Reins Building, a 4-story, 32-unit apartment building at 201 Essex St. in Lynn, is listed for sale at $2.75 million.
After a two-year surge in interest rates, the Federal Reserve Board is holding rates steady for now as energy prices continue to fall, moves that could spur real estate investment in the fourth quarter and into next year.
While anything could happen to change the investment landscape, including an uptick in inflation, an overnight spike in oil prices or another world calamity like Sept. 11, industry experts are predicting moderate improvements for real estate investors in 2007.
“Nothing lasts forever,” said William E. Croteau, a spokesman for PricewaterhouseCoopers, a global company based in New York that provides tax and advisory services. “The fact is that real estate has enjoyed a very healthy up-cycle for longer than normal. Even so, real estate is still viewed favorably as an asset class and there is still a lot of money – especially from private funds and institutional investors – looking for the right opportunity.”
Croteau’s optimism comes on the heels of an upbeat forecast on real estate investment by PricewaterhouseCoopers and the Urban Land Institute (ULI), an independent education and research think tank. Most property sectors in Greater Boston show good prospects for profit led by moderate-income apartments, offices, full-service hotels and warehouses, according to “Emerging Trends in Real Estate 2007.”
The just-published study provides a glimpse into next year’s outlook on U.S. investment and development trends, real estate finance and capital markets and property sectors.
The best opportunity for investors is in multifamily housing with the “smart money” on older apartment buildings in the Boston area, San Francisco, New York, Los Angeles and Seattle, the report said. The two-percentage-point rise in historically low mortgage interest rates this year removed some would-be buyers from the market, keeping them in the apartment hunt.
With Boston’s luxury condominium market showing signs of saturation coupled with falling prices, apartment buildings make more sense for investors than condo conversions.
The well-publicized auction this month at the 96-unit FolioBoston in the Financial District overlooking the Rose Fitzgerald Kennedy Greenway attracted more than 200 bidders who snapped up 31 unsold units. The condos, with list prices of $1.16 million to $1.76 million, sold for up to 36 percent below the asking prices.
Price Concessions
In September, prices for a condo conversion of Boston’s District Four police station also saw price concessions. International designer Philippe Starck and Urbanica Inc. lowered their asking prices by an average of 12 percent.
The project in Boston’s South End was riddled with construction delays as the market cooled and brokers complained that the units’ prices were too high. In response, the developers dumped Gibson Domain Domain as the project’s broker and signed with Coldwell Banker Residential Brokerage, who dropped prices. One unit that started out at $1.77 million was lowered to $1.65 million. Other units in the mid-$600,000 range saw price breaks of $70,000.
Still, even with such price concessions, many people who want to own in the city can’t afford it and apartment living remains the best option.
In the office sector, Boston is “about to come out of the woods,” the study said, reversing the declines in employment as office vacancy rates fall. While Boston still lags behind New York and Washington, D.C., office rents are increasing in the downtown as financial companies expand. Landlords are gaining the upper hand as tenants realize it’s time to make deals in the market recovery. “Concessions start coming off the table,” the report said.
Hotels are recovering in Boston after a dramatic dip following the terrorist attacks on the World Trade Center in New York in 2001.
In the research-and-development sector, those properties track the fortunes of the volatile tech industry, providing bursts of appreciation that can flicker reminiscent of the 2000-2001 tech wreck, the study said.
Still, the report offered hopefuls signs that if chip-maker and software-designer prospects continue to improve as expected, R&D markets may be poised to accelerate again. The Route 128 corridor has been revived and offers a good opportunity for investment, the report said, as well as Silicon Valley in California, Silicon Forest in Seattle, and Austin, Texas.
The most promising opportunities are in the “investment meccas” on both coasts, the report said. Location has become ever more important in real estate investing as the transforming global economy increasingly determines where companies and people need and want to be.
Distinguishing Characteristics
The top markets, including Boston which has the closest airport to Europe, are distinguished by several characteristics, including locations along global pathways with major international airports and harbor ports, 24-hour features, attractive settings in reasonably comfortable climates, geographic barriers limiting sprawl and brainpower jobs attracting an affluent, highly educated workforce.
The report notes that several cities in the South and Southwest, such as Dallas, Houston, Atlanta and Phoenix, remain development magnets, although their tendency toward oversupply compromises their standing with investors.
“Sunbelt development havens consistently fall behind global gateways for investment prospects, even as their economies continue to grow,” the report said. “They remain relatively affordable, but these areas lack strong 24-hour cores and mass transit systems, while interior locations make them secondary destinations for international business.”
Denver is cited as a market with strong development prospects, due to its growing light-rail system, evolving 24-hour downtown district, natural beauty and international-scale airport.
Mixed-use projects continue to be the favored type of development, offering greater convenience for busy professionals. Such projects also appeal to empty nesters and their young adult offspring by providing pedestrian-accessible retail, restaurants, parks, supermarkets and offices.
Transit-oriented development that puts new construction at subway or light-rail stations “almost cannot miss,” the report said. It lists senior housing, student housing and infrastructure as favored niche property types.
Emerging Trends interviewees rank construction material costs, land costs, construction labor costs, and inadequate infrastructure as key industry-related issues that could pose problems for real estate investment and development next year. They cite insufficient job growth, inflation, wage growth and energy prices as economic-related issues that could present obstacles.
The consensus among respondents is that the economy “has enough steam to support demand growth in real estate markets, which seem well-positioned to muddle through any mild distress associated with a slowdown,” the report said. “Expect enough economic growth for solid real estate absorption.”
The Federal Reserve kept interest rates for a third consecutive meeting in October, hoping that a slowing economy will dampen a worrisome rise in inflation. The Fed left its federal funds rate at 5.25 percent. It has been at that level since late June when the bank raised rates for a 17th consecutive time in a two-year effort to combat inflation.
“Most people who responded to our survey expect to sleep well at night, and are comfortable with high single-digit returns for core properties,” said Stephen Blank, a ULI senior resident fellow.
