Development sites for life science projects remain in demand in Boston, while investors seek additional clarity on the future of office leasing.

We’re certainly in a down cycle for real estate, and this is one of the rare times where the leasing market is more impacted than the capital markets. There remains plenty of capital, funds are being raised, but investors are selective on where that capital is being placed. 

Hot sectors, such as life science, industrial, and multifamily remain highly liquid with strong capital flows. While there is short-term pressure, long term the investment community still perceives Boston as an innovation hub that will create new demand generators. 

National sales volumes were off 57 percent from year-ago levels in the third quarter; however, in a sign of improvement, national volume was higher in the third quarter than in the second. Boston ranked fourth in the U.S. for total sales volume through the third quarter, trailing Dallas, Los Angeles and Manhattan. Boston was the no. 1 office sales market, though most sales were early in the year, pre-pandemic or were under contract beforehand. Lab real estate has been a major contributor to the overall office investment totals.  

The debt markets are segmented today, with lenders leading the bidding on deals secured by favored asset types. Credit and term mean everything. Multifamily is among the most liquid thanks to aggressive agency financing, and it has been difficult for life companies and banks to compete. Local and regional banks are still active on the development front, as Greater Boston remains underhoused. Ultimately this combination of active lenders and agency financing has made acquisition and development financing readily available across the market. 

Industrial real estate is riding high as e-commerce has surged, pushing demand for last-mile distribution through the roof. But investors are chasing more than just last-mile, which has pushed out past the Interstate 495 belt. Appetite is strong for portfolios too, as there are big allocations coming to the asset class. Along with the dearth of modern industrial product in Greater Boston, Amazon is seemingly gobbling up anything and everything, and competition for space remains high. Amazon deals are being done with cap rates in the low 4 percent range.  

Aaron Jodka

Life Science No Longer High-Yield Play 

Boston’s thriving life science market has attracted numerous investors. Alexandria Real Estate Equities, King Street Properties, National Development, IQHQ, BioMed, Related Beal, Samuels & Assoc. and The Davis Cos., to name just a few, are expanding existing footprints or entering the market for the first time.  

This is no longer just a high-yield play. Pensions and investment managers are shifting part of their office allocations to lab. This has driven liquidity, and that looks to hold for the foreseeable future, as the sector has been rather unaffected by the pandemic. Tremendous venture capital, IPO, National Institutes of Health and Big Pharma investments are supporting the industry. Land purchases of late have been lab-focused, demonstrating the market’s faith in the future of the life science market. 

Frank Petz

Office investment is highly dependent on credit and the “story” of the asset; there is no clarity on where lease rates are and where they are heading in the near term. Overall, the office sector has more financing challenges and has slowed markedly during the pandemic. However, we see signs of thawing, as deals are getting done, albeit with a strong bent toward lab/life science conversion. And once there is more clarity on the ultimate direction of rents and occupancies, office deals will start to pick up. 

Retail and hospitality find themselves in the same boat: largely out of favor. Hospitality, though, is operating more on the question of when, not if, a recovery is coming. Retail, on the other hand, is in multiple lenders’ no-go zones, limiting transactions. These two asset types, at the top of distressed assets, could create opportunistic buying opportunities. 

Bryan Koop

Despite a volatile 2020, the year ahead looks brighter. Volumes are increasing nationally, COVID vaccine trials are showing promise, and a return to normalcy, or at least to a “new normal,” doesn’t seem so far off. Interest rates will stay low thanks to accommodative policy from the Federal Reserve, supporting transaction volume. Multifamily, industrial and lab are expected to remain the most liquid, as they have this year. And as there is more clarity on the office, retail and hospitality markets, their deal volume will increase as well. 

Aaron Jodka is managing director of research and client services at Colliers International in Boston. Frank Petz is Colliers’ managing director of investment sales. Bryan Koop is an assistant vice president in capital markets at Colliers.