The National Association of Realtors is predicting that investment transactions in Greater Boston and elsewhere will be limited by tighter credit conditions this year.
Tighter credit conditions are expected to limit the number of investment transactions in 2008.
That prediction from the National Association of Realtors is a far cry from last year, when The Blackstone Group’s $39 billion purchase of Equity Office Properties last February catapulted 2007 with the nation’s largest private real estate sale of all time. The transaction included more than 10 million square feet of signature office space in Greater Boston and redefined the U.S. commercial real estate market. It also launched a new phrase, “The Blackstone Effect,” as brokers gleefully used the term to describe the run-up in Boston’s office rents.
But by summer, the exuberance was cooled by the global credit crunch that took hold of financial markets and deflated the commercial real estate balloon. Office buildings, malls and warehouse space, which once looked like a safer haven for investors as home prices fell, started to feel the pinch.
Still, by the end of October, the most recent data available, a record $325 billion worth of commercial real estate had traded hands nationwide, with over half involving office properties, according to NAR’s Commercial Real Estate Outlook. In 2006, nearly $307 billion worth of commercial properties was exchanged while $268 billion was sold in 2005 – both yearly totals surpassing the “modest” $150 billion in 2004.
And as they look ahead to the remainder of this year, NAR analysts say tightening credit conditions likely will limit the number of investment deals. Institutional and foreign investors can only take up some of the slack and primarily tend to be interested in properties valued in excess of $5 million. Capitalization rates or “cap rates,” the difference between the cash flow produced by a real estate asset and the original price paid to own it, will slowly begin to rise as prices fall. The era of rapid price escalation may be coming to an end, NAR predicted.
‘A Compelling Story’
The Federal Reserve Board of Boston’s outlook for 2008 found that tighter credit conditions remain in place in New England’s commercial real estate markets. Investors have not returned to the commercial mortgage-backed securities market in significant numbers, the Fed noted. Since some credit sources have disappeared, banks and life insurance companies are picking up more commercial mortgage business.
But their willingness to add commercial mortgages to their balance sheets is limited by portfolio allocation considerations, the Boston Fed noted. Credit tightening continues to have the biggest impact on loans for speculative construction. Sales activity and planned construction have declined in Boston.
Still, the year-end office data demonstrates very little letup in demand while rents increased in every Greater Boston submarket, according to Jone Lang LaSalle, a global real estate services firm with offices in Boston.
In Boston, the vacancy rate fell to 6 percent in December, down from 8.5 percent in December 2006, while average asking rents increased to $54.80 in the fourth quarter, up from $37.31 in 2006.
Cambridge saw office vacancies slip slightly to 7.3 percent last month, down from 8.1 percent the previous December. During the same period, Cambridge asking rents soared to $52.69, up from $32.32 at the close of 2006.
While the suburbs are still seeing double-digit vacany rates in all submarkets with the exception of Route128/Massachusetts Turnpike, average asking rents increased to $23.49 at the close of last year, up from $21.29 in 2006.
Brokers predict that office rents may continue to increase slightly or level off in 2008.
The Greater Boston laboratory market, which consists of 16.4 million square feet of space, has grown by 35 percent since 2002, while the Cambridge lab market has nearly doubled, according to Jones Lang LaSalle researchers. But the increase in supply has failed to keep pace with the demand, and the market has seen its availability rate steadily decline to 14.1 percent, the lowest level recorded in 2002.
The suburban lab market has gained traction, Jones Lang LaSalle found. As a result, availability is at 18 percent after holding steady at 20 percent for the past five years. In Cambridge, the availability rate increased slightly due to 177,000 square feet of new lab space becoming available at 200 Technology Square.
In Boston, the smallest of the three lab markets, availability remained relatively unchanged but rents continued to increase. In the Longwood Medical Area at the Center for Life Science Boston, BioMed Realty Trust is seeking more than $100 per square foot for its upper floors.
As availability shrinks and rents continue to rise in Cambridge and Boston, tenants are migrating to the suburbs in pursuit of more affordable space, Jones Lang LaSalle said. The company also expects steady tenant demand, boosted by growth in the biotechnology and scientific research industries combined with a constrained supply, to keep laboratory landlords in the driver’s seat over the short term.
The performance of the U.S. real estate investment trust market trailed the broader markets in 2007. But investors are bullish on REITs for the new year and insist they offer more value today than they did a year ago when the market was approaching its all-time high, according to the National Association of Real Estate Investment Trusts.
The total return of the nation’s REIT market was down nearly 18 percent for 2007, NAREIT reported, while the index of property-owning REITs fell 15.7 percent for the year. It was the first time since 1999 that either index delivered a negative total return.
In contrast, the S&P 500 index, the most notable of the many indices owned and maintained by New York-based Standard & Poor’s, was up 5.49 percent for the year; the Dow Jones Industrials increased 6.43 percent; the NASDAQ Composite was up 9.81 percent; and the Russell 2000 Index, a stock market index consisting of 2,000 small-cap U.S. stocks, slipped 1.57 percent.
Following seven consecutive years of outperforming the broader equity market, U.S. REIT returns suffered in 2007 as some investors began to reduce their REIT positions early in the year. The downturn continued later in the year as many investors shied away from real estate investments, including REITs, in the wake of illiquidity in the credit markets and the fear that illiquidity could lead the economy into recession, NAREIT wrote in its year-end report.
“As a result of last year’s downturn, though, many analysts believe the U.S. equity REIT industry today is trading at approximately a 15 percent discount to the net asset values of the actual properties in REITs’ portfolios,” Michael Grupe, NAREIT’s executive vice president, said in a prepared statement. “While no one can ever call the bottom of a market with assurance, the discrepancy between REIT share prices and net asset values presents a compelling story for value investors.”
