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During a decade-long expansion, real estate investors and developers cashed in on economic conditions that delivered rising rents to a wide variety of property types around Greater Boston.
Investment will be more selective in 2024, commercial real estate executives predict, amid the most challenging financing climate in over a decade. Even sectors with strong fundamentals such as multifamily housing are feeling the pinch, as some acquisition deals fall apart in a volatile interest rate environment and construction becomes harder to pencil profitably.
“There is a big bid-ask gap in the market,” said Jackie Meagher, a senior director at brokerage Berkadia in Boston. “There are a number of [mutifamily housing] deals that hit the market post-Labor Day, and have gotten pulled until the market settles down.”
Investors and lenders are still reeling from the run-up in the benchmark 10-year Treasury bill, which briefly topped 5 percent in late October to a 16-year high. Although the rate has since declined below 4.5 percent, acquisition and development financing remains challenging, Meagher said.
Over the past decade, virtually every commercial real estate category benefited from the availability of cheap financing. Greater Boston’s strong economic growth created thousands of new jobs in sectors such as tech and life science, increasing demand for offices, labs and housing.
Downtown office landlords and housing developers benefited from the growing popularity of urban workspaces and housing. The Cambridge life science cluster reached virtual capacity, prompting lab development to spill over into neighboring communities. E-commerce vendors led by Amazon gobbled up massive warehouse development sites in suburbs. Retail landlords replaced traditional department store anchors with sports and entertainment concepts and multifamily housing.
But Greater Boston isn’t immune to the global downturn in commercial real estate. Investment in the Americas declined 53 percent in the third quarter from the previous year, according to CBRE, which predicts further declines in 2024 because of tighter credit standards and expectations of slower economic growth.
Headwinds created by the Federal Reserve’s 11 interest rate hikes since March 2022 are already affecting pricing across all property categories. iStock illustration
Lenders Remain ‘Very Hesitant’ About Office Deals
The headwinds created by the Federal Reserve’s 11 interest rate hikes since March 2022 are already affecting pricing across all property categories, but some sectors will face additional challenges from waning demand, and its negative effects on future rents.
Commercial real estate researchers CoStar predict rent declines in office and multifamily sectors nationwide during 2024.
Lenders remain reluctant to offer financing for office acquisitions because of limited availability of recent transactions for price comparisons, said Chad Littell, CoStar’s national director of capital markets analytics.
“Capital is very hesitant around office. It’s very difficult to underwrite today when you’re seeing net operating income fall,” he said.
After a lengthy, COVID-induced hiatus, some recent office investment sales are giving investors and lenders a source of price comparisons that point to deep declines in value. Class B buildings in Boston’s Downtown Crossing and Leather District traded this fall for 74 and 53 percent below their previous transaction prices, respectively.
“Over the past two quarters, there have been a few comps that are helping price discovery that we didn’t have for the better part of two years,” said Tim Mulhall, a senior vice president for CBRE capital markets in Boston. “There’s an overarching sentiment that you can’t time the market, but we might be at the trough, or close to it.”
A surge of life science sublease listings coupled with the historic development pipeline has sent availability rates for the lab market above 30 percent in some submarkets such as Route 128 West, pointing to potential future distress.
“People are focused on that and how that will be absorbed,” Mulhall said. “We’re not seeing too much pain yet, but those projects delivering in 2024 were financed in 2021 when the 10-year Treasury note was [2.5 percent] south of where it is today. We still have a handful of quarters to see that through.”
Multifamily Investment, Development Slows
Local brokers say Greater Boston’s multifamily sector fundamentals remain strong, but a volatile interest rate environment and high construction costs are depressing investment sales and the development pipeline.
Greater Boston’s chronically constrained housing supply keeps apartment rents and occupancy rates high, a pattern that is likely to continue in 2024. The local apartment construction pipeline has declined 20 percent since mid-2022, according to a recent report by brokerage Colliers, while rents rose 3 percent.
The interest rate environment is disrupting investment sales activity, prompting some deals placed under agreement in the summer to fall through and other listings to be withdrawn, Berkadia’s Meagher said.
New supply is likely to remain constrained by construction loans approaching 8 percent and higher project costs. Projects that do move forward will be rewarded by the limited competition hitting the market for lease-up upon completion with higher rents, Meagher predicts.
Steve Adams
Fergal Woods, whose FinanceBoston brokerage specializes in finding equity and debt for commercial projects, said regional banks are looking to lend for multifamily development because of the strong rent and occupancy picture. He predicted an uptick in market-rate condominium developments in inner suburbs on public transportation north of Boston, such as Malden and Revere.
Industrial real estate has remained the most resilient sector, according to a CoStar analysis of repeat sales for investment-grade properties across all property types for the past decade. Industrial properties’ values have declined just 2 percent from the market cycle’s peak in the fourth quarter of 2021.
Unlike life science, industrial development in Greater Boston hasn’t dramatically overshot demand. The vacancy rate stood at 9.1 percent at the end of the third quarter, according to Colliers, with asking rents increasing 2.5 percent in the previous 12 months.
“Capital has been chasing rent growth, and that’s why it’s still heavily focused on industrial,” CoStar’s Littell said.
