2024 promises to be a year of reckoning for many commercial property owners as rising vacancies and expiring mortgages threaten their once-lucrative business plans.
Investors that sat on the sidelines hoarding cash amid spiraling commercial real estate values in recent years will have plenty of opportunities to acquire properties at discounts, industry sources predict. Nationwide, commercial real estate values will decline 5 to 15 percent in 2024, CBRE economists forecast in a recent report.
In Greater Boston, the lab space glut and still-rising office vacancies point to continuing declines in rents, depressing development activity in both sectors. Multifamily developers could receive a robust new source of funding from Gov. Maura Healey’s proposed five-year, $4.1 billion housing bond bill – and a potentially powerful new path to approvals under the MBTA Communities zoning law.
But financing hurdles remain high in the current interest rate environment, and a recent slowdown in new supply points to higher rents at existing properties, aggravating the Bay State’s affordability crisis.
A Pricing Reset for the Office Sector
Buyers and sellers of class B office properties in Boston are getting closer to a consensus on values, likely leading to an uptick of discounted and distressed sales in 2024.
A handful of transactions in 2023 saw class B properties trade for discounts up to 74 percent below their previous prices, reflecting their lower occupancy and rental rates.
“There’s been a precedent set in the $200 and $300 per square foot range, and that’s going to continue,” said Brandon Dickason, a principal at Avison Young’s investment sales group in Boston.
Banks remain wary of offering acquisition financing for office properties, however, as vacancy rates continue to rise and many companies lease smaller offices when leases expire.
“We’ve got several deals under contract, and finding lenders for those deals has been a real challenge,” Dickason said.
Traditional institutional investors continue to shy away from the office sector, leaving a pathway for debt funds and value-add opportunistic buyers to acquire properties at discounts to pre-pandemic prices, said Chris Angelone, a senior managing director at JLL.
Transactions will be triggered by owners with expiring mortgages at lower interest rates facing higher future debt payments, or other expenses that make continuing ownership unprofitable, he said.
“It’s a moment in time where if you believe in office, it’s a tremendous entry point in markets and assets you believe in,” Angelone said.
Through the first nine months of 2023, the city of Boston’s office market had over 1.5 million square feet of negative absorption, according to CBRE data, contributing to a record 15.3 percent vacancy rate.
Declining office property values have created an opportunity for local investors to reenter the market, said Matt Daniels, New England brokerage lead for JLL in Boston.
“These local operators are saying, ‘This is an asset that I want at this price and this rate, so I can own this building and be successful,’” Daniels said.
The stability of the industrial market – which has maintained single-digit vacancy rates even after a slowdown in leasing by e-commerce giants – could generate demand for more office-to-industrial redevelopments in the suburbs, Daniels said.
Shifting Pieces in the Seaport
In the aftermath of a historic building boom, a fresh crop of large development parcels are in play in Boston’s Seaport District.
Gillette Co. said it will kick off the local permitting process this month for a mixed-use redevelopment of its 31-acre headquarters and manufacturing facility in South Boston.
Oxford Properties Group is proposing a 1.7 million-square-foot R&D-focused project on a 13-acre section of the Pappas Business Park property off E Street.
And while development plans for two parcels near the Boston Convention and Exhibition Center hit a political snag in 2023, they could be revived in the coming year.
The Massachusetts Convention Center Authority paused development plans for its 6-acre D and E Street parcels, amid complaints about a rushed disposition process and the resignation of MCCA Executive Director David Gibbons. Two developers, Cronin Group and Boston Global Investors, submitted proposals for over 1 million square feet of commercial development apiece.
A New Path for Boston’s Squares and Streets
After two years of administrative reorganization, Mayor Michelle Wu’s Boston Planning & Development Agency is starting to rewrite the rules of what can be built, seeking to encourage higher-density projects in highly-trafficked areas.
The BPDA’s “Squares + Streets” initiative will rezone neighborhood centers and main streets near transit stops to allow additional building heights and faster approval of multifamily housing. It’s intended to simplify the city’s 69-year-old zoning code, boiling down more than 250 regulated building uses to approximately 70, while setting ground rules for density and building design.
“We are setting clear rules for what can be built in an area,” BPDA Deputy Director of Zoning Kathleen Onufer said during a recent presentation, adding that the outcome would reduce the need for project-by-project negotiations with developers.
Each of the “small area plans” will include five subdistricts allowing gradually intensifying density, with maximum building heights from 50 to 85 feet. A list of the affected districts has yet to be announced, but the BPDA anticipates a six- to nine-month review period for each, as opposed to the typical multi-year process for neighborhood planning studies.
A Third Try for Everett Stadium?
The Kraft Group’s search for a 25,000-seat soccer stadium to replace Gillette Stadium as the New England Revolution’s home pitch received its second setback in as many years in late 2023.
Construction of a stadium on Everett’s Constellation Energy power plant property can’t move forward without lifting of existing state regulations which include the Alford Street property in a designated port area. Although state legislators again failed to include the stadium rezoning language in a late-session budget bill, state Sen. Sal DiDomenico, D-Everett, said he will file legislation this year reviving the project.
The stage is set for a showdown with opponents including Conservation Law Foundation, which said the state legislature’s action circumvents a public review of the port area removal. And Boston Mayor Michelle Wu objected to lack of communication with the city, despite a portion of the property’s location in Boston, and its potential effects on the Sullivan Square area.
New Tools, Old Obstacles for Housing Developers
Multifamily housing development could fill a void created by the downturns in the office and lab markets, but financing hurdles have curtailed groundbreakings in the past year.
Greater Boston housing developers are on pace to deliver just over 6,500 units in 2024, according to researchers Yardi Matrix, representing 2.5 percent of the region’s multifamily stock.
Boston Mayor Michelle Wu’s office-to-residential conversion program has generated two applications thus far from developers: one creating 15 apartments at 281-285 Franklin St., and a second for 98 units at 85 Devonshire and 258-262 Washington St. The program seeks to stimulate housing conversions by offering a 75 percent reduction in the residential tax rate for 29 years.
“But one or two properties doesn’t quite make a program,” said Jeanne Pinado, executive vice president at Colliers in Boston.
“My sense is if we’re going to use tax abatements, we could use it to get the projects that are sitting on the sidelines over the finish line,” she added, referring to approved developments that have yet to obtain construction financing.
Housing development opportunities also could arise from the life science industry downturn.
“If you had a site in Cambridge that was for lab [development] five years ago, it’s probably multifamily today,” Pinado said. “In some cases, it’s an affordable project because there’s still capital in that system, and affordable housing can compete when the market isn’t red-hot.”
Editor’s note: This report has been updated to correct the office investment sale pricing precedent figures cited by Brandon Dickason of Avison Young.