My end of real estate – the valuation and advisory business – more often than not, is a team effort. Teams are created to answer the issues we are asked to address. We interview and work with “market participants.”
For the 2012 outlook, I followed this mantra and interviewed such “participants” as George J. Fantini Jr., of Fantini and Gorga; Peter L. Goedecke, of Goedecke & Co.; and William F. McCall Jr. of McCall & Almy.
One of the central themes of our discussions was basic real estate economics. Jobs, job growth or job recovery is what drives the commercial real estate business.
New England ‘Better Off’
CBRE’s global research and consulting group for years has prepared job projections. For the nation as a whole, we have a long way to go.
It will not be until mid-2014 before all jobs lost will be gained back (“barely”).
In New England, we are better off than the balance of the country. We have a better business and real estate climate. That does not mean that we will rapidly recover to the 2007 era. The reason is growth in GDP.
Review of PNC’s September 2011 Economic Outlook shows a year-end GDP growth of 1.7 percent and bumping up to over 2 percent in 2012 and 2013. The problem is that we are far from being back to a growth level around 4 percent, which fueled our economy in the 2007 timeframe.
The lag in recovery, as one market participant suggested, is reflective of “gross financial incompetence.” Another referred to the Federal Reserve financing the $15 trillion deficit as being “off the backs of taxpayers.” For Boston, basic economics are far healthier. Unemployment rates are 2 percent below national averages and our capital markets are stronger than the nations as a whole.
Robust Community Banks
In Boston, we have one of the top five markets in the United States, in part because of our educational/technology/medical/life science structure. There is a healthy supply of money-seeking core assets in which to invest.
The strongest part is the community banks that are strongly capitalized and compete head-to-head with life companies. These banks are capturing about 50 percent of the financing business and servicing typically small- to mid-size real estate transactions which must thrive for a region to remain vibrant.
Capital availability is supporting space markets. The typical average office or industrial lease term is seven years with a 15 percent market turnover per year. Capital to support tenants, tenant expansion or retrofits are readily available, and is moving our markets in the right direction.
Marketability Risk
The simplest definition of marketability risk that I know of is the difficulty of converting real estate into cash to recapture one’s investment in a reasonable period of time.
With the drawback since the 2007 peak, landlords have found that there are renewals of leases at rents below what tenants had been paying, resulting in decline in net income due to higher operating bases.
Markets have “shrunk” towards Boston. Between Needham and Burlington, there is an active market, and also in Boston and Cambridge. Route 495 is an issue unto itself. The average office availability for Route 495 Northeast, Route 2 West, Mass Pike West, and 495 South as of the third quarter of 2011 was an incredible 29.85 percent.
Availability at this level hangs a cloud over the outer-suburban belt where there are a total of 254 office buildings, nicely developed but with many locked into the death throws of special servicers, foreclosure auctions, and quarters to half dollars in terms of cash recoveries at best.
Recovery Year
2012 will continue to be a recovery year. Even in Boston, while we are ahead of national markets, it will be a long time before across-the-board recovery can take place.
Back Bay and East Cambridge are doing well in terms of office space, and the apartment market is separate unto itself.
For 2012, there is expected to be, as one participant described, “a moderate pick-up in action.” At the same time, there is huge capital still sitting on the sidelines, which will likely remain there for “the longest period in time ever seen.”
What we truly need for the market to fully recover is for visionary CEOs to return to the market. It is the CFOs who have cut back on space, but the true CEOs are the ones that will drive our market by expanding their operations to the point where major new construction can again begin. Just look at Vertex.
Webster A. Collins is executive vice president/partner within CBRE’s valuation and advisory group.
