Tim Thompson Regional Manager - Boston Marcus & Millichap (617) 896-7200
In Boston, employers are on target to increase the labor pool by 55,000 jobs in 2016, a 2.1 percent advance over the prior year. Boston households are benefiting from job expansions brought by employment sectors like technology, bioscience and professional services, and by extension retail sales have been positively affected. In recent years, retail sales were heightened in downtown Boston and in Fenway/Brookline/Brighton, along with Cambridge/ Somerville where residential towers have been completed close to workplaces in the city’s core. This activity has created a healthy demand for retail services for consumers.
Developers in Boston will add about 1.6 million square feet of retail space to the market, much of it near urban mixed-use projects; the space will consist mostly of pre-leased, single-tenant offerings. The former Boston Garden site along Causeway Street on the West End/North End border, dubbed “The Hub on Causeway,” has nearly 300,000 square feet of retail space under construction, and will include a new grocery store, a 15-screen movie theater and underground parking. The project will include three towers that will house nearly 2 million square feet of retail, office, hotel and residential spaces.
Redevelopment is also taking place in Boston’s core due to very little vacant land. Elsewhere in the metro, tight operations are inciting more development, with northern submarkets receiving the majority of new retail space. This is a change from previous quarters and may pose temporary changes to vacancy compression in these areas. Other submarkets like Cambridge and the South Shore will support absorption of existing space, maintaining tight metro vacancy averaging in the low-3 percent range. (Based on net absorption of approximately 2.4 million square feet, average metro vacancy will tighten to the lowest point in a decade, down 40 basis points over the year to 3.1 percent. In 2015, vacancy tightened 10 basis points.)
The demand for retail space by tenants in Boston has resulted in tight vacancy and rent growth, fostering net operating income gains. Bullish investors have been active, targeting retail assets at both ends of the quality spectrum. Vigorous investor demand in the institutional segment has boosted pricing for prized assets, reaching record pricing levels per square foot, with cap rates into the sub-4 percent range. Both local and foreign institutions targeted these assets. Properties outside the core also garnered investor attention, ticking average cap rates higher last year. This includes the few grocery anchors sold near 6 percent initial yields in smaller towns. Investors purchasing drugstores invested with first-year returns generally starting near 5 percent and ranging upward depending on location and lease term, as urban listings were limited. National and foreign investors will be decidedly active as Boston retail properties retain their position among gateway metros.
About Marcus & Millichap (NYSE: MMI)
With over 1,600 investment sales and financing professionals located throughout the United States and Canada, Marcus & Millichap is a leading specialist in commercial real estate investment sales, financing, research and advisory services. Founded in 1971, the firm closed over 8,700 transactions in 2015 with a value of approximately $37.8 billion. The company has perfected a powerful system for marketing properties that combines investment specialization, local market expertise, the industry’s most comprehensive research, state-of-the-art technology, and relationships with the largest pool of qualified investors. To learn more, please visit: www.MarcusMillichap.com
