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As Boston commercial real estate becomes a valued commodity on a global scale, ownership of top-tier properties have become concentrated in a handful of long-term institutional holders.
Gaining entry to the exclusive club of trophy asset landlords is more difficult than ever, but there’s no shortage of available capital for acquisitions. Investors may gravitate toward class B office buildings in 2018, suburban and inner-ring markets and industrial holdings, local capital markets executives say.
After several years in which luxury towers dominated Boston’s multifamily development market, the appetite for high-end residential appears to be waning. Development is migrating to mid-rise construction in outlying Boston neighborhoods and inner suburbs, particularly sites with transit connections.
Industrial properties remain in heavy demand both in Boston, where they’re a popular opportunity for multifamily conversions, and throughout the metro area, where warehouse space is becoming an increasingly valuable asset for e-commerce companies and suppliers.
Banker & Tradesman asked local capital markets and investment sales executives for their thoughts on the 2018 commercial real estate climate. While most agree Greater Boston’s strength in tech, life science and financial services is a recipe to extend the real estate cycle, concerns over global instability and the Trump administration’s leadership remain the biggest perceived risk factors in the new year.
Frank Petz
Frank Petz
Managing Director
JLL
We’ve traded a lot of downtown office product to long-term holders. The owners are saying, “I love Boston, why would I sell right now?” That’s the story line. I don’t see class B accelerating, but there should be significant rent growth in this market. We’re forecasting office rent growth greater than 6 percent next year in the city of Boston. There is a very strong appetite for industrial product, and a lot of investors can’t meet their allocations, so they’re buying anything they can. Foreign capital continues to increase from Japan, the Middle East and Korea. There’s way more capital than there are deals available, which tells you where pricing is headed. There’s still more pressure to go up. Certainly with vacancy rates sub-5 percent in Cambridge, development pencils out. You can deliver yields that investors want and if they can’t buy it, they’ll build it.
Matthew Pullen
Matthew Pullen
Executive Managing Director
Newmark Knight Frank
The suburban office market was dominant the second half of the year and I expect that to continue. You’re going to see more companies pursuing a dual strategy (for office space). The companies that are all flocking to Boston are realizing these kids they’re attracting (as employees) are getting older and can’t afford to pay for two children in preschool downtown, so they’re looking at the suburbs. We started to see that trend six months ago.
Industrial properties are as hot as it gets right now. Every year starts out with a fresh perspective and I don’t think there’s going to be a single component of capital that’s going to be more conservative. With a limited supply in the urban market, they’re going to have to decide if they want to put it to work or sit on the sidelines.
Ben Sayles
Ben Sayles
Senior Director
HFF
The inner ring suburban office market is a new frontier for today’s investors. There really is a ton of existing product that fits that bill. You’re going to continue seeing tenants leaving the urban core and going to Watertown and West Cambridge.
Foreign investors are certainly in the suburban office game. It’s a great place to invest with very positive fundamentals and yield premiums over downtown. Asian capital has been very active in ground-up multifamily development in other U.S. markets and you could definitely look for them to be a player in large mixed-use projects within the urban core. I think most investors would say they feel really good about next year. If there was a dark cloud, it revolves around housing and a little bit of softness at the top end of the rental market. If there’s an issue we have to grapple with as a region, it’s home affordability, and that’s going to ripple across all sectors.
Brian Barnett
Brian Barnett
Managing Director
Cushman and Wakefield
You’ll continue to have international capital chasing deals in Boston and also the domestic investors who’ve been buying here for decades. When it comes to the suburbs, the foreign investors generally have a larger amount of equity they’re trying to deploy. The deals will need to be a certain size to make sense. Industrial is probably as popular in and around Boston as it’s ever been. Amazon is trying to do same-day delivery and the facilities they require don’t have to be as large because they’re holding things for a shorter period of time. In terms of risk factors, the biggest is going to be just an unforeseen macro event. People have expected some increase in interest rates so it shouldn’t have any impact on the pricing and strength of the market.
Scott Jamieson
Scott Jamieson
Principal
Avison Young
Close-in industrial product is on fire. Investors can’t get enough. Historically, Boston has not been a prime industrial market. We were sort of end of the line, but that is all changing because of e-commerce and accelerating delivery times. For office product, there’s plentiful capital from every corner of the world that would love to invest in Boston, Cambridge and the prime suburban markets like Waltham and Burlington. Barring unforeseen world events, we’ll see more of the same and relative stability. The proposed tax plans are going to be positive for business and the reduction in the corporate tax rate could result in more investment in this country with facilities, people and R&D.
Jeff Black
Jeff Black
Executive Vice President
Colliers International
We have a number of clients approaching us constantly asking us to keep an ear to the ground for recap opportunities. The core tower markets downtown, most of the trophy properties, have traded at least once during this market cycle. Foreign capital is certainly a force to be reckoned with in Boston. We’re speaking with a number of German groups, Japan and China. There’s an increasing level of investor capital that is a huge believer in Boston’s inner suburbs and the outer urban ring of the city, extending all the way to Quincy, Malden, Melrose, Lynn and Everett. You can build open shop, which gives material discounts on labor pricing. Apartment renters are ZIP code agnostic – it’s really what you can offer in terms of amenities and total monthly rent.
Chris Skeffington
Chris Skeffington
Partner
Transwestern Consulting Group
Downtown Boston, Cambridge and the Burlington, Waltham and Needham markets are getting more interest from the capital markets. It’s driven by leasing fundamentals. Money follows the tenants, which are continuing to trend toward the newest and best-in-class properties with public transportation.
Industrial has been a hotbed close to the urban core. There’s a huge appetite on the investor side for last-mile urban industrial product. The problem is just finding it. A lot of those buildings are tied up in long-term family trusts. The foreign capital is pretty flexible, and there’s only so many trophy assets to go around. If foreign money continues to pour into Boston, they’re going to be more flexible in geography and product type. It may be doing to the B-plus, A-minus assets.
We have more of our institutional clients coming in to get educated on the life science world, once dominated by a handful of owners. You’re going to see the Seaport become a micro relief valve for Cambridge for those (tenants) that want to maintain an urban presence.
