MARKET HIGHLIGHT, NOVEMBER 2007
BOSTON MARKET HIGHLIGHTS
Boston Office Market
BOSTON OFFICE OWNERS, DEVELOPERS IN THE SWEET SPOT
The fundamentals in Boston’s office market are terrific. Rents have spiked, vacancies are falling, demand is high and new projects are commonplace. In the CBD alone, approximately 7 million square feet of high-rise office space will be delivered by 2010.
Why the rush? Some credit it to an infusion of investment capital — to the tune of several hundred million dollars — into the biotech sector, which in turn is funding expansions and new builds. But because most of this activity is happening in Cambridge and its nearby suburbs, it doesn’t account for the downtown surge.
Many link the downtown boom to the entrance of private equity groups who have aggressively pushed up rents. The arrival of companies like The Blackstone Group — who recently acquired 11-million-plus square feet of Boston office space from Equity Office Properties — have helped grow rents by as much as 20 percent to 30 percent this year, to an average $60 per square foot and as high as a reported $80 to $90 per square foot. Combined with vacancy rates that are at a 6-year low of less than 10 percent, developers have the financial platform they need to build.
The latest downtown development announcements include Lincoln Property Company’s 200,000-square-foot Two Financial Square, Boston Properties’ 500,000-square-foot Russia Wharf project, and 500,000 square feet of office space within Fallon Company’s 1.2-million-square-foot mixed-use project on Fan Pier. Other planned downtown projects include Gale International’s 500,000-square-foot One Franklin redevelopment deal and its 1.5 million-square-foot Seaport Square mixed-use property, Transnational Group’s 111 Federal Street super-high-rise, and the 1.5-million-square-foot South Station mixed-use project by Hines and TUDC, a subsidiary of Tufts University.
Boston’s suburbs also represent well, absorbing 1 million square feet of office space last year. However, suburban vacancy is at a higher 15 percent to 20 percent and rents range in the mid $20s per square foot. What is common between both submarkets is the demand to own. In the last 12 months, 188 properties sold at an average of approximately $300 per square foot and an average cap rate of approximately 6 percent, an added bonus to already attractive rents.
While there will surely come a time when the private equity players will no longer be able to push rents and tenants are again on the same footing as landlords, today’s level of construction and deal transactions are clear signs that Boston’s office owners and developers — for now — have found a sweet spot.
— Robert Miller is the managing director for Sperry Van Ness in Boston.
Boston Multifamily Market
Where have all the cranes gone? The fallout in the credit market prompted by the sub-prime debacle, coupled with an oversupply of condo projects, has resulted in very few new multifamily projects making it off the drawing board; even despite sticky vacancies in the 5 percent range and a steady unemployment rate at 4.5 percent. Historically, many apartment projects have been constrained by high construction costs, high land costs, and thin development yields, which create the drive to build condos.
Are there signs of more apartment starts on the horizon? Rent appreciation has helped as many submarkets are experiencing 3 percent to 5 percent growth. Unabsorbed condo projects, however, 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 rental market somewhat of a wild card. Both Harborview in the Charlestown Navy Yard and Longwood Towers in Brookline have recently announced their plans to convert their originally planned condo units into rentals. The cost structure for these projects is likely to be higher than what would have been incurred if they had originally been designed as rentals, i.e. acquisition cost and/or construction cost (i.e., hardwood floors, granite countertops, etc.). The real profit making opportunity on these projects will be deferred until later. On a positive note, once the condo market returns, these units should be ready for conversion with little need for significant improvements.
On the construction-side, with the trail-off of “Big Dig” construction and leveling of institutional work, there has been evidence of some relief in sub-contractor bid premiums. This too should help projects move off the drawing board. Land owners, historically are the last to recognize the cooling of values. This class has the philosophy, “when one product type falls out of favor, there’s always an alternative use: retail, biotech, etc.” It is interesting how the latest use usually surfaces as the new highest/best use! Two Financial Center’s decision to move from residential to an office tower is a good case in point.
What can we take away from this? As with stocks and bonds, real estate investment money chases yield opportunities. To the extent one product type falls out of favor, it becomes overlooked until it gets back to a desirable yield. The multi-family development projects that will be ale to make the jump from the planning phase to the construction phase will be the projects that hit an acceptable yield level, generally 100 to 150 basis points higher than what a cap rate would be and are located in in-fill locations. Given the recent drop in interest rates, as well as, the momentum in rents, we may start to see more apartments on the rise.
— Dennis Walsh is senior director at Tremont Realty Capital in Boston.
Boston Biotech Market
Developers and owners of biotechnology research-focused (laboratory) real estate in greater Boston have enjoyed a remarkably consistent growth in demand for their space over the past decade. Biotechnology research will enter its fifth decade in Massachusetts in 2010, though the growth and scale of the industry over the past 10 years has been particularly notable.
Developers have responded by filling in a much needed demand for increased inventory. In fact, with the completion of the Center for Life Sciences Boston and Cambridge’s 200 Technology Square and 301 Binney Street, the 15 million square feet of existing laboratory space in greater Boston will be more than twice the 7.2 million square feet that existed in first quarter 1998. East Cambridge, the birthplace of the local industry and an internationally recognized hub of biotech research activity, will have grown from a 1.2 million-square-foot submarket into a 4 million-square-foot submarket.
The biotechnology industry has morphed from a small number of mid-sized players into a dynamic marketplace of diverse competencies and a full array of business model types. A tight geographic concentration of the industry in East Cambridge remains the regional epicenter, though laboratory space exists in a full variety of Cambridge, Boston and suburban settings.
As mentioned above, the amount of laboratory space in existence has expanded dramatically. The demand for space, however, despite all these changes, has averaged 178,000 square feet per quarter over the past 38 quarters, when omitting a three quarter correction in 2002/2003. While the trend has been extremely constant, it is also interesting to quantify the limited nature of this correction. There was a mere three quarters when 916,000 square feet of biotech space was vacated, compared to the correction in the office market — 11 consecutive quarters of negative absorption during which 14.6 million square feet was vacated. Additionally, the number of quarters of positive absorption of laboratory space during the past 38 quarters is 31, far outpacing the number experienced during the same period in the office market — 22.
As the interdependence between the greater Boston economy and biotechnology research grows, so does the imperative to identify the correct geographic areas for biotech development. With the highly desirable geographic clusters of East Cambridge and Longwood near its full development potential, Cambridge’s NorthPoint, Boston’s Seaport District, West Cambridge and suburban locations will emerge as the likely locations for the majority of development as space is depleted, at its current pace, some time in 2010.
— Brendan Carroll is the vice president of research for Richards Barry Joyce & Partners in Boston.
©2007 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.