falling dollar bills from money tree

As the year 2017 comes to a close, the industry collectively is looking forward to 2018 and wondering what the future holds. The good news for everybody is that 2018 is going to look a lot like 2017.

The levels of “dry powder” in the market is at all-time highs and up 70 percent from 2007. This represents the inflows into real estate funds but also the measured approach managers are taking to deploy the capital. So far acquisition teams have held to their underwriting criteria and it will be interesting to see if those standards loosen up to win deals in 2018.

Lenders Are Open For Business

Owners of commercial real estate in Boston are blessed with one of the strongest banking markets in the entire country. Due to health discipline and robust deposits, banks will be very competitive in 2018. As lenders seek yield with a preference for shorter term, floating-rate bridge deals now have multiple lender types competing (banks, debt funds and some life companies).

This is the deepest part of the market. Construction lending will make a comeback in 2018 after a slight pullback in 2017 as loan payoffs need to be redeployed. Life insurance companies continue to increase debt allocations and offer the best spreads and structures on stabilized, low leverage deals. Alternatively, CMBS remain the best option for long-term, full-leverage loans and can provide liquidity in secondary New England markets. In summary, if you have a deal the lenders will follow.

Supply-Constrained Market

If there is a gripe to be had by the commercial real estate industry, it would be that there are not enough suitable transactions for both debt and equity investors. Many recent sale transactions have resulted in long-term holders controlling an ever-increasing share of the market. Construction is down from the 2012-2015 levels. At the same time, sellers today are wrestling with the idea of booking a profit and then having to find a reinvestment opportunity. Both debt and equity investors will need to look a little harder to find deals that fit for them.

Global Capital

As Boston’s prominence on the global stage has increased, so too has the volume of global capital finding its way into the region’s commercial real estate. Global investors are familiar with Boston due to its position as a true gateway market, as well as its educational and medical institutions. With familiarity comes trust. Global capital will continue to play an outsized role, due to the United States’ political stability, economic outlook and stable currency. Look for Asia, and Japan in particular, to be a driving force.

Blurring The Lines Between Urban And Suburban

As yields on urban assets remain thin, investors seeking yield naturally look outside of the central business district. Boston’s inner suburban submarkets have emerged as a favored destination for capital – a trend that is only likely to strengthen. Markets like Jamaica Plain, Brighton, Watertown, Somerville, Medford and Malden have become legitimate value alternatives to downtown by virtue of their in-fill locations, access to mass transit and walkable and highly amenitized environments.

2018, A Lot Like 2017

Due to Boston’s strong market fundamentals and key drivers (education, health care, life sciences, finance and technology), 2018 is likely to be another terrific year for the commercial real estate sector. While the pace and volume of large transactions is likely to be down from the peak of 2015, the market will remain highly liquid and attractive to investors across the entire risk spectrum. As the Boston market continues to draw tenants and residents to the region, investors will be able to acquire newly built or renovated product with durable income. All in all, 2018 is very likely to have the same feel as 2017 – which isn’t a bad thing at all.

Ben Sayles is a senior director and Robert Butler is an associate at HFF in Boston.