New office space that will be developed during 2001 includes Hunneman Commercial Co.’s 303 Congress St. in Boston’s Seaport District.
The deodorant commercial warned viewers to never let them see you sweat, and thus far, that appears to be the approach being taken toward the 2001 commercial real estate market. While the sector appeared to hit a serious speed bump at the end of last year, industry practitioners do not seem overly concerned that the difficulties will continue inextricably during the coming months.
The market is still very strong, said Jones Lang LaSalle Senior Vice President Elizabeth Carrillo Thomas. We’re not seeing the same euphoria we did six months ago, but the fundamentals are still great and we are operating from a very low vacancy rate.
Thomas, who specializes in investment sales, said one factor to look at this year is whether pension funds will cut back on their interest in office buildings. After having been active players in that arena in recent years, pension fund operators may feel they are overexposed, Thomas said, while a dampening of activity could also make suburban investments less desirable. At this point, Thomas said the matter is in limbo, with pension fund advisors only now beginning to outline their target investments.
We’re talking to advisors now to determine what their appetite is going to be, Thomas said.
The peripatetic stock market could slow down commercial acquisitions, according to CB Richard Ellis/Whittier Partners principal Gary W. Lemire, who noted that most pension funds tie their real estate investments to a percentage of their portfolio. If stocks go down, that could have a corresponding impact on real estate holdings, he said.
Overall, Lemire said he believes 2001 will start out slow because right now, people are looking for bad news versus good news.
What we need to be careful of is an overeaction of the negative, he said. The sharp increase in rental rates over the summer made the problems in the fourth quarter appear more acute than they really were, Lemire maintains, adding that he believes the demand constraints of the 1990s will blunt any economic slowdown.
There has been so much discipline on the part of the lenders that nothing has really gotten out of hand, he said. Even if we were to go into a recession, this market appears very solid … In retrospect, I think it will turn out to be a pretty good year.
Last week’s drop in interest rates by one-half point should also help kick 2001 off in the right direction, Lemire added.
Both Thomas and Lemire said they believe the interest in multifamily rental properties will continue to attract investor interest in 2001. Concurring with that outlook is CB/Whittier Vice President Simon Butler, who handled several such deals in 2000.
This is a product type for which there is a great deal of demand, Butler said. The issue is finding the product to sustain the demand.
With much of the Bay State’s multifamily stock developed in the 1970s, Class A buildings are especially difficult to find, Butler said. The promising aspect of that dilemma is that those properties on the market have yielded solid pricing, as witnessed in the sale of the Northgate Heights apartment complex in Waltham. The sale, which CB/Whittier brokered, fetched SSR Realty Advisors $27.7 million, or about $135,000 per unit. That compares to just $105,000 per unit paid by SSR two years ago, and is considered a record for Class B suburban apartments, Butler said.
Equity Residential, Archstone Communities Trust and the RREEF Funds have been among the most aggressive buyers of multifamily properties, Butler said, reflecting one of the few areas that real estate investment trusts have been active in terms of investment deals. After being battered for much of 1998 and 1999, REITs remained on the investment sidelines in 2000, and the current debate appears to be whether they will remain spectators this year.
‘Remarkably Tight’
Lemire said he believes improved performance among REITs in recent months, fueled partly by people seeking save haven from the stock market, could lead to more acquisitions from that class in 2001. Others are not so sure, however, including Frederick Carr, a REIT analyst and principal with the Penobscot Group of Cambridge.
While acknowledging that REITs are on the upswing and should remain solid in 2001, Carr said the notion of manifest destiny for a REIT no longer holds sway. That, plus the lack of real estate opportunities significantly below replacement cost, should keep REITs from flexing their increased capital flow significantly, according to Carr.
The notion that per-share cash flow can grow by growing gross assets is dead, he said. There is no longer a view that being bigger is necessarily better.
In that same vein, Carr said he does not think the consolidation movement among REITs will be advanced greatly in 2001. Only unions that offer substantial benefits for both sides will be consummated, he said. Development activity by REITs will be strong again in 2001, Carr predicted, with Boston Properties among the most active in that area.
Carr acknowledged that the business community is on edge entering the year, with the prospect of a recession a cloud on everybody’s horizon. Nonetheless, the Penobscot Group’s outlook is upbeat for REITs, with rental rates sustainable and no glut of supply preparing to hit the streets.
The markets aren’t terribly overbuilt right now, and Boston in particular, he said. It’s remarkably tight.
Similar sentiment is being expressed in the leasing sector. Broker James J. Adams of Insignia/ESG said he believes the economic slowdown will ultimately benefit the region, preventing tenants from paying so much for rents that they cannot compete. Although Adams said he believes rental rates will remain among the best in the country, the dropoff in demand should curb the feeding frenzy mentality that had dominated the market last summer.
I look at 2001 as the year that the dust settles, said Adams. I see a more rational approach as firms look around for space.
The big change, he said, will be the retreat of technology companies, which accounted for 9 percent of the city’s 4 million square feet of net absorption in 2000, according to Insignia/ESG. With the pressure off, some firms which had begun their search years in advance of their lease terminations may back off, said Adams, who anticipated net absorption will drop back to between 400,000 and 500,000 square feet this year.
Landlords most likely to be hit by the correction will be those in the Class B and C office markets, with those buildings the most popular targets last year by dot-com and other technology providers. Although he is anticipating a 10 percent decline in rents, Adams said much of that will be weighted toward the older properties, largely due to the run-up in rates seen there in 2000.
I think it will be a little bit normal, but Boston’s pricing in the A market will continue to be the highest in the country, he said. There is still a good level of demand in the core-quality properties.
2001 will be a more balanced year in terms of regular deal flow and process, agreed Codman Co. principal Ted Wheatley. The urgency factor is not there like it was.
Given that, the prospects for office space underway is somewhat in question, with several new projects available as alternatives. In Boston’s Fort Point Channel district, for example, both Hunneman Commercial Co., with 303 Congress St., and the Boston Wharf Co. are underway with new office projects, while across the channel, Modern Continental Enterprises is pushing forward with the renovation of 470 Atlantic Ave. In the meantime, Gale & Wentworth is trying to wrap up its mega-deal with State Street Global Advisors for One Lincoln St., while new space is also on its way in North Station, Government Center and the Back Bay.
