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Wed, Sep 19
A Compendium of Property & Capital News
Wed
Sep 19
A Compendium of Property & Capital News

NAIOP/SIOR Panel: Good Times Roll On as CRE Posts Strong Demand, Metrics at Mid-Year 2018

June 01, 2018 — By Mike Hoban
Photo by Derek Szabo

BOSTON—Unlike New England’s capricious weather this spring, the commercial real estate forecast regionally remains both predictable and positive, panelists at the NAIOP/SIOR Midyear Roundup relayed to an audience estimated at over 325 Wednesday at the Seaport Hotel. Anchored by solid fundamentals and fortified by the emergence of Greater Boston as a magnet for technology companies, the nation’s eighth largest metro area continues to attract tenants and investors, with no signs of any slowdown, a refrain of sunny days becoming commonplace of late at the semi-annual program bringing together industry experts and joined for the 2018 Midyear by JLL Chief Economist Ryan Severino who delivered fresh industry metrics served with a few prognostications.

“If you think about the things that drive the economy here – education, healthcare and technology – those are the industries of the future,” Severino told attendees, sectors he said “are going to continue to take on relative greater importance to the economy than they have in the last 15, 20, 25 years, (putting) this economy in an advantageous position relative to a whole bunch of other places in the country.” America is still in the midst of a “good but not great” economic expansion, according to Severino, reporting the nation has now experienced 107 consecutive months of sustained economic growth, marking the second-longest period “in the history of good data in the United States.” The economist predicts US GDP will approach the 2015 high-water mark of 2.9 percent achieved during this run, based on the combination of deregulation, federal tax cuts and spending packages passed by Congress. Although there are early warning signs (inflation and rising interest rates) of a potential recession/downturn on the horizon, Severino said he does not consider that imminent.

Following the economic forecast, overviews of the individual markets were presented by Cambridge expert and Newmark Executive VP Juliette Reiter; CBRE principal Jonathan Freni, who offered the downtown Boston perspective; suburban specialist Jonathan Freni; and HFF Senior Managing Director Lauren O’Neil, her focus on the Capital Markets realm. The multifamily sales world was dissected by Walker & Dunlop Managing Director Travis D’Amato. Those presentations were followed by a Q & A from NAIOP Massachusetts CEO David J. Begelfer.

Reiter began her overview with a succinct, two-word assessment of the unrelentingly hot Cambridge market: “Expensive and tight.” It is one of only two major districts in the US where the supply of lab space (11 million sf) actually exceeds office product (10 million sf), plus Class A lab commands a per-sf asking rent averaging $85—triple net—versus $58 for first-class office rents. Lab space citywide has an availability rate of 4 percent, while the office rate stands at 7.7 percent (3.1 and 5.0 percent respectively in East Cambridge, which comprises 65 percent of the total space in the market). Presently, 51 companies are looking for lab and 53 are seeking office occupancy. “So tenants really need to make the demand fit the supply,” said Reiter, explaining that means tenants are waiting longer to lease space or exploring coworking options.

The suburbs, rocked by a number of high profile tenants migrating to Boston or Cambridge mid-decade, “are still alive and well,” Lynch reported in his overview. Among many sticker-shocked companies being pushed outwards by the surging rents, says the life sciences sector is being especially active embracing a suburban address. Having up to a 50 percent discount has spurred promising operations like C4 Therapeutics (45,000 sf at LINX in Watertown) and Visterra (moving to 27,000 sf in Waltham) to depart Kendall Square and doubling their space in the relocation.

Another developing suburban trend Lynch covered is that hospitals are opening campuses there to allow for more space to be allocated for complex procedures at urban facilities. Rents in the suburbs are running the gamut from the mid-$40’s along Route 128 (with some reaching $50 psf) for Class A office to the mid-$20’s out in the Interstate 495 market, but Lynch advised attendees he expects rents will remain largely flat for the rest of 2018.

Freni began his analysis of downtown analyzing the impact of co-working on the leasing landscape. Of the 80 million sf of office space in the Boston CBD tracked by his firm, co-working space comprises approximately two million sf, with WeWork the largest operator at over one million square feet, making it among the largest tenants as well as the largest landlords today. That figure will only grow as “there’s always a co-working operator looking to open up another location,” offered Freni, typically their requirements in the 50,000- to 100,000 sf range. That trend is also affecting development, as there are currently only two options available in Boston for tenants seeking an immediate move-in into 100,000 sf or more, with four more becoming available in 2019. “So if you have a site in Boston, go ahead and build it, because there are no more options (for large users),” Freni said while further predicting that “we are going to see more and more lab users coming to the Seaport,” pointing to Related Beal’s plan to convert some office to lab space at the recently acquired 451 D St. a prime example of the trend. Related closed this past week on that Class B office mainstay, its $276 million purchase negotiated by Eastdil Secured first revealed by Real Reporter among the highlights of the Capital Markets season to date in 2018.

Speaking of Capital Markets, HFF’s O’Neil gave a comprehensive assessment of the macro outlook and drilled down on the Boston markets/ While the U.S. remains a top investment target for foreign capital, the amount of investment declined from $95 billion in 2015 to $51 billion this past year, O’Neil relayed, with offshore investors acquiring over $2.5 billion worth of assets in Boston. “We continue to have an insane amount of folks who want to invest in Boston, we’re still the prettiest girl at the dance, and everyone wants to be here,” she said. However, Boston’s lower yield environment is causing investors to look for more value-add plays in inner ring markets such as Chelsea, Everett, Medford and Malden to produce higher results. And one of the emerging trends in the last few years is the change in ownership, O’Neil noted, with opportunistic buyers being replaced by long-term holders like Oxford Properties, Tishman, TIAA-CREF and Boston Properties.

On the multifamily sales front, despite a number of projects completed in recent years and more construction underway, rents continue to climb and vacancy is actually shrinking (approximately 6 percent today for metro Boston rentals). In the first three months of 2018, the average rent for an apartment in Greater Boston rose to $2,152, up 4 percent from a year prior, according to the real estate firm Reis Inc. In terms of downtown development, after a strong year in 2017 that saw deliveries of 2,261 new units, 2018 is expected to return to 2016 levels (approximately 1,325 new units).

D’Amato stated that Boston is in the top three markets for multifamily in terms of where investors want to be, “but the problem is that we don’t have enough product to sell.” That demand is translating into some eye-popping trades, as institutional buyers purchased three properties – the Girard (160 units), The Harborview at the Navy Yard (226 Units) and Watermark Seaport (346 units) – for sub-4 percent capitalization rates at prices ranging from $660,400 to $727,500 per unit.

Following the program, Begelfer said that while economist Severino indicated business sentiment is currently at a record high nationally, there is still some trepidation among those in the local market. “Here in Boston, with the economy doing so well, it’s amazing how many people are still a bit nervous,” he said. “But with that being said, the Boston economy is as strong as ever, from Boston to Cambridge to (select) suburbs.”

David Begelfer
NAIOP
Ryan Severino
JLL
Juliette Reiter
Newmark
Travis D'Amato
Walker&Dunlop
William Lynch
Colliers
Jonathan Freni
CBRE/New England
Lauren O'Neill
HFF