Justin MacEachern
While the maxim “survive until ’25” dominated the real estate industry for much of the latter half of 2023 and 2024, we all understood that the sector would take time to rebound.
As we continue to navigate the path forward, opportunities remain for those with diversified portfolios. In this current environment, the winners will be those who are willing to be flexible, innovative and adapt to current market conditions, given that the softening that many hoped for is not quite yet here.
While many developers are holding off on breaking ground, others are getting creative with different partnership structures to minimize risk. The high vacancy rates in the office and lab sectors offer many opportunities for interior build-out and retrofit projects, and the Massachusetts state government began the year announcing proposed investments in state-owned buildings.
Minimizing Risk
In an uncertain financial environment, institutional and corporate entities with capital seek to minimize risk. As it became more difficult to finance projects, institutions have had to explore alternatives to adapt and get deals done.
One project structure that’s been popular in other regions of the country and seems to be becoming increasingly popular in the Northeast is design-build. This building method establishes a single contact, often the contractor, who is responsible for the design and construction work, which increases delivery speed and decreases costs while eliminating some project risks.
Locally, there’s been an increase in public-private partnerships, often called P3s. A P3 is typically a contractual agreement between public- and private-sector partners, although it’s no longer only public agencies that are using this delivery method. In the P3 model, a developer is usually hired to finance, design, build and then lease back the project to their partner. Universities are already utilizing P3 structures to increase student housing supply and educational facilities, other institutions are expected to follow suit.
Notably, the state Division of Capital Asset Management and Maintenance recently held a public meeting in Springfield around the redevelopment of the city’s courthouse. Rather than constructing a state-owned courthouse, the project is being proposed as a P3 development, where a developer will build the courthouse with the state leasing back the new building. The P3 partnership will remove some of the financing burden from Massachusetts, enabling the project to break ground sooner.
Decarbonization of Public Projects
Gov. Maura Healey’s recently filed bond bill – An Act to Build Resilient Infrastructure to Generate Higher Education Transformation (the BRIGHT Act) – would invest $2.5 billion in the modernization and decarbonization of state-owned college and university buildings. Many state-owned higher education institutions have already begun the process, including Salem State University’s project to modernization its science labs and health sciences spaces.
Gilbane is overseeing two projects for Salem State, the first of which entails a full renovation of a 45,000-square-foot former elementary school into lab space for occupational therapy, nursing simulation and computer programs, as well as the construction of a 22,000-square-foot addition to an existing academic building, which will create additional labs and space for the chemistry, biology and geology departments.
The second project is implementing the campus decarbonization and infrastructure program, which includes the development of a new central energy plant, a geo-exchange system and a new campus-wide thermal distribution loop.
Beyond higher education campuses, many public works in Massachusetts need modernization as well, including many K-12 schools across the state.
In 2023, Mayor Michelle Wu announced the Green New Deal for Boston Schools, which commits the city to ensuring that schools are “safe, healthy, climate-resilient, inclusive, and inspiring” over the next decade.
While still in early stages, efforts are underway, with community work around projects to expand Madison Park Technical Vocational High School, rebuild the Mel King Academy special education schools and replace the Jackson-Mann/Horace Mann complex. This long-term investment provides many opportunities for builders of K-12 schools in Boston. While Boston Public Schools has a centralized effort to upgrade its stock of schools, districts across the state need similar modernization and decarbonization updates.
Flight to Quality
Ending with the office market, we’ve seen that the flight to quality trend is here to stay.
With a record high office vacancy rate in greater Boston of 17 percent this quarter, tenants can choose to be picky about where they’re leasing. As companies seek to provide top-of-the-line space for their employees to help incentivize return to office policies, many landlords are looking to modernize and improve existing space. Offices, more than ever, are amenity-focused, with flexible workspaces at their core.
Given the existing supply of space, interior build-outs and retrofit projects can be expected to increase in popularity as employers adapt spec and sublease suites to fit their organizations.
Despite the challenges facing commercial real estate, 2025 will provide organizations with the opportunity to hit reset. Whether that’s planning for climate resiliency and implementing building upgrades, evaluating office footprints and in-office work structure, or learning to adapt to the current economy, this year will allow organizations to plan for a more informed future.
“Twenty Twenty-Thrive”? Maybe not quite yet, but I am optimistic that things are improving and 2025 will be a better year than 2024 was, helping us survive until 2026.
Justin MacEachern is a vice president and business leader for Gilbane Building Company in Massachusetts and northern New England.
