What Does 2020 Hold for CRE in Massachusetts? Companies Incorporate Real Estate as Recruitment Tool

By: Tamara Small, CEO of NAIOP Massachusetts

The following first appeared in Banker & Tradesman on December 29, 2019.

The end of 2019 marks more than 10 years in the current real estate cycle. As we enter a new decade, now is a good time to take stock of current market conditions and make predictions for 2020. 

Experts are predicting continued, moderate, growth for 2020. Nationally, investor appetite for real estate remains strong and active in all sectors – retail, industrial, lab, office and housing. National vacancy rates are not showing signs of oversupply, and banks are remaining disciplined and conservative in their lending practices.  

While slow and steady job growth is expected, trade wars, political uncertainty and a labor shortage pose the biggest threats to continued economic growth. Market fundamentals remain strong, but such threats should be monitored closely given their potential to dramatically impact the market. 

Access to Talent Drives Market  

The Greater Boston market had an exceptionally strong year in 2019 with record rent growth and tenant demand. Boston remains one of the top markets for foreign investment. However, while continued growth in 2020 is expected, threats exist.   

Construction and land costs continue to soar, weakening returns and potentially threatening the feasibility of new projects. In the third quarter of 2019, Massachusetts real gross domestic product declined 0.2 percent according to MassBenchmarks, while U.S. real gross domestic product grew by 1.9 percent. A labor shortage, which is only expected to continue, is viewed as the single largest threat to the Massachusetts economy.  

At the recent NAIOP/SIOR Annual Market Forecast, which featured leading real estate experts who provided an analysis of the 2019 statistics and predictions for 2020, the need for access to a talented workforce – and what this means for real estate – was a major theme.   

Historically, tenant space was viewed as a cost center by employers, but it is now being used to attract and retain talent. While WeWork’s business model may have been flawed, it did have a dramatic impact on tenant expectations. Whether it’s beer on tap, game rooms or state-of-the-art fitness centers, employers are now using their space to gain a competitive edge when it comes to getting the best talent. This can be seen in the suburbs as well as Cambridge, Boston and surrounding markets, and it will continue in 2020. This all translates into a rising need for new or renovated space and an average tenant improvement allowance average of $5 per square foot. 

Looking Ahead to 2020  

As we enter a new decade, the Boston market remains strong with opportunities opening up beyond the urban core. Limited supply and high demand for lab space are fueling growth. With East Cambridge lab vacancy rates now at 0.8 percent, life science projects are moving forward in Watertown, Alewife, Allston/Brighton and Somerville, as well as Dorchester, the Seaport and South Boston. Cambridge’s success will also create opportunities for well-located suburban assets, particularly transit oriented development projects with the right amenity base.   

Unprecedented growth is expected to continue in the industrial sector. According to Rick Schuhwerk, executive managing director at Newmark Knight Frank, every $1 billion in online sales translates to 1.25 million square feet of new warehouse demand. The demand for “last-mile” facilities near high-density urban centers is driving up values. In the last five years, rents in core urban industrial space have more than doubled. In 2020, with online sales only expected to increase, vacancies will drop and rents will continue to rise. Spec developments are expected as well as a western migration of industrial space.  

On the housing front, according to Kelly Whitman, vice president of investment research at PGIM Real Estate, opportunities exist to upgrade and develop larger suburban apartments. Suburban apartment annual rent growth continues to outperform the urban, and, given changing demographics, a shift away from small units in the suburbs is expected. As the housing crunch continues, these areas outside of Boston’s core are vital to easing the pressure and providing middle income housing.  

On Tap on Beacon Hill 

Finally, while national economic and market indicators tell us that continued growth is expected next year, legislative and regulatory proposals at the state and local levels have the potential to significantly impact the market and should be watched closely. 

Housing: More housing production is needed to keep up with increased population growth. H.3507, An Act to Promote Housing Choices, is targeted at lowering voting thresholds in key zoning votes, allowing for increased production of housing. If it is not passed before the end of the legislative session, anticipate a continued tightening of the housing market, statewide. 

Transportation: NAIOP believes that a functional, accessible transportation system is key to continued development and investment. As area residents and business owners know, congestion has gotten worse in Greater Boston. The Baker-Polito Administration recently filed the Transportation Bond Bill, (H.4002), outlining a capital plan for addressing gaps in transportation infrastructure statewide. Other legislative proposals to address transportation are expected in 2020.  

Fossil Fuel Bans: A number of communities are considering bans on natural gas connections in all new construction, which will likely halt development entirely. While addressing climate change must be a priority, it is critical that policymakers employ achievable measures that are grounded in the reality of today’s technologies, without blocking housing production.  

Tackling Congestion: Lessons Learned from London and Stockholm

Other Cities Show Greater Boston Needs Both Carrots and Sticks

The below column, written by NAIOP CEO Tamara Small, first appeared in Banker and Tradesman on December 15, 2019.

Whether it’s in a board room, on a soccer field, or at the doctor’s office, the conversation invariably touches on traffic. Our daily commutes have become personal battles and the details are shared like war stories.  

As area residents know, and as multiple reports have confirmed, congestion has gotten worse in Greater Boston. Boston’s economy is booming – with nearly 100,000 new jobs created in the last year alone. There are 300,000 more vehicles on the road than five years ago, which is only projected to grow with the on-demand economy. The result? Bottlenecks on highways and local roads throughout the region. It’s clear that creative solutions, big and small, are needed to address congestion.  

Boston is not alone. Other cities across the nation are struggling to address traffic, air pollution, unsafe roads and emissions. Recognizing that the U.S. benefits by learning how other nations have tackled this issue the Bloomberg American Cities Climate Challenge, along with the Barr Foundation, brought a study group to London and Stockholm to see firsthand how these cities have used one specific tool: congestion pricing.  

How Other Cities Tackle Traffic 

The group, of which I was a part, included elected officials, environmental advocates, and business representatives from San Francisco, Seattle, Portland, Washington, D.C., Honolulu, Boston and Philadelphia. We met with government officials, transit industry experts, and local community members who shared how London and Stockholm implemented congestion pricing and how it has evolved over the years.  

London launched congestion pricing in 2003 after Ken Livingstone’s mayoral campaign included a pledge to reduce the number of vehicles entering the city. In advance of the launch of the program, London focused on making public transit and other alternatives to car travel easier, cheaper, faster and more reliable. It expanded its already robust public transit options by adding 300 buses, froze fare increases, created discounts for residents in the district and upgraded trains and subways heading into the zone.  

Within the first year of the program, the number of cars in the congestion pricing zone dropped, eventually creeping back up somewhat as the population increased and road capacity was reduced by allocating space to cyclists, pedestrians, and buses. Today, the number of people riding buses is up 40 percent and twice as many people commute by bicycle than in the year 2000. Overall, traffic in London has decreased by 20 percent.  

In Stockholm, congestion pricing was implemented in 2007 after a six-month pilot program. Again, in preparation for the program, major investments in public transit were made, including 14 new bus lines, more high frequency trains, and 2,500 new park and ride spots. People experienced a decrease in traffic congestion starting on day one of the program, which has continued with a permanent reduction of 20 percent less traffic.  

Four Key Takeaways 

In some ways, comparing Boston to Stockholm or London is not an apples–to–apples comparison. These cities have very different public transit systems. However, as the Greater Boston area attempts to address congestion through a variety of mechanisms, the following are the key takeaways from the study trip:  

  1. Pilot programs work. In Stockholm, public support for congestion pricing was extremely low until a pilot program allowed people to experience it firsthand. It demonstrated the significant impact congestion pricing could have on traffic. A pilot program also provides critical data that could shape and fine–tune a more comprehensive program.
  2. People will not get out of their cars if alternative mobility options do not exist. Whether it’s new protected bike lanes, expanded bus routes or increased frequency of commuter rail and subways, investments and expansion must be made before a comprehensive congestion pricing program can succeed. Importantly, the revenue generated by congestion pricing in Stockholm and London was used to further expand these options. In addition, riders must be confident that the public transit system is reliable.
  3. A successful congestion pricing program must consider equity – whether it is the impact on certain populations or regions. Outreach to key community stakeholders along with data collection on exactly who would be impacted and in what ways are critical in the development of congestion pricing programs. 
  4. Congestion pricing is an effective tool. Cordon and area pricing have generally reduced driving by 15-20 percent and congestion by 30 percent or more. Importantly, in Stockholm, even after investments were made to expand public transit options, ridership did not increase until after congestion pricing was implemented. This is proof that a carrot and stick approach is needed to effectively reduce congestion.  

One thing is clear, there is no one silver bullet that will reduce congestion throughout Greater Boston. A wide range of investments and actions is needed. MassDOT recently issued recommendations on how they plan to tackle congestion including, among other things, addressing local and regional bottlenecks where feasible; reinventing bus transit at both the MBTA and at regional transit authorities; increasing MBTA ridership and capacity; and creating infrastructure to support shared travel modes.  

Changes of all sizes will make a difference and NAIOP looks forward to working with MassDOT and key stakeholders as discussions around addressing congestion continue.  

Ridesharing May be Saved by Technology

RideshareThe Clean Air Act was created to respond to the ever-increasing air pollution that has come from industrial expansion and a reliance on fossil fuels for energy and transportation. Automobiles are a major source of air pollution (e.g. hydrocarbons, nitrogen oxides and carbon monoxide). It is estimated that road traffic accounts for about 40 percent of the pollution that contributes to ground-level ozone (the main ingredient in smog).

Single occupancy vehicles have long dominated the roadways, especially for commuters. In an effort to reduce pollution, states, like Massachusetts, have adopted Rideshare Programs. Ridesharing is the sharing of vehicles by passengers to reduce vehicle trips, traffic congestion and automobile emissions. Ridesharing (carpooling, vanpooling, public transport), as well as bicycle commuting and walking, are all goals of these programs.

Locally, the idea has been for Massachusetts Department of Environmental Protection (MassDEP) to work with large employers (with more than 1,000 employees) to promote commuting options. The program depends on corporate surveys of worker commuter patterns, providing a menu of commuting options, offering incentives, and documenting the resulting annual changes in patterns, hopefully to successfully meet a specific performance goal of reducing by 25 percent the number of times commuters drive alone to work.

Unfortunately, for various reasons, these programs have had limited success, but continue to burden the employer with annual compliance costs. Part of the problem has always been the difficulty of organizing car-pooling and the uncertainties due to the drivers’ and passengers’ daily schedules.

We are all getting accustomed to technology searching for logistical problems to solve. The ridesharing conundrum is one of those problems and “real-time ridesharing” are the solutions beginning to be provided by Transportation Network Companies, such as LyftUber and Sidecar. These companies, with their mobile apps, arrange one-time rides on an on-demand basis.

Both Lyft (Lyft Line) and Uber have now introduced a carpooling service in Boston. Passengers along a route get in the car at a price cheaper than the ride-for-hire alternative. The trip has to maintain its original route as it picks up other customers, who have to be ready immediately to get in the car when it arrives for them.

Although this service is currently limited to the Boston/Cambridge market, there is no question that an expansion of this service into the suburban market is inevitable.

It is also not very difficult to foresee an app that allows single occupancy drivers to easily connect with fellow commuters heading in the same direction, on a ride by ride basis. With no long-term commitments and many scheduling alternatives available, it seems like an easy fix. Yeah, we’ve got an app for that!

MBTA Control Board’s First Report Shows Urgent Need For Change

The MBTA’s new Fiscal and Management Control Board (FMCB) has just issued its first 60-day report identifying the scope of the challenges facing the T. The GreenLineFMCB has been tasked with identifying and shaping solutions to improve operations and performance. The report is extensive, probing, and extremely candid. The Board members should be congratulated on producing such a clear case for moving from the status quo to a system that is reliable, transparent, and sustainable.

It is no surprise that the some of the underlying problems are even more serious than originally thought. Firstly, the MBTA’s annual operating budget is unsustainable, with expenses increasing at nearly three times the rate of revenue growth. Secondly, annual capital spending on deferred maintenance and capital investment is substantially below the $472 million annual spending needed to prevent the backlog from further increasing. The prolonged under-spending has caused the backlog in capital investment to rise to $7.3 billion. The report states that the management team has committed to ensuring that available capital funds are spent, maintaining the MBTA system at a level that will prevent the backlog from further increasing while improving the overall condition of the system and its facilities as expeditiously as possible.

The FMCB has reported some progress:

• Total Capital spending increased to $740 million in FY2015 and is budgeted to be $1.05 billion in FY2016.
• The MBTA planned, designed, and is executing a Winter Resiliency Plan to better prepare the system to withstand major storms and extended periods of cold.
• The MBTA and Keolis Commuter Services have signed a Performance Improvement Plan and are working to address identified shortfalls in performance.
• The FMCB and MBTA management are developing a strategy to make improvements in the procurement and contracting processes and to review all existing service contracts (e.g., the MBTA issued a Request for Information for the private-sector on some low and moderate ridership bus routes, express bus routes, and late-night bus service).
• The FMCB and MBTA management are focusing on performance metrics to drive improvement in MBTA operational practices and to expand transparency and accountability with the riding public.
• The FMCB and MBTA leadership are also pursuing efforts to increase workforce productivity and to reduce absenteeism among MBTA staff.
• The FMCB is committed to a positive employee engagement program, understanding that morale, sense of mission, clear management and decision-making structures, and workforce investments are all necessary ingredients for any successful organization.

It is very clear to the reader of this report that the work of FMCB has just begun. The goal is to have a transit system that is sustainable and accomplishes its mission. Hopefully, in the not too distant future, the MBTA will be operating efficiently. It will certainly take a lot of work by a dedicated management team and workforce. However, there is no alternative. Businesses, residents, and workers must have an MBTA that is reliable.

Business Coalition Urges Governor and Legislature to Create World-Class Transit System

A broad coalition of 25 business associations representing large and small employers from a wide range of industries today issued the following statement urging the Governor and the Legislature to adopt the recent recommendations made by the Special Panel to Review the MBTA and to swiftly begin the task of fixing the state’s public transit system:

Business Coalition Statement in Support of a World-Class Transit System

The Challenge
The winter of 2015 highlighted the Commonwealth’s transportation vulnerabilities, particularly for the MBTA. While school and business cancellations, a dramatic drop in retail sales, and an increase in public safety risks result from many major winter storms, the complete shutdown of the MBTA followed by a prolonged reduction in services for the subways and commuter rails are not the norm.
The unreliability of our public transit system caused many businesses to lose substantial revenues from the loss of productivity due to delays and/or the inability of workers to get to work. Many hourly workers forfeited wages; many retailers forfeited sales; many restaurants forfeited patrons; and the Commonwealth forfeited the income, sales and meals tax associated therewith. A sub-optimal public transit system also caused roadways to be more congested than usual and commuting times to grow to unreasonable lengths for those who opted to drive or were transporting goods. The adverse financial impacts totaled in the billions of dollars. This is unacceptable and must not be repeated.

The Framework
Due to the urgency of fixing the MBTA and the need for the public transit system to be reliable and fully functional, the undersigned business organizations are requesting policy makers to address the following issues:
• Make the T a customer-focused organization that provides first-rate service and clear communication while instilling confidence in its ridership.
• Provide greater accountability and transparency for the T’s governance and management practices to ensure the entity is efficiently and effectively run while employing a productive workforce.
• Develop a long-term strategic and capital plan for the T that efficiently uses its resources to enhance the current capabilities and future needs of the T, businesses and workers, while providing sufficient funding to cover the costs.
• Overhaul the T’s procurement and maintenance practices so that the system is safe, reliable and in a state of good repair.
• Establish metrics, milestones and regular reporting to ensure proper implementation of the T reforms within a reasonable period of time.
• Ensure that the T balances its operating budget without the need for ever-increasing state assistance each year.

The Solution
The undersigned support this position and urge the Governor and the Legislature to act swiftly so we can begin the arduous task of fixing the state’s public transit system.

Following a thorough analysis of the various recommendations from the Governor’s Special Panel to Review the MBTA, and measured against the principles outlined above, we endorse the Panel’s proposal and urge the Legislature to adopt the plan immediately.

The following business organizations support this statement:
495/MetroWest Partnership
Affiliated Chambers of Commerce of Greater Springfield
American Council of Engineering Companies of Massachusetts
Associated Industries of Massachusetts
Associated Subcontractors of Massachusetts
Construction Industries of Massachusetts
Environmental Business Council
Greater Boston Chamber of Commerce
Greater Boston Real Estate Board
Massachusetts Biotechnology Council
Massachusetts Chemistry & Technology Alliance
Massachusetts High Tech Council
Massachusetts Lodging Association
Massachusetts Petroleum Council
Massachusetts Restaurant Association
Massachusetts Taxpayers Foundation
Massachusetts Technology Leadership Council
Massachusetts Business Roundtable
Metro South Chamber of Commerce
NAIOP Massachusetts, The Commercial Real Estate Development Association
National Federation of Independent Businesses
Neponset Valley Chamber of Commerce
North Shore Chamber of Commerce
Retailers Association of Massachusetts
South Shore Chamber of Commerce

Quotes from Business Coalition Members:
“The unreliability of the public transit system has caused many businesses to lose substantial revenues from the loss of productivity due to delays and the inability of workers to get to work,” said Richard Lord, President and Chief Executive Officer of Associated Industries of Massachusetts (AIM).

Eileen McAnneny, President of the Massachusetts Taxpayers Foundation, said, “Now that the breadth and severity of the problems confronting the MBTA have been revealed and the price of inaction is evident, we have a real opportunity to move forward with a plan for transforming the MBTA into a modern, world-class public transit system.”

“The transit system experienced a ‘stress test’ and failed. The time is right to not only fix today’s MBTA, but ensure that it will meet future demands,” said David Begelfer, CEO of NAIOP Massachusetts, The Commercial Real Estate Development Association.

“The MBTA is critical to Greater Boston’s economy. Workers, customers, patients, students and tourists depend on it every day. We need to take the T to the next level right away,” said Paul Guzzi, President and CEO of the Greater Boston Chamber of Commerce.

Good to Great: Creating a Long-term Vision for the Commonwealth’s Transportation Needs

On April 9, NAIOP will host Transportation Transformation, a thought provoking conference addressing the challenges and opportunities facing Massachusetts as we plan for the transportation system of the future. MassDOT Secretary Stephanie Pollack and Secretary of Housing & Economic Development Jay Ash will discuss the role of transportation in a growing Massachusetts economy. Vinn White, Senior Policy Advisor, Office of the Secretary, US Department of Transportation will discuss how demographic shifts will affect transportation, and nationally recognized transportation experts will discuss lessons learned from other regions, new technologies to consider, and what all of this means for real estate development. If you fought to get to work this winter, then this conference is for you!

Building off of these same themes, we thought this week was a good week to share our Good to Great recommendations to MassDOT. Special thanks to Marilyn Swartz-Lloyd, President and Chief Executive Officer, of the Medical, Academic, Scientific Community Organization (MASCO) for her input on this. Comments, as always, are encouraged!

Good to Great: Creating a Long-term Vision for the Commonwealth’s Transportation Needs
The Commonwealth’s transportation infrastructure is critical to our state’s economy, quality of life and industrial competitiveness. However, many of its elements have already exceeded capacity constraints with increasing delays on congested highways and transit systems. At the same time, demand has increased and is predicted to continue over the coming years with no major increases in capacity coming soon. Without a serious long-term plan, further declining services, increased travel times, and a degraded environment will be the future of the Massachusetts transportation system.

In 1970, Governor Frank Sargent created the Boston Transportation Planning Review that analyzed and redesigned the entire area-wide transit and highway system. It provided a blueprint for transportation policy and investment that we have been effectively following for the last 40 years. Massachusetts needs a similar long-range visionary thinking that will result in a comprehensive transportation plan for 2040.

A Vision 2040 Transportation plan, endorsed by the Baker Administration, should address tomorrow’s opportunities, focusing on the issues which may arise over the next 25 years, including long term demographic, economic, environmental, technological, cultural and governmental transformations, the potential effects of global climate change on infrastructure, and the development of new modal choices.

To successfully implement such an initiative, NAIOP supports the following guidelines:

  • Connectivity is key: Creating a seamless, reliable connection between air and rail, bus and subway, and the network of roads and transit is necessary for improving the flow of ideas and people.
  • Out-of-the-box thinking is vital: New and “disruptive” technologies are already impacting other parts of society and should be considered, making enhanced transportation information sharing through technology an integral part of the Commonwealth’s hand-held knowledge system.
  • Public Private Partnerships needed: Innovative public private partnerships can leverage the limited state resources to increase capacity to actualize a long-term plan that can be implemented over the next decades.

Next governor needs transportation vision

This article originally appeared in the online CommonWealth Magazine.
The below version includes post-election updated information.

By most accounts, the Patrick transportationadministration and the Legislature have moved the needle forward on the issue of transportation. They know that investing in transportation infrastructure is critical to our state’s economy, quality of life and industrial competitiveness.

However, many aspects of the Commonwealth’s transportation system have already approached capacity constraints with increasing delays on congested highways and transit systems. At the same time, demand has increased and is predicted to continue over the coming years with no major increases in capacity coming soon. Without additional investments in our infrastructure, further declining services, increased travel times, and a degraded environment will be the future of the Massachusetts transportation system.

In 1970, Governor Frank Sargent created the Boston Transportation Planning Review that analyzed and redesigned the entire area-wide transit and highway system. It provided a blueprint for transportation policy and investment that we have been effectively following for the last 40 years.

In 2013, the Massachusetts Department of Transportation outlined the investments needed to stabilize today’s transportation system and proposed designing a system for the 21st century. Working together, the Massachusetts Legislature and the Patrick administration created and provided funding for a transportation plan that responded to years of deferred maintenance, underfunded transit operating costs, and delayed mass transit and regional transportation improvements. The funding focused primarily on bringing the Commonwealth’s existing transportation infrastructure into a state of good repair.

Unfortunately, the funding that was put in place fell short of what is needed to truly meet the existing and future transportation needs of the Commonwealth’s residents and businesses. What has been missing from the conversation of late is visionary thinking and a more expansive understanding of why investments in transportation are so important to the future of our state. With one of the highest housing costs in the nation, a solid transportation network that can expand access to a larger and more affordable housing market is critical to the success of our economic development centers.

Across the country – from the Research Triangle in North Carolina to the Texas Medical Center in Houston – state governments and private industry are investing in systems and incentives designed to replicate the Commonwealth’s innovation economy. Though Massachusetts has strengths in higher education, strong academic medical centers, and a historic commitment to innovative technologies, transit and access are weak links and a potential liability for recruiting and retaining a qualified workforce – and the companies that create those jobs.

As Governor-elect Baker begins to outline the issues that will be critical for the next four years, we assert that a top priority should be the establishment of a new long-range statewide visioning and planning effort for transportation. This will require strong leadership to take the bold steps necessary to establish a vision and make it a reality. To successfully implement such an initiative, we’d propose a few guidelines:

• Connectivity is key: With several strong innovation, life science, and health care clusters that are major economic engines for Massachusetts, creating a reliable network of roads and transit is necessary for improving the flow of ideas and people.

• Out-of-the-box thinking is vital: Aligning transportation programs with energy and environmental goals, focusing on seamless connections between air and rail, bus and subway, and making transportation information an integral part of our hand-held knowledge system are all planning efforts that can begin early in a governor’s term and be implemented over the next decades.

• Embracing multiple modes of transportation and access is essential: A 21st century statewide plan must include not only roads, bridges, and public transit, but also bicycle and pedestrian needs, as well as enhanced information sharing through technology.

• Public private partnerships can extend the reach: Innovative partnerships between the public and private sectors must be part of a long-term plan that addresses the needs of businesses and residents alike.

Long-term planning and continued investments in a modern, integrated, multi-modal network are critical to our global competitiveness. Massachusetts cannot lose out to those states that know that transportation investment equals economic growth.

David Begelfer is CEO of NAIOP, the commercial real estate development association, and Marilyn Swartz-Lloyd is CEO of MASCO.

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