Debt will be hard to come by on reasonable terms in 2010, retail leasing will hit the skids, and the commercial development outlook will remain bleak, according to respondents to a recent Banker & Tradesman/Bannon & Co. survey.
“2010 will be a year for the solidification of fundamentals, but probably not too many groundbreakings,” said Yanni Tsipis, a senior vice president in the development and advisory services practice at Colliers Meredith & Grew.
More than half of all respondents said none of the four high-profile Boston developments either stalled or in permitting now – Columbus Center, the Filene’s redevelopment in Downtown Crossing, Raymond Property Co.’s proposed Government Center Garage redevelopment and the Chiofaro Co.’s proposed Harbor Garage redevelopment – will move forward in 2010.
Just one in five respondents expressed optimism for the Filene’s project, which has been stalled for more than a year now by financing shortfalls. The project suffered a major blow last year, when its would-be anchor tenant, law firm Fish & Richardson, bolted for Fan Pier. Developers Vornado Realty Trust and Gale International have wrapped the construction site and mothballed it for the winter. Last spring, Gale CEO John Hynes told Banker & Tradesman he was shopping designs for a taller, cheaper tower to Asian investors. That search continues.
Tsipis argued that after a tough year for leasing in the city, tenants would need to absorb large chunks of open space at Russia Wharf, 33 Arch, Fan Pier and Two Financial Center before large-scale developers begin to feel bullish again.
Banker & Tradesman readers expect industrial, retail and office development – already a rare site in 2009 – to slump further in 2010. Only six percent of survey respondents said they expect industrial and warehouse construction to increase even modestly; that figure is three percent for retail construction, and two percent for office construction.
Wait ’Til Next Year?
Tight pre-leasing requirements and a dramatic slide in rents and commercial values all but iced new construction in 2009, and at a recent NAIOP Massachusetts roundtable, Portfolio & Property Research CEO Bret Wilkerson predicted that office incomes would not trend upward again until 2011. That presumption, on its face, would seem to preclude all construction but build-to-suits (a quietly strong category in 2009).
However, Wilkerson and others have predicted a sharp swing upward in rents from 2011 to 2013. Wilkerson predicted a “phenomenally interesting and exciting cycle” beginning in 2011, and said Boston is PPR’s top market nationally for forecast rent growth until 2013. But unless the commercial financing environment evolves dramatically, and quickly, few new developments will be in a position to take advantage of that upswing. Eighty-five percent of Banker & Tradesman readers said they believe it is either not very likely or not at all likely that lenders will make commercial development loans available at reasonable terms in 2010.
In addition to the stalled Filene’s tower, two other high-profile Hub developments illustrate the harsh lending terms developers will have to navigate in 2010. Boston Properties had to swallow a tough recourse provision to get a club of five lenders to issue a $215 million construction loan for its Russia Wharf office tower in Boston – a project substantially pre-leased to Wellington Management. The loan amounts to less than half the tower’s $550 million construction tab. And when a group of three lenders refinanced the new Center for Life Sciences Boston, Biomed Realty Trust’s Longwood research tower, the San Diego-based REIT had to increase its equity position by $150 million, replacing a $500 million construction loan with a $350 million mortgage.
A Changed Landscape
Notably, there appears to be some dissent on pharmaceutical and life sciences research space, one of the few bright spots in the commercial industry. A legion of boldface developers, including the Beal Cos., the Fallon Co., National Development, Alexandria Real Estate Equities, and the Massachusetts Institute of Technology, have plans on the boards for new lab space developments from Kendall Square to South Boston and Mission Hill.
A full twenty-five percent of survey respondents predicted an increase in new lab construction, though the people with the money disagree. Only 8 percent of readers who identified themselves as bankers said new lab construction would increase this year.
There was near-unanimity on one view, though: The retail leasing landscape looks brutal. Less than 12 percent of readers predicted even a modest increase in retail leasing in 2010, while 59 percent believe retail leasing is in for a fall from already-grim 2009 levels. Twenty percent believe the retail market will see a major decrease from a year that saw Brockton’s Westgate Mall seized for $51 million by its lenders and the Hanover Mall move into special servicing after defaulting on its $87.5 million mortgage. At an Urban Land Institute forum last month, Kenneth Himmel, chief of retail giant Related Urban, said retailers and retail developers are in for a “long three years.”
“We should all get prepared for a permanently changed landscape,” he added.
