Banker & Tradesman readers say prospects for office construction will remain bleak in 2011, debt will be tough to find on reasonable terms for commercial developments and retail and office leasing will remain at 2010 levels.
“For speculative development, it’s extremely difficult to get reasonable debt,” or any debt at all because there is no current demand for new office space, according to Andrew Maher, managing director for Equity Office Properties. “The market rents don’t dictate for new construction in the downtown, so I don’t foresee any new developments in 2011.”
About 47 percent of respondents to a December Banker & Tradesman reader survey, conducted in conjunction with Sudbury-based Bannon & Co., said they expect multifamily unit construction to remain at 2010 levels, and 48 percent said they expected the same for office development construction.
In a sign that faith in credit markets has still yet to be fully restored, more than 56 percent of respondents said it will not be very likely that credit will be available on reasonable terms for commercial developments in the coming year.
The source of debt itself, however – banks and other lenders – offered a different opinion, one which, if true, will be welcome news for developers. Almost 60 percent of survey participants identifying themselves as bankers said that reasonable credit terms for commercial developments will very likely be available in 2011.
Out With The Old
But until ample empty office space in buildings like One International Place, One Marina Park Drive, and 75 and 53 State Street are filled, speculative development will continue to be at a standstill, said Yanni Tsipis, a senior vice president in the development and advisory services practice at Colliers Meredith & Grew.
“There are many large blocks of space in existing and newly completed office buildings that will have to get filled before new speculative construction can be supported, either on the demand side or on the capital markets side,” Tsipis said. “We will not see new groundbreaking for commercial office buildings, other than very specific cases like Liberty Mutual or other build-to-suit examples. We will probably see several groundbreakings for new multifamily rental projects in the city, because that is a product type for which there is both demonstrated market demand and capital markets capacity.”
While office construction is not expected in the coming year, Equity’s Maher said his company is expecting increased activity in building sales, with low cap rates as the catalyst. And even though he predicted debt for speculative construction will be nearly impossible to come by, he said that ample capital exists to refinance well-located and well-leased properties.
Roughly 45 percent of survey respondents said they expected new lab construction to remain at 2010 levels. But massive vacancies at the recently constructed 650 East Kendall Street and 301 Binney Street in Cambridge, dictate that existing space would need to be leased before any speculative lab projects are built, said Paul Leonard, research manager for Jones Lang LaSalle (JLL).
Modest Growth Needed
“We’re just about at the bottom [of the Greater Boston market], and it seems like things are starting to turn around,” Leonard said. “You could argue that East Cambridge and the Back Bay have turned the corner, but there’s still a ways to go before they’re fully back.”
According to a new JLL study, office fundamentals should tighten further in 2011 as the local economy continues to strengthen. Massachusetts economic growth outpaced the nation in 2010, and Massachusetts will continue to grow faster than the rest of the country over the next two years, JLL concluded, which should bode well for the Boston office market.
“After losing 5.1 percent of our office-using jobs during the recession, Massachusetts is expected to add 81,600 office jobs, a 10.8 percent increase, over the next five years, surpassing the level of office jobs we had before the start of the great recession by the end of 2012,” the study states.
Taking a broader view of the New Year, 60 percent of Banker & Tradesman survey participants think the Massachusetts economy will improve moderately in 2011, even though less than 30 percent think the unemployment rate will ease.
However, at the recent annual meeting of local commercial real estate trade group NAIOP, Alan Leventhal, CEO of Boston-based real estate investment firm Beacon Capital Partners, said economists are now expecting a roughly 3 percent growth rate in jobs in 2011.
In 2003 and 2008, jobs grew by about 1.6 percent, according to Leventhal. Now, he estimates the country needs to create 1.3 percent more jobs to get back to the employment levels of 2008.
“That’s not a lot of growth,” Leventhal offered. “In the 1990s, office jobs grew 3.5 percent.”
