The credit crunch has unleashed an economic flu that has infected every sector of Greater Boston’s commercial real estate market.
Sales of offices, malls, apartment buildings and warehouses fell dramatically in the first quarter, according to a survey by LoopNet, an online listing service, and Real Capital Analytics, a global research firm.
The biggest plunge was in office buildings as sales plummeted to $153 million in the first three months of 2008, down from $5.7 billion for the same months last year. Even when the Blackstone Group’s $3.8 billion purchase of 12 million square feet of Boston office properties in February 2007 is excluded from the calculation, first-quarter office sales still declined by a whopping 92 percent.
“Obviously there’s been a drop-off. You’d have to be in coma not to see what’s going on,” said David Pergola, senior director at Cushman & Wakefield. “Deal velocity was fantastic a year ago because the stars were aligned in the economy and the financial and leasing markets.”
The Loop Net/Real Capital data reflect a year of pain dating back from March. The region’s office sales dropped to $4.4 billion, down from $15.2 billion for the 12 months ending March 2007, a 71 percent drop. Greater Boston fared worse than the nation as a whole, with U.S. office sales falling 17.7 percent to $153 billion in the last year, down from $186 billion one year ago.
In the multifamily market, sales of Greater Boston apartment buildings dropped to $107 million in the first quarter from $599 million one year ago, an 82 percent decline. The fall was in stark contrast to the national trend that saw sales of multifamily dwellings slip by a modest 5 percent.
Paul Donahue, senior vice president at CB Richard Ellis, blamed the stunning multifamily downturn on the lack of listings and the credit freeze, not the lack of willing buyers.
“Very few buildings were listed last fall, so the drop is more of a reflection of a lull in listings than a lack of buyer interest,” he said.
Typically, he said, there are 10 large apartment buildings for sale at any given point in time in Greater Boston. Today, that number has dwindled to three.
“The sales numbers are reflective of the fact that the financial and capital markets have been experiencing a fair bit of chaos this past six months and it’s been an extraordinary transition,” Donahue said.
Rising acquisition finance costs also may have contributed to the drop in sales. One year ago, the average interest rate was 5.79 percent. Today, that number is closer to 6.3 percent for apartment properties.
‘A Little Panic’
Regional malls and neighborhood shopping centers also traded hands more slowly. The retail sector saw sales in Greater Boston fall to $192 million in the first three months of 2008, down from $406 million one year ago, a 52 percent decline. Nationally, retail center sales fell 7.6 percent.
Theodore J. Chryssicas, a senior vice president at Colliers Meredith & Grew, said he doubted sales had sunk by half, but added he has not seen any statistics that contradict the Real Capital Analytics findings.
The recent announcement by Linens ‘n Things to close 120 failing stores, including three in Massachusetts will not help. “There’s no panic on the retail side from investors,” Chryssicas said. “But where there’s starting to be a little panic is when these big box stores, like Linens ‘n Things, go belly up.”
Warehouses did not fare much better. First-quarter sales in Greater Boston slipped to $283 million from $309 million one year ago, a 9 percent dip. In the 12 months that ended in March, warehouse sales fell to $992 million from $1.5 billion in the prior year. In contrast, U.S. warehouse sales increased to $51 billion from $49.7 billion for the same period a year earlier.
Richard Schuhwerk, an assistant vice president at Jones Lang LaSalle, said if there’s a silver lining for warehouses, it’s that capitalization rates – the ratio of a property’s annual operating income to its sale price – are rising.
“Sales are down, financing is tougher as lenders require more money down and there are just not as many players in the game,” he said. “But cap rates are up from 7 [percent] to as much as 9 percent, and that’s a good chunk of change.”
Susan Levy, a financial analyst at the Federal Deposit Insurance Corp., acknowledged that the commercial market is suffering. But she warned against putting too much stake in the limited data.
“It’s worrisome that sales dropped off at a higher percent than the rest of the nation,” she said. “But I wouldn’t put too much weight on one quarter or even one year’s data in such a volatile time. Boston is the fifth biggest market in the United States, but it’s still quite a small market. There are not that many deals, so there can be huge variations in a quarter or even a year, so the data is very bouncy.”
