be rising in the short term, but that is a big risk for all asset classes. The markets could wake up to a starting spike in rates that, in hindsight, will have seemed inevitable.

Strategies for Today and Predictions for Tomorrow

The following blog post was submitted by Ally Quinby, Account Executive at Solomon McCown.

NAIOP Massachusetts’ Smart Money in Real Estate event, on September 19, gathered together a distinguished panel of Boston’s real estate professionals to discuss the state of today’s market, as well as their predictions for the future.

To set the table for the event, NAIOP MA disseminated a poll to members regarding their current perceptions and future predictions. Doug Poutasse, Executive Vice President, Head of Strategy and Research at Bentall Kennedy, and moderator of the panel, leveraged the results from the poll during the discussion.

In regards to real estate investment, Jeff Furber, CEO of AEW Capital Management, listed the four qualities investors are seeking currently: Safety, Income, Control and Liquidity. Tier 1 core costal markets like Boston have been a major beneficiary of this fact due to the lack of risk associated with investing in stable regions.

Similarly, Jon Davis, CEO of The Davis Companies, believes there are many value-add opportunities in healthier cities, “Here in Boston, we are transforming neighborhoods. Take Kendall Square and the Fort Point Channel; there is so much vibrancy in these areas.”

According to one panelist, what the Boston area is lacking is supply of retail space. Despite the recent buzz around grocery-anchored retail centers, Tom DeSimone, Executive Vice President of WS Development, believes centers like this are “overplayed” and the increase in food sold outside grocery stores across the country, in retail shops like Wal-Mart, will be a problem in the future. In agreement, Mark Weld, Managing Director of Clarion Partners, said, “Distressed debt is aggregating in grocery-anchored retail centers across the country that people thought were on the path to growth.”

Looking forward, all the panelists agreed the looming effects of sequestration raise many questions for real estate professionals across the country. Despite the increased activity seen in markets like Boston, New York, San Francisco and Washington, D.C., uncertainty of this type has its effects. According to Jon Davis, “cleaning up from sequestration is the single biggest risk” we are facing today. There is no indication of whether or not Congress is going to be able to come together.

General sentiment among the panelists regarding the economic future was mild, noting there will not likely be significant improvement or dramatic decline in the state of the market.  Instead, all panelists agreed success today—and in the future—will rely heavily on partnering with the right people for leverage. Especially in times like these, what matters is one’s character and ability to execute.

Commercial Real Estate Bubble?

Is the investment market for core commercial properties cooling a bit? If so, what does this mean for Boston?

According to Pensions and Investments newsletter, the California Public Employees’ Retirement System (CalPERS) is considering dropping its real estate allocation to 8% from 10% by year end.

The buying pressure for core “trophy” properties from pension funds, foreign investors, REITs, and private investment pools are pushing acquisition pricing back to the pre-recession highs.  Locally, 33 Arch Street traded at a sub 5 cap rate ($530/sf.)  Earlier, Boston Properties acquired the Hancock Tower at an initial 4.6 cap ($475/sf.) Most recently, Landmark Center was purchased by Samuels for $530.5 million ($558/sf.)

The Blackstone Group told investors it had raised another $4 billion for its latest real estate fund with a target of $10 billion.  It has already invested/committed $4.4 billion to real estate deals during the first six months of this year.  Blackstone believes that the opportunities lie with the relatively low prices and the sluggish global economy.

At some point, investors will need to ask whether these investments have been worth the high prices paid for them.  Will they achieve the projected rental increases and vacancy decreases that the investments were based on, if the economy continues to remain sluggish with nominal job growth?

According to Colliers’ Boston office , although the vacancy rate in Boston only dropped from 16.6% to 16.3% during the second quarter, the Back Bay submarket showed an overall 8.0% vacancy, with class A space at a very low 5.8%.  Rents have improved with Class A asking rents averaging slightly above where they were before the rental spike that occurred in mid-2007. However, Boston Class B space and the suburban markets are another story. Vacancy rates are still high with the Route 128 submarket at 19.3% and Route 495 at 25.6%. With Boston class B space discounted 30% off class A space and suburban rents having dropped 20%, properties in these markets are clearly going to be challenged for some time.

The good news is that Massachusetts is actually doing better than the rest of the nation, but even here there may be fears of another bubble – especially in light of recent market events.  Could we have a “double-dip” downturn in commercial real estate?  If the world economy does not show some initial stabilization followed by real growth, we may see some of these recent property acquisitions reselling at a loss. Only time will tell.

Development Opportunities May Arise Out of Anglo Irish Sale

As I discussed in today’s Boston Herald, the announcement of the sale of Anglo Irish Bank’s portfolio to Lone Star Funds, JP Morgan Chase and Wells Fargo, means that some of the Boston market’s premier development projects will be changing hands.  Although the bulk of the performing loans will be acquired by the two traditional banking companies, much of the action will come from Lone Star’s share of the nonperforming loans.

Anglo Irish was the go to bank for much of the development action over the past decade.  It provided funding to the region’s top developers for some of the best located projects.  Unfortunately, the 2008 downturn and the continuing recession put a chill on all speculative developments across the country.

The big question is who will get the rights to start these developments when the market begins to improve?  Will it be the existing borrower negotiating a deal to stay with the project or will it be a new player?  It seems clear that Westwood Station will be the latter with a transfer that came close before the whole portfolio was put on the market.

The Greater Boston market has not recovered, but there are pockets of demand that will justify some new development occurring over the next 12-24 months and it is very likely that some of that product will come from this newly sold portfolio.

CMBS: Too Little, Too Late?

At its peak in 2007, the Commercial Mortgage-Backed Securities (CMBS) loan market funded over $230 billion in the U.S. That market virtually dried up in 2009, with a more modest $11 billion.

However, it appears that the CMBS market may be showing signs of life with an estimated $50 billion expected to be funded by the close of 2011.

At a recent NAIOP program, Banking on Real Estate: Capital Flows and the State of CRE Lending, Stephen Holmes, Executive Director at Morgan Stanley, indicated that more than $1 trillion of CMBS loans will be maturing over the next five years, with $100 million coming due this year alone. Without a serious resurgence in this market, it is hard to know where these refinancing dollars will be found, especially with many of the assets over-leveraged based on today’s market values.

Not surprisingly, there has been a rise in the delinquency rates on CMBS loans, with more than 8% of current outstanding loans at least 60 days past due. Standard & Poor’s is currently expecting that rate to reach as high as 11.5% by year’s end.

The good news is that this important source of Wall Street financing is coming back.  Unfortunately, it might be too little, too late. (Read Banker & Tradesman’s account of the event here)

Demography is Destiny for Multifamily Housing

This was the mantra shared by Dr. Barry Bluestone, founding Dean of Northeastern University’s School of Public Policy & Urban Affairs, at today’s NAIOP program, The Future of MultifamilyHow Demographics Are Driving Development. Barry started off the program with a great presentation on the impact changing demographics are expected to have on Greater Boston’s housing market.  Given the national depression in home prices, it was surprising to see that our local apartment rents continued to rise after 2005 and, even with some adjustment due to the recession, today they are only 2% lower than their 2008 peak.  This is due in large part to vacancy rates that have remained stable at 6%.

Our rental housing market has remained strong for a number of reasons including: foreclosed homeowners reverting to rental housing; young families holding out for further drops in housing prices or being unable to make the necessary down payment due to new lending criteria; and increased student demand.

On the last point, due to the Boston area’s abundance of colleges & universities, the student population has increased by nearly 24,000 undergraduates and 22,000 graduate students since 2000.  And although the schools house over 100,000 undergraduates, nearly 180,000 live off campus. With graduate students, only 8% of them live on campus.

Bluestone was convinced that there are real opportunities for the private sector to provide the needed housing for both undergraduates and graduate students.  New housing alternatives for graduate students could include the creation of Multi-University Graduate Student Villages to help take pressure off the urban rental market and help retain young professionals in the city.

At the opposite end of the spectrum, Massachusetts is aging rapidly, with the Baby Boomers projected to represent higher percentages of the population over the next decade. There will be some great opportunities for multi-family housing during the next decades, with some empty nesters looking for smaller, easier to maintain housing, and others choosing to “age in place” in suburban, smaller units, while still others may look to more urban environments with more amenities provided by city life.

The panel that followed Dr. Bluestone included Larry Curtis, President, WinnDevelopment; Wendy Nowokunski, President, The Northbridge Companies; and Doug Straus, SVP, Director Residential Development, National Development.

Some key take-aways included:

  • For market rate housing, transit-oriented multi-family is highly marketable.
  • Be it subsidized, market, or senior housing, higher quality finishes are now expected as the norm.
  • Senior housing is not your “grandfather’s” housing – it is now varied in service delivery, including independent, assisted living, and memory care residences (diminished cognitive capabilities affects more that 40% of those over 85 living in senior housing.)
  • Even with state and federal subsidies, new construction is very difficult, leading to more interest from investors in repositioning older properties.
  • Green is becoming an expectation, but there is no clear standard as owners market their properties as green.  Some owners are focusing on very visible improvements (solar), while not pursuing the more energy saving upgrades.

It appears that the current strong attraction for rental housing in the investment markets is well founded and the prognosis for the future of this product type is a clearly bullish one.

“It’s Getting Better all the Time”, The Beatles

At the well-attended NAIOP Developing Leaders breakfast this morning, a panel presented “Booming In Beantown: Why Boston Remains One of CRE’s Hottest Markets.”

I was particularly interested in three slides that certainly left me and the other attendees sighing with relief about our future.  The first two slides were from Yanni Tsipis, Senior Vice President of Development & Consulting Services, at Colliers International.  The Market Forecast shows the historic run-up of the vacancy in Boston to a 10 year high of 16.6%.  However, they are forecasting positive absorption over the next four years, dropping the vacancy rate to 12.4%.  That might not be the low single digits, but it is in the range to start pushing up the rental rates.

The next slide should not come as a great surprise regarding the relative health of the commercial real estate investment market.  It does, though, show how bad off are the other regions of the country.  The delinquent or special service loans are under 5% for the Boston market.  However, take a look at some of the other metro markets like Phoenix, Riverside-Ontario, and Seattle.  New York and Washington, the other “stars” are a bit worse off than Boston.  It has been many a recession ago since we were not the poster child for being the worst affected region.

Finally, Peter Merrigan, President & CEO of Taurus Investment Holdings provided a chart showing Boston’s advantage in terms of employment gains.  This may be the first time Boston has ever been in any top grouping regarding employment (other than loss of.)  Not only is Boston ranked third with over 1.3% twelve month gains, but the Commonwealth is ranked fourth in actual raw employment numbers!

Bring out your old records and enjoy the refrain: “It’s getting better all the time.”  And hopefully for the foreseeable future too.

Mass. Officials Make Their Case to Israeli Entrepreneurs

Editor’s Note: NAIOP CEO David Begelfer is traveling with Governor Patrick’s Trade Mission to Israel and is sending daily updates on their progress.On our third day in Israel, Governor Patrick led a Town Hall: “Collaborating as Leaders in the Innovation Economy” at The Technion (Israel’s “MIT”).

Governor Patrick at The Technion

Questions centered on what early stage resources were available if the Commonwealth wanted to attract start-up businesses? 

Susan Windham-Bannister, President & CEO of the Massachusetts Life Sciences Center, explained that the Center was established to promote and make financial investments to grow life sciences companies. The Center is there to fill the gap in the “Death Valley” of VC funding, the period from when a startup receives initial capital to when it begins generating revenues. Additional financing is usually scarce during this time, so the Center provides 5-year loans to qualified firms.

Patrick Cloney, Director of the Massachusetts Clean Energy Center, said they are promoting the state’s clean energy industry by making direct investments and providing assistance to access capital. In 2009, the state’s ratepayer-funded Renewable Energy Trust Fund was transferred to the Center.

Finally, Pat Larkin spoke about the Massachusetts Technology Collaborative, which encourages the formation, retention, and expansion of technology-related enterprises.  As Director of the MTC’s John Adams Innovation Institute, he makes investments in the knowledge-based economy.

Other notable moments on the trip included a presentation by Haifa Mayor Yona Yahav who spoke to our delegation at the Combined Jewish Philanthropies’ Boston-Haifa Connection’s “Shiluvim” program (an effort to help Ethiopian Jewish immigrant children adjust to a new life in Haifa).

And the BEST falafel stand in Tel Aviv!