The Science of Success: Bus Tour Recap

This post was written by BLDUP and originally appeared on their site.

Now in its 16th year, the NAIOP bus tour took several hundred CRE professionals on an info-packed trip through Waltham, Watertown, Newton, and Needham last week. The theme of the tour, the science of success, highlighted the continued growth of the 128 corridor as a hub of innovation in both the tech and life science fields. With the strong talent pool coming out of the areas many top colleges and universities, companies look to Boston to plant their flag. However, with extremely limited availability in Cambridge and rents continuing to rise, Boston’s tech highway is a more affordable option. All of these employees also need housing options, spurring development in the multi-family sector. Despite a few hiccups along the way (I survived the fabled orange bus) it was another enjoyable and educational NAIOP program.

Highlights of the Tour

225 Wyman
As part of the Hobbs Brook Office Park, 225 Wyman will be the largest contiguous Class A office building along the Route 128 “technology belt”. Currently, demo is wrapping up on the site and construction is set to be complete in 2021. The building, designed by Gensler, will include both office and lab space and the “H” shape of the allows for many leasing configurations.

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A rendering of the upcoming project at 225 Wyman Street.

828-830 Winter Street
Many life science companies in the market for space, need it ASAP! Looking to fill this type of demand King Street Properties has been building lab buildings like 828 Winter Street on spec. 828 Winter, completed in August 2018, is outfitted with a full MEP structure and column spacing to allow for an 11ft lab bench. The King Street team also discussed their upcoming project, Nexus Allston at the Allston Innovation Center. Currently, under review with the City of Boston, the development would include 3 buildings to feature office/lab, retail, and residential space. King Street expects to complete permitting by the end of this year and have first units/space ready for occupancy in Q1 2022.

Gauge
Hilco has completely renovated this 1940s-era brick-and-beam structure to provide creative office and R&D development space. Historic features of the building including high ceilings with expansive windows, skylights, and exposed brick interior walls. Utilities throughout the project were upgraded and a fitness center added to meet modern tenant expectations.

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Bus tour attendees arrive at The Gauge in Waltham.

Elan Union Market
Developed and Managed by Greystar, this 282 unit project welcomed residents in June of last year and is currently wrapping up construction on the final residences. The luxury development features numerous amenities including an art gallery, pool, and resident lounge. The project is currently 55% occupied and 75% leased.

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One of the resident lounge areas at Elan Union Market in Watertown.

Kendrick
At The Kendrick in Needham, the development team at Toll Brothers set out to create a not-so-typical apartment community. Their goal was to design a building with a high-end residential hotel feel that “made you look” with unique artwork, amenities, and finishes. Amenities at the Kendrick include an outdoor beer garden, fitness center with climbing walls, and a revolutionary coffee maker that allows residents to order coffee from their phones (said to cost around $10,000!).

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One of the many unique common spaces at The Kendrick.

Northland Newton Development
Our final stop of the day was at the historic Saco-Pettee Mill building to hear more about Northland’s vision to create a vibrant live, work, play gateway in Newton’s Upper Falls.  The proposed project calls for 800 residential units, 173,000 square feet of office space, and 115,000 square feet of retail. 9.8 acres of open space within the development including 7 parks will provide ample green space for residents and visitors and a new streetscape will allow for easy access for pedestrians and bicyclists. By converting an aging, obsolete industrial complex into a dynamic community, Northland aims to promote smart growth within Newton.

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A rendering of the proposed Northland Newton Project.

CoWorking: Collaboration, Configuration and Considerations

This guest blog post was written by Meghan Doherty of BLDUP.

Elisif_20190130_3367The Coworking industry grew 50% between 2016 and 2018 and the variety of options within this market segment is staggering. Boston is no exception, currently, there are around 2.3 million square feet of coworking space in Boston and Cambridge. Last week NAIOP Massachusetts hosted a lively panel discussion covering all things coworking. The panel was moderated by Kristin Blount of Colliers with guests Jessica Hughes of Tishman Speyer, Bryan Koop of Boston Properties, Karina Silvester of Gensler, and Craig Robinson of WeWork.

Aaron Jodka, Chief Economist/Director of Research at Colliers International set the stage for the panel by providing some stats on coworking in Boston and around the globe. While Boston has one of the fastest coworking markets in the country, London and NYC have the largest total markets with WeWork as the single largest tenant in each market. Jodka and his research team certainly expect coworking to continue to grow while lenders in capital markets determine how best to handle deals involving coworking spaces.

As the market grows, traditional office landlords are finding ways to get into the coworking game. Jessica Hughes & Brian Koop discussed how their companies are moving into the coworking space by transforming some of their limited vacant space into a coworking option. Tishman Speyer’s coworking product, Studio, will focus on hospitality and tenant service. Their first foray into this space just opened at Rockefeller Center in NYC with the next location coming to 125 High Street in Boston. Tishman Speyer is working with Gensler on the fitouts for these spaces to ensure a high quality of design.

Boston Properties has transformed a floor of the Prudential Center into Flex – their version of coworking, which is less about shared space and more about more flexible lease terms and ready-to-occupy space. Koop told the crowd the new space has been very popular, being fully leased in its first 1-2 months. As Koop mentioned, the average lifespan of a company is getting shorter and the market is moving away from the “long and strong” leases of old. The goal of Flex is to cater to clients looking for leases in the 1-5 year range.

WeWork, now the We Companies, has been the leader in the space and continues to grow their brand across the globe with locations now in 100 cities. Craig Robinson, WeWork’s new Global Head of Powered by We Services, discussed some of the stats behind the company’s mission to “Create a world where people work to make a life, not just a living”. Generally, 85% of employees are not engaged and around 51% are on the lookout for another job. Employers are finally beginning to realize that the future of work is going to be measured by how people feel and not by the old standards of productivity. Many Fortune 500 companies are already getting ahead of this trend with over 150 of them signed on as WeWork Enterprise members. Enterprise services allow these large companies the ability to offer more creative environments, the flexibility to have offices in multiple cities and the freedom to grow to new markets.

From a design point of view, Karina Silvester of Gensler discussed the broad variations of coworking space. Within this spectrum, there are a few common factors including the need for lots of flexibility along with varied activity-based workstations.  Gensler has designed numerous coworking spaces both large and small including the new Reebok headquarters in Boston. For their new space, Reebok wanted a more open plan/flexible space instead of the numerous small offices they had in the past. As Karina also pointed out “the desire to cowork will extend to digital realms as people are working all the time.”

The panelists agreed the coworking model is here to stay and even in the event of a downturn flexibility will prove important. WeWork continues to diversify its portfolio and offerings and other commercial landlords are following suit as the market shifts. Employee expectations are changing and to attract and retain top talent, employers and in turn, landlords are moving to this flexible, community space.Podcast_Ep1

Can’t get enough coworking? Craig, Karina, and Kristin continue their discussion on The Big Dig, BLDUP & NAIOP’s new CRE podcast. Listen now!

Luxury Residence Report Misses the Mark

A report was recently issued from the Institute for Policy Studies that has attracted significant media coverage and editorials from virtually all of the local print and broadcast outlets.

Elisif_20161213_5514.jpgCredit: Elisif Brandon

It’s a great story: the ultra-rich, international money launderers have descended on the Boston real estate scene, crowding out poor and middle-class residents.

However, when you go beyond the buzz and dig into the content of the report, there is much to question. The report implies that owning condos through a trust or LLC is done to hide the owner’s identity. This form of ownership is actually a very common practice for tax, estate, and transactional reasons. Furthermore, while some buyers may choose to remain anonymous, it’s rather uncommon and to imply that anyone who does this is somehow laundering money is factually incorrect.

If these higher priced apartments or condos were not built, middle income apartments would not be replacing them — the economics just do not work with the current high construction costs. Furthermore, these buildings are already paying a tax devoted to the production of affordable housing, with a requirement to provide for at least 15 percent of the units built on site as affordable or a fee to produce those units off site. In addition, the city’s office buildings must also pay a “linkage fee” for affordable housing and workforce training.

Virtually all of these new developments are built on vacant land or in commercial areas where there had not been any housing, so they have not displaced existing residents. In fact, many of these developments have been the catalyst to creating new 24/7 neighborhoods.

If these condo owners are not here full-time to justify a residential tax break, so what? Do we want to discourage retirees living in Florida from living here for six months? Do we want to tell the penthouse owner, Michael Dell, to take a hike and take his jobs with him? I don’t think so.

The real issue is that it will take federal and state resources, communities working with developers, and overcoming NIMBY-ism and fear of affordable housing at the local level to truly address this housing crisis. Rather than drawing false conclusions and creating easy scapegoats, it’s time we all come together to find economically feasible solutions.

This letter to the editor originally appeared in the Boston Business Journal on September 20, 2018, as written by NAIOP Massachusetts CEO David Begelfer.

 

How Much Are Smart Buildings Really Worth?

smartinfographicMITCourtesy of the MIT Center for Real Estate and Real Estate Innovation Lab – Get Smart, Connected & Green

Arguably, the premier commercial office space market in the U.S. – New York City – is showing signs that office tenants will pay a significant premium on rent for space in a ‘smart’ building.

Compared to office leases in the city for non-smart buildings, MIT Center for Real Estate researcher Alfredo Keitaro Bando Hano (2018) found that office properties with smart building attributes attracted rents that commanded a 37 percent premium on effective rent per net square feet. The sample included 454 non-smart building properties and 223 smart office leases using the Compstak transaction database for Manhattan for 2013 and onwards. The MIT Real Estate Innovation Lab continues to research and report on smart, connected and green buildings.

Thanks to new technologies and devices, occupiers now have the possibility to measure and analyze the activity that occurs inside their structures. Companies are not focused on location only anymore; they now they look for more productive and efficient areas, and smart buildings rise as a possible answer to this new requirement.

In search of flexibility and agility, users have pushed changes in architectural and interior design to improve employee satisfaction, health, and engagement, hence better productivity.

Smart buildings are self-sensing. For the purposes of Keitaro’s study, a smart building must have installed one or more smart amenities that go beyond sustainability and aim to improve the occupier experience. Smart amenities include occupancy sensors, automatic windows, cameras with emotion recognition algorithms, and other technologies that capture and provide information to tenants and landlords. Ultimately, a smart building is one that adapts to the needs and preferences of the building’s occupants. And, in the office environment, responding to workers’ needs and preferences stand to significantly increase employee productivity and well-being.

We can predict that in the future, new smart amenities will come to market and offer commercial real estate developers, owners, and investors opportunities to incorporate smart technology in the building’s plans and reap the financial benefits.

That being said, the New York City sample did not delve into the cost of constructing and operating a smart building compared to a non-smart facility. It is not yet clear whether the rent premiums offset the costs to construct, renovate, and operate smart buildings. Further, due to other factors (like location) not all the projects will immediately obtain these premiums just by embracing a smart strategy. Nevertheless, it is worth emphasizing that smart buildings have value.

NAIOP Massachusetts is an industry partner to the MIT Center for Real Estate. Alfredo Keitaro Bando Hano wrote The Incremental Value of Smart Buildings Upon Effective Rents and Transaction Prices (2018) as a master’s thesis.

For more information about the MIT Center for Real Estate’s research, please go to: https://mitcre.mit.edu/ or to the MIT REILab:  http://realestateinnovationlab.mit.edu/

 

NAIOP Event Showcases Three of Boston’s Top Developers

This post comes from BLDUP (bldup.com) reporting on the NAIOP Massachusetts event on September 13, 2018: Development Unicorns: Neighborhood Game Changers.

Elisif_20180913_2045See photos from Development Unicorns: Neighborhood Game Changers. Credit: Elisif Brandon

The developers of three of Boston’s most changed neighborhoods, Fenway, Assembly Row, and Seaport Square came together last week for NAIOP’s panel discussion, Development Unicorns. If the catchy title didn’t grab your attention the insight provided by these forward-thinking developers certainly will. The event opened with a keynote from David P. Manfredi, Elkus Manfredi Architects, that highlighted the 8 Place Making Principles these neighborhoods have in common.  Mr. Manfredi also spoke about the important changes at work in each of these neighborhoods; public investment in infrastructure, skillful placemaking, flexibility and evolution along with density and walkability.  While the architecture of each area is different they all share these characteristics which have played a large role in the success of the projects.

After Mr. Manfredi’s introduction, the expert panel took the stage moderated by Sara Cassidy of AEW Capital Management.  Representing Federal Realty Investment Trust, the minds behind Assembly Row, was Donald Briggs, Executive VP of Development. Mr. Briggs mentioned that as a realty investment trust Federal Realty had the large balance sheet to a take risk on a piece of land in Somerville that had been tied up in a 6-year lawsuit.  He also discussed how the Assembly Row site is much closer to Boston than many people originally realized making it a great location for a development opportunity.

Steve Samuels, Chairman & Principal at Samuels & Associates discussed how his company “stumbled” into the Fenway neighborhood as it was being held hostage by Fenway Park.  His team had to convince people one use at a time to come to Fenway for something other than baseball. The final panelist was Yanni Tsipis, Senior VP-Seaport at WS Development.  WS has been involved in the Seaport since 2006 when it was just a wide open lot with great water views. Mr. Tsipis noted this blank slate provided an interesting opportunity for the development team and once momentum swung in their direction his team decided to triple down and buy out their remaining partners in the Seaport Square area.

The developers had their own story to tell on how the pieces of each neighborhood came together.  The Fenway, Mr. Samuels mentioned, was already a great neighborhood but it had no core. His team worked to build relationships with stakeholders in the area and then began to buy up lots one at a time.  They then rezoned each lot, again piece by piece, leading to a very slow process. Assembly Row also started off slow, as Federal Realty stepped into a deal that had been stalled with that 6-year lawsuit.  However, settling the lawsuit did have a positive outcome as Mr. Briggs pointed out, it pushed his team into embracing office space. Although not part of their original plans the offices turned out to be a very positive driver of growth.  In the Seaport it was very important for WS Development to ensure the area developed a sense of place very early on in the process. As Mr. Tsipis pointed out the neighborhood is still growing, with only about ⅓ of the planned construction now complete.

Other key points echoed across the panel were the importance of responsiveness to the market and also ensuring public realms and first floor retails spaces are unique and inviting to the neighborhood. Mr. Briggs suggested it is always prudent to entitle more square footage which allows for flexibility and optionality.  Federal Realty sacrificed density at the beginning of their project to build on a horizontal context and are now moving to build high rise projects. In the Fenway, The Samuels team had to find the right balance between old and new architecture.  Ultimately their goal for the area is to be ⅓ office, ⅓ residential, ⅓ retail but as Mr. Samuels quickly mentioned the market will drive these decisions.

In Seaport Square, WS has devoted time and energy to planning the public spaces and also programming around these areas as these events organically bring people together.  Mr. Briggs agreed, pointing out that he believes creating fabric in architecture, space between buildings is more important than buildings themselves.

When discussing retail spaces all agreed it was most important to get the first floor spaces right to command a premium above. With the continued success of these three neighborhoods, the insights from the panel were certainly valuable as the city’s development boom continues.

 

NAIOP/SIOR Annual Market Forecast Remains Positive

This guest blog post was written by Mike Hoban of Hoban Communications.

Elisif_20171129_1972Fueled by one of the strongest economies in the nation, the Boston commercial real estate market should continue to thrive for the foreseeable future. That was the conclusion of the enthusiastic panel at the 2017 NAIOP/SIOR Annual Market Forecast held last week at the Westin Waterfront Hotel before a crowd of 450 CRE professionals.

Moderated by David Begelfer, CEO of NAIOP Massachusetts, the panel included Molly Heath, Executive VP, JLL (Cambridge); Ben Sayles, Director, HFF (Capital Markets); John Carroll, Executive VP, Colliers International (Suburbs); Ron Perry, Principal, Avison Young (Downtown); and JR McDonald, Executive Managing Director, Newmark Knight Frank (Industrial). Barry Bluestone, Professor of Public Policy at Northeastern University and Senior Fellow at The Boston Foundation, set the table for the program with an economic forecast that – with one major caveat – bodes well for the long-term health of Greater Boston CRE.

Bolstered by the highly educated workforce provided by the educational and medical institutions located in Greater Boston, the Massachusetts economy has outperformed the U.S. economy nearly every year since 2009. GDP growth for the Commonwealth has generally been in the 2.5 to 3.0 percent range since 2010, a figure that is significantly above the national average of 2.0 during that period. The Bay State has added 355,600 jobs since the recession (including 62,500 last year), an 11.2 percent increase since 2009. The 4.2 percent unemployment rate has led to virtual full employment, and with the tight labor markets, average wages are beginning to increase, albeit slowly. And none of the factors that typically contribute to a slowdown are in evidence.

Elisif_20171129_1971But despite the positive outlook, there is a looming threat to the overall health of Greater Boston economy, he cautioned. “The housing stock is limited and growing too slowly to meet the demand, and as a result, home prices and rents continue to rise,” said Bluestone, who is one of the co-authors of the Boston Foundation’s 2017 Greater Boston Housing Report Card. The price of housing is pushing workers farther away from the urban core, causing housing prices in traditionally affordable communities to escalate, as well as putting a strain on an overburdened public transit system. The Housing Report Card estimates that the region will need an additional 160,000 housing units by 2030 to accommodate its expanding population (an additional 342,000), “and that is going to be a challenge,” Bluestone concluded.

Elisif_20171129_1988JLL’s Heath led off the program with an overview of the Cambridge office and lab markets. “The Cambridge market is one of the strongest markets that we track globally at JLL, and it continues to be driven by this incredible demand from the tech and life science clusters,” she stated, adding that the demand is coming not only from organically grown companies, but outside firms seeking to establish an R&D presence in close proximity to MIT, Harvard, and the educated workforce. With a vacancy rate below 3.0 percent, there continues to be upward pressure on rental rates, with office (by 13 percent) and lab (23 percent) soaring well above previous highs. Achieved rents for office space in E. Cambridge are now in the low $90’s (gross), with lab space in the low $80s (NNN). And due to the lack of supply in the market, “we really do believe that there is room (for rents) to run,” said Heath.

Elisif_20171129_1992Colliers’ Carroll reported that “the suburbs are alive and well”, as the market has added over five million SF of positive absorption since the downturn. There has also been a steady increase in rent growth in the Class A office market, approximately 10 percent since 2009, with new construction in Waltham achieving rents in the low $50s. The Class B market is not faring as well (although there is some rent growth occurring in select markets), with some of the older building stock being slated for repositioning or demolition to make way for senior living, hotel and other non-office uses (including 450,000 SF of properties in Chelmsford). One particularly bright spot is the emergence of biotech in the suburbs. The Gutierrez Company is currently constructing a five-story, 350,000 SF building for EMD Millipore (2018 Q3 completion) in Burlington, Alkermes is “close to signing” a lease for a 250,000 SF build-to-suit in Waltham, and Waltham-based Tesaro is in the market for a 300,000-500,000 SF suburban campus.

Elisif_20171129_2005Citing the enormous amount of commercial, residential, retail and restaurant development underway in the Seaport and other Boston locations, Avison Young’s Perry observed that “Boston is clearly a different city today than it was even five years ago.” The in-migration to the city by firms seeking talent continues, he said, citing the recent relocations by Reebok, PTC and Alexion to the Seaport, as well as Amazon’s establishment of a Boston presence with the 150,000 SF lease at 253 Summer St. and Rapid7’s relocation to North Station. Demand remains strong Downtown, with over 4.5 million SF of requirements in the market, including nine companies seeking 100,000-500,000 SF. CBD Class A rents range from the mid $40s to the mid $80s (Back Bay high-rise), and vacancy rates in the top floors of the towers (10 percent) are nearly in equilibrium with the lower floors (9.4 percent), as tech companies continue to absorb space on the lower tiers.

Elisif_20171129_2006NKF’s McDonald reported on the industrial market – the newfound darling of investors and developers – noting the transformational effect that Amazon and e-commerce has had on the product type. With 12.8 percent average annual returns to investors over the last five years, industrial has outperformed both retail (12.1) and multifamily (9.9), driven by feverish demand for “last mile” properties located in urban and infill submarkets. That demand has driven rents “way beyond the norms” of what had traditionally been $5 to $6 psf to the “high single digits and low teens” for buildings such as 480 Sprague St. in Dedham, a 234,000 SF warehouse that straddles the Boston line. And warehouse space located within the urban market, such as 202 Southampton St. in the South End (which lacks basics such as air-conditioning), is fetching $20 psf, based solely on location.

Elisif_20171129_2017HFF’s Sayles addressed the ‘When will the cycle end?’ question early on his presentation. “End of cycle concerns have largely abated,” he reassured the gathering. “Nobody is really talking about that right now, instead, what people’s biggest concern is, ‘If I sell, what am I going to do with that capital?” He expects pricing for assets to remain flat in the near term with cap rates trending downward. Financing for assets is up by 17 percent from Q3 2016 to Q3 2017, but investment sales for that period declined by approximately 8.0 percent as buyers are choosing longer term holds. Sales volume for Boston is expected to be approximately $13 billion for 2017, with foreign capital again accounting for a significant portion of those transactions.

Begelfer was in full agreement with Sayles’ assessment of the cycle concerns. “Boston is pretty unique. There are only a handful of cities around the country that are experiencing this kind of strong growth,” he observed. “Any slowdown that we see is probably not going to come from the economy, it will be from the cost of construction and land costs, or the pricing of assets. It won’t be caused by a recession, but by our own success,”

My Top Ten Predictions for 2018

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The CRE industry kept smiling through 2017! Is anyone talking about innings anymore? We just keep doing deals.

So, here are my predictions for the coming year:
1. Amazon will pass on Boston for a campus, but leave us with a great consolation prize.
2. No Turnpike air rights project will start construction (ditto for 2019).
3. Fed. interest rates will be up 75 basis points by end of year.
4. In Boston, more condos will be permitted than rental apartments (other than the neighborhoods).
5. An office or lab lease will hit $100 per square foot in Cambridge.
6. Construction costs, on average, will be up 7%.
7. More than one million SF of commercial space will commence on spec.
8. The 128 office market will show more transactions (both numbers and SF) than the downtown market.
9. Foreign buyers will begin to acquire major CRE property outside of Boston/Cambridge.
10. And, yes, the Patriots will do it again.

Below were my predictions for 2017. Not the best batting average, but here is to a New Year!
1. Cap rates will finally start to rise in the Boston/Cambridge markets.
2. A new Fortune 500 corporate HQ will relocate to Boston.
3. Apartment construction starts will drop in downtown Boston.
4. The Dow Jones Industrial Average will finish the year down.
5. Fed interest rates will be raised twice.
6. Foreign investment will increase as a percentage of total CRE sales in Boston.
7. There will be a noticeable business migration from 495 to 128, 128 to Boston, and Cambridge to Boston.
8. Drones will pilot consumer product delivery.
9. An infrastructure bill will pass Congress and be signed by the President.
10. No viable candidate will step forward to run against Mayor Walsh.