MARKET HIGHLIGHT, MAY 2008

NEW ENGLAND MARKET HIGHLIGHTS

Boston Multifamily Market

One of the silver linings in today’s stormy real estate market is multifamily investing. Despite the fallout in the credit market from the sub-prime debacle, and an oversupply of condo projects, multifamily assets are still high on investors’ lists.

The inherent counter-recessionary nature of apartments in combination with tighter lending standards for single family home buyers, has boosted occupancy levels and consequently the appeal of this asset class. Couple that with Boston’s high “barrier-to-entry” market, with its arduous entitlement process and hard-to-find developable sites, pricing on Class-A assets remains healthy as trades are still occurring in the 5 to 6 percent cap rate range.

Granted there has been some pressure on apartment investing, with financing options fewer as “CMBS land” is on its back, there are still reasonable options (Fannie Mae, Freddie Mac, portfolio lenders) available to borrowers, albeit at tighter underwriting standards and at generally lower leverage levels. 

Development deals are active but at a slower pace than in 2007, with Avalon and Archstone-Smith leading the REIT charge along with local established private developers. Private developers will need to build these projects to a higher return in order to satisfy the stress underwriting that joint venture equity investors and lenders will apply.

The majority of these developments are occurring in established suburban communities along Route 128 that have infrastructure, retail and amenities already in place. Development is also occurring in urban in-fill areas; generally with an affordable component in order to attract cheaper capital via tax credits and bond financing.

This segment however is not immune from the credit crisis, due to the huge losses at investment banks that have caused weak demand on the tax credit syndication side. Tax credit pricing has dropped from 90 to 95 cents on the dollar to 80 to 85 cents. Developers need to fill the gap with other soft debt or equity.

Market vacancies are relatively sticky in the 5 percent range and rent appreciation is expected to remain in the 3 percent range. The tenuous mess of the current credit markets, has caused a downward pressure on land values. Land owners who’ve held out and missed the peak sale opportunities of a year ago or more, will need to take their medicine and accept what the market will bear or re-up and sit on the side-lines until the capital markets show some stability. 

Finally, unabsorbed condo projects will compete with rental stock, albeit, generally at the higher end of the market, making continued rent growth and absorption at the upper end of the market somewhat of a wild card.

Expect transaction volume and new development activity in 2008 to pale in comparison to the recent past. Deals will get done, but they will have to meet a stiffer litmus test, which probably is not a bad thing after all.

— Dennis Walsh is a senior director with Tremont Realty Capital in Boston.

Boston Industrial Market

The current status of the economy has managed to affect all product types and markets; however, given population of the Northeast United States and Boston’s geographic location within the region, in conjunction with the major linkages for road, rail, and shipping traffic, the Boston industrial marketplace still experiences a relatively healthy demand for existing space and new product. 

The industrial market in 2007 ended on an up note, showing positive absorption for the third straight year with a net of roughly 400,000 square feet, bringing the vacancy rate to 13.8 percent.  That momentum has carried over into the first quarter with a host of new leases signed in the 20,000- to 50,000-square-foot range and larger users continue to scout the market awaiting opportunity.  These larger tenants will be slow to make significant commitments given the weak economy, forcing the smaller users to drive the leasing market.  With limited large users weighing in, warehouse rents should remain stable, ranging from the mid $5 per square foot in the 495/North submarket to over $12 per square foot in the inner submarkets, with a weighted average of near $6.00 per square foot on a NNN basis.

While the demand from users has remained stable, the investment market has been more affected by the shakeup in debt supply.  CMBS loans, which comprised the vast majority of debt vehicles placed over the past several years were nearly dormant for the second half of 2007 and into 2008.  New CMBS issuance is down from $61.2B in first quarter 2007 to a mere $5.1B in first quarter 2008.  This has added as a catalyst towards the correction in pricing for all the four major product types, however, none as drastic as the industrial sector.  According to Real Capital Analytics national report, cap rates for industrial product are up 60bps since last September.  This rapid alteration in price expectations has caused a disconnect between buyers and sellers.  Closed industrial transactions in the Boston area average $75 per square foot, while offered product is still averaging $110 per square foot. 

Recent actions by the Fed to increase liquidity combined with lowering the benchmark Fed funds rate by 300 basis points since September has finally showed some signs of alleviating the lenders constraints.  While loan issuance is sure to increase, underwriting standards have tightened, lowering the appeal of older facilities in need of rehab, which explains the appeal of the large flex and R/D market of Boston.  Beyond the generally newer facilities, conversion of flex to office allows upside potential over the short- and medium-term.

Overall, the Boston industrial market will continue to feel the trickle down effect of a slowing economy and continued corporate pull backs.  While large moves aren’t expected, an overall slowdown across all product types could provide unique opportunities for landlords and owner/users in the near term, as planned projects for office or residential have been put on hold, opening the door for redevelopment into industrial product.

— Patrick Nutt is an associate with Calkain Realty Advisors, Inc.

New Hampshire Multifamily Market

Little new product and virtually no new growth have led to a rather flat multifamily market in New Hampshire in the last year. Many projects that had been slated for development have been put on the back burner due to the high cost of development and the soft rental market. In addition, barriers to entry for developers are very tough, 2 to 4 years for permitting, which will always constrain the supply.

However, the future is looking bright. The market is on the verge of starting to take off once again, which is attributable to the credit squeeze and various sub-prime issues. Many people are having a difficult time getting approved to purchase a home, so renting is becoming more popular. Since New Hampshire leads New England in terms of population growth, this tends to be a strong indicator of housing demand. Class A vacancy rates range from 3 percent to 12 percent, a median of around 6 percent. Class B multifamily product is also averaging an approximately 6 percent vacancy rate. The full spectrum of rental rates for a two-bedroom unit ranges anywhere from approximately $700 per month for a Class C property up to around $2,000 per month for Class A product.

Many area developers are converting former mills in multifamily housing due to the high cost of construction. For example, two large mills located in Manchester and Nashua are in the permitting phase for conversion to apartments, approximately 180 units and 200 units, respectively. These properties will feature high ceilings and brick, which is a typical amenity of most mill conversion projects.

The majority of the new development is taking place in Southern New Hampshire due to the steady population growth and job growth that is occurring there. As demand for rental product increases in New Hampshire, the majority of the projects being developed are high-end, Class A product. Historically, New Hampshire has been known to have mostly older rental housing stock, so there is certainly a demand for modernized units.

The Residences at Manchester Place in Manchester is the first luxury apartment complex to be developed in the city’s downtown area. The 204-unit apartment complex is a joint venture development between Main Street Development Group and Silvestri Development Corporation. Situated at the corner of Bridge and Elm streets at 1220 Elm Street, The Residences are located in the heart of Manchester’s business and shopping district, within a few minutes walk to Manchester’s high rise office buildings, The Verizon Wireless Center, The Palace Theatre and a host of Manchester’s finest restaurants and retail establishments. As Manchester’s first Class A luxury rental property, the project is part of the overall resurgence going on in Downtown Manchester. The development will also feature a 306-space garage and 5,400 square feet of retail.

In addition, The Trammell Crow Company, which is a new developer to the New Hampshire marketplace, is currently permitting apartments in Lebanon. In the next several years, more development is expected to take place within the I-93 corridor (Salem to Concord), the Route 3 corridor (from the Massachusetts border) and the I-95 corridor (along the seacoast). These corridors will most likely experience the most development and activity in the multifamily market due to excellent highway access.

The New Hampshire multifamily market has a bright future because it is not overdeveloped, there is a steady influx of new people moving to the area and new jobs are being created. The state’s access to viable highway systems, the Manchester Airport and its proximity to Boston also make it a robust market for multifamily and all sectors of commercial real estate. In addition, there is an excellent quality of life in New Hampshire and of course, no broad-based taxes, which makes the market quite appealing.

— Terence M. Scott is a senior vice president of Apartment Realty Advisors – New England

Boston Retail Market

Institutions Actively Seek Retail Property Opportunities in Boston

The outlook for Boston’s retail market remains bright, supported by healthy development activity, strong leasing trends and an active investment market. The metro’s retail supply is expanding, as redevelopment of older shopping centers and malls is being generated by consumer and retailer demand for a unique live, work, play experience. These revitalization efforts are transforming the area’s outdated shopping destinations such as the Natick Mall into mixed-use lifestyle centers that are attracting top retailers including Neiman Marcus and Gucci. New retail construction is expected to increase inventory more than 1 percent by year-end, causing a short-term uptick in the metrowide vacancy rate, which has remained essentially unchanged during the past 5 years. With vacancy fairly stable and demand healthy, owners will be able to implement steady rent increases again in 2008. Continued employment growth will generate demand, and retail sales are expected to advance at a slower pace than last year, following the national trend.

By the numbers, Boston employers are expected to increase payrolls 1.1 percent in 2008 with the addition of 25,100 positions. Last year, 26,700 new jobs were created. Retail development is picking up in Boston, and area builders are projected to bring 2.1 million square feet online by year end, up from the 1.9 million square feet delivered in 2007. New construction will modestly outpace absorption this year. Retail vacancy is forecast to inch up 20 basis points to 5.3 percent in 2008 after shedding 20 basis points last year. Rents continue to climb at a measured pace. Asking rents are expected to advance 3.3 percent to $22.28 per square foot this year, while effective rents will gain 3.2 percent to $20.66 per square foot.

Boston’s retail investment market remains strong, and competition among investors will keep transaction velocity at healthy levels. Local investors still comprise the majority of sellers, while institutional buyers are playing a larger role as they seek to expand holdings within Boston’s stable retail market. Buying activity has compressed cap rates into the low-7 percent range, down nearly 100 basis points over the past year, with rates likely to stabilize going forward as a result of more conservative underwriting. Investment activity continues to focus primarily on stable assets near the city center, where competition remains healthy and consumer demand is elevated. Buyers seeking value-add plays may consider investments near redevelopment and mixed-use projects such as Natick Collection and Seaport Square, particularly in the metro’s vibrant urban core.

Investment opportunities persist for redevelopment efforts in Boston’s urban core. Due to high barriers to entry, upside potential exists in or around assets that have been repositioned to capitalize on the metro’s steady retail demand.

— Gary R. Lucas is a senior vice president and managing director of Marcus & Millichap Real Estate Investment Services. He is also the regional manager of the firm’s Boston office.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.