Michael Hoban
As we enter the second quarter of 2016, one of the lingering questions for those with a vested interest in the commercial real estate industry has been, “Where are we in this cycle?”
According to a panel of experts assembled for the Emerging Trends in Real Estate Forum that ULI Boston/New England recently held, it would appear that this cycle – which has resulted in U.S. commercial property prices reaching all-time highs, unprecedented levels of foreign investment and a boom in commercial property construction – still has room to run.
That prediction was made by keynote speaker Michael Van Konynenburg, president of Eastdil Secured, the real estate investment banking services arm of Wells Fargo & Co. Van Konynenburg’s comforting prognostication was preceded by a detailed analysis of the capital markets, which – despite a high degree of volatility early in the year which included sharp declines in oil prices and the overseas equity markets (both of which have rebounded significantly since mid-February) – laid the groundwork for his optimistic outlook. Van Konynenburg’s presentation corroborated and built upon the Emerging Trends in Real Estate 2016 report, co-published last year by PwC US and the Urban Land Institute (ULI).
The fundamentals remain strong, as economic indicators in the U.S. continue to be overwhelmingly positive, with the official unemployment rate at 4.9 percent, the addition of 2.7 million jobs in the last 12 months, 10-year treasuries remaining below 2 percent for much of 2016, and the deficit at its lowest point ($439 billion) in seven years. The improving employment numbers have resulted in an increase in office rents and absorption, while vacancies for multifamily properties have decreased with a corresponding increase in rent growth.
And although there are some reasons for concern (slowing of growth in China, the possibility of a recession), Van Konynenburg stated that the factors that generally precede an end to a cycle – oversupply, over-leverage or a banking or financial services crisis – aren’t currently present. And although there is always the possibility of a material recession, the current market indicators do not point in that direction.
Foreign investment in the U.S. also remains strong, with over $100 billion in offshore capital placed since January of 2012. Asia ($35 billion) and Canada ($26 billion) remain the largest investors, followed by “Other Europe” ($17 billion), the Middle East ($11 billion) and Germany ($10 billion). Boston remains the third favorite target of foreign capital, with over $9 billion invested between 2013-2015, trailing only behind Manhattan ($44.1 billion) and Los Angeles ($11.7 billion).
Panelist Scott Brown, global president and CEO of Cornerstone Real Estate Advisers, speculated that the influx of offshore capital in the U.S. may be slowed if the dollar continues to get stronger, but Van Konynenburg reported that his international clients remain bullish, especially for the Boston assets, because of the familiarity that many have with the market through experiences with the region’s educational institutions.
What About Boston?
Brian Kavoogian, founder and president of Charles River Realty Investors (CCRI), provided insight into the Boston market for the forum and reported that yield in the office market in Boston is becoming more difficult to achieve. Construction costs are among the factors making ground up development prohibitively expensive, and current pricing for assets often preclude value-add acquisitions, although he conceded that his firm missed such opportunities earlier in the cycle.
CCRI, which typically operates within a 25-mile radius of the city in conjunction with operating partner National Development, has not made an investment in office within the city of Boston since 2011, and has sold all office assets in Boston Proper.
CCRI and ND have instead focused their Boston development on multifamily, developing Ink Block, the successful mixed-use (472 residential units and retail) project in the South End, and have also turned to the suburbs seeking yield, developing a handful of transit-oriented development residential projects in Medford, Newton and Cambridge. The firms have also created value by developing some of Greater Boston’s highest profile suburban projects in recent years, including massive mixed-use, retail-driven projects University Station in Westwood and Market Street Lynnfield. CCRI and ND also created value by transforming the New England Executive Park, an aging office park built in the ’70s into The District in Burlington, by upgrading the buildings and creating a walkable urban-style campus that is enhanced by a lively mix of retail and restaurants.
While every real estate cycle eventually comes to an end, it doesn’t appear that 2016 will be the year for this current cycle.
