Despite a few high profile closings over the final 30 days, 2002 transaction volume was down significantly as many sellers continued to wait for signs of improvement in the leasing markets before offering their properties for sale.
Unlike the real estate downturn of the early 1990s, today’s investment market is characterized by ample equity capital anxious to exploit the leasing market imbalance. This competitive equity market is fueled by historically low mortgage rates, encouraging sellers to bring quality offerings to the market. For this reason we believe we will see increased sales activity in 2003, even in the face of an anemic leasing climate.

Investors

For both the institutional and individual investor, real estate continues to perform well relative to alternative asset classes. Especially in light of stock market losses and corporate accounting scandals, real estate compares well given its relatively healthy income returns, bricks and mortar business plan, and accessible financial reporting.
As a result, increasing amounts of capital is flowing into real estate through a variety of investment vehicles, including institutional management accounts, private syndications and retail funds.

Cap Rates

While market volatility creates some upward pressure on cap rates, the low cost of debt is alleviating that pressure. As overall average cap rates hover in the 9 percent range and mortgage rates are generally in the mid-6 percent range, investors continue to exploit positive leverage opportunities. Current return hurdles have increased most on suburban office product, reflecting risk due to both over-supply in general and technology sector exposure in particular.
Cap rates on downtown office properties have risen nominally, despite increased vacancy and lower rents. This is attributed to investors’ long-term confidence in Boston’s core, as well as below-replacement cost pricing.
The industrial market remains very stable given attractive leasing fundamentals and pent-up investor demand for quality warehouse opportunities.
Renewed leasing activity is enabling investors to price today’s rents. The bigger challenge is making bets on rental trends over the next two to three years. Have rents bottomed and when will rental rate recovery begin? These are the toughest calls to make in today’s market.