ERIN O’BOYLE
‘Bullish about Boston’
Beacon Capital Partners’ chief investment officer offered some simple advice about commercial real estate development at a National Association of Industrial and Office Properties breakfast panel last week: In tough times like these, stick to the basics.
“Go back to the fundamentals,” said Erin O’Boyle, also a senior vice president at Beacon Capital in Boston. “An urban location, a 24/7 economy, an educated workforce – all of that’s in Boston. It’s always stood above [other markets] because of those characteristics. We’re still very bullish about Boston.”
Investors should go where the tenants are, where a company can create value and double the wealth of investors, she added.
Despite a sluggish economy, vacancy rates that – in some neighborhoods – teeter in double digits and rent prices that some are expecting will continue in a downward slide, the panel of experts that joined O’Boyle last week said there’s some good news for Boston – finding capital isn’t a problem.
“It’s finding the good deals and structuring them well,” said Thomas Alperin, president of National Development and a member of the NAIOP panel. “The challenge is the market and the product.”
Panel experts said that mixed use seems to be drawing the most attention from investors, particularly residential developments in downtown Boston. Foreign investors are also tapping into the city’s real estate market, impressed by the Central Artery project, the Seaport District and Boston Harbor. Once the major projects are complete, the city will see an abundance of investment, said panel member Kyle Warwick, principal of the Boston office of Spaulding & Slye Colliers.
Beacon Capital is already experiencing the fruits of investor demand. The company will soon close on a new fund that netted more than $2 billion.
“They’re looking at real estate because of the current cash component … They’re looking for returns in the high teens to 20 percent; that’s why we’ve found tremendous demand in raising new funds,” said O’Boyle.
‘Weak’ Fundamentals
One panelist, however, cautioned that finding capital isn’t so easy for everyone.
“The real estate industry has unprecedented access to liquidity, but it’s become extremely more disciplined,” said Dean Stratouly, president of Congress Group Ventures in Cambridge. “If you’re trying to do a hotel, it’s a different market. If you’re doing residential, there’s a significant amount of interest. It’s more sophisticated and more disciplined than it’s ever been and it’s directed at very significant markets … It’s not as easy as a lot of people think it is.”
That left some wondering when the market will recover. Most panelists agreed that while residential real estate stays at the top, the commercial market will continue to drag along the bottom, with significant growth at least four years away. Warwick was even more conservative, projecting that 2007 to as late as 2009 would be Boston’s big turnaround year.
Stratouly said Congress Group Ventures has been looking outside Boston for the first time in 20 years.
“What’s interesting is the contrast between Boston and other markets. There’s a significant level of enthusiasm in the other markets that you don’t find in Boston. There’s a vibrancy there, a net positive growth occurring,” he said. “When the vacancy rate in Atlanta hits around 20 percent, they go out and build another tower; we want to jump out the window.”
Stratouly said that for the first time in two years, tenants need 10 percent to 15 percent more space. He projected that 2006 and 2007 will be very strong years for commercial real estate in Boston.
“When we sat in this room in 1992, we never thought real estate would come back. We thought it was doomed for another 15 years,” he said.
Stratouly said there are still transactions moving, albeit much more quietly than they did in the 1990s. It’s about having a good relationship with non-traditional real estate sources, the brokerage community and being in the right place at the right time, he noted.
“Clearly the days of the early 1990s, when you were hanging on by your fingernails and buying assets at 10 cents on the dollar, are back – but we’re beginning to see opportunities,” he said.
While O’Boyle said that Beacon Capital remains focused on Boston, the company also is continuing to expand its hold in other markets, particularly Los Angeles. Beacon bought $1 billion worth of properties in Washington, D.C., in 2001 and 2002 – a portfolio it’s now beginning to sell – while at the same time dipping into the Los Angeles market, buying up properties at $190 per square foot.
“As we look across the markets today, the fundamentals are clearly weak,” she said. “There are always differences. We understand that you can always make money as long as you know where you are.”
