Capital Markets Firing for all Asset Classes
Intercontinental Real Estate COO/CFO Paul Nasser says it's the best of times to be a seller. And, as the laws of the universe insist, not as much fun to find deals as a buyer. So how did his team manage $2B in acquisitions since ’14? Get the inside scoop from Paul at Bisnow’s Boston Capital Markets event tomorrow, Thursday, Oct. 22, 7:30am, at The Liberty Hotel. Last chance to sign up!
In March, Paul tells us Intercontinental purchased 100 Cambridge St in Government Center for $280M, expecting substantial future rent growth. This summer, the company sold 830 Winter St in Waltham, which Intercontinental renovated and rebranded as a life science building (now 100% leased), for $104.2M to a JV of The Carlyle Group and King Street Properties. Paul’s team bought the 182k SF building for $51.3M in ’05 when it was 35% occupied. The company is experiencing tremendous growth.
A net seller in the past 18 months, it’s harvest time for some Intercontinental funds. Buyers span the spectrum, but the sovereign wealth funds coming to the US from China, Europe and elsewhere are driving up prices. Given their structure as long-term investors, they pay high prices and accept relatively low returns, Paul explains. He’d like to see the Fed raise rates to prevent the commercial property sector from overheating.
Boston, like many major US cities, is experiencing lots of growth. The multifamily sector is “exploding” and The Hub has done an “amazing” job diversifying the economy by bringing in tech and life science, and cultivating its private equity and VC businesses, Paul tells us. Boston's biggest advantage is holding onto its throne as the intellectual capital of the world. Mayor Marty Walsh brings to the party an understanding of how real estate can contribute to the local economy and help elevate various neighborhoods.
For all of its vibrancy, commercial real estate investors and developers are being more restrained than they were a decade ago before the big bust, says Taurus Investment Holdings CEO Peter Merrigan (also an event panelist tomorrow). Back then, companies were doing some pretty exotic maneuvers to keep up yields, he says. Now, sovereign wealth funds may be boosting real estate prices, but they’re also putting a great deal of equity into their deals. Before the 2008 financial crisis, purchases and developments were often highly leveraged.
As a seller, Peter is finding buyer enthusiasm that even he—as a seasoned pro—didn’t expect. Recently, he signed an agreement to sell a seven-acre Walmart-anchored retail center that Taurus is developing in the Tampa area; construction is nearing completion. Peter was surprised at the price it fetched. All buyers, especially investors coming from abroad, like the US interest rate, the yield and stability of the US body politic. In Europe, borrowing costs are much higher than in the US and the migration phenomenon is at a crisis level. The Taurus team: Alana Doran, Jim Derminasian, Kate Pedersen, Elizabeth Lane, Erik Rijnbout, Dmitry Iokovid.
This is the best cycle that Avison Young principal Scott Jamieson (also an event panelist) has ever seen. All asset classes are achieving peak pricing. Investors—increasingly from China and Japan—continue to pour capital into Boston, which proved its mettle as a safe haven by being one of the first US cities to emerge from the Great Recession. Certainly, urban locations are hottest, but capital is going out to Route 128 and even I-495, where big sales used to be tough to close, Scott tells us.
Downtown, markets like the once-sleepy North Station are “going gangbusters” compared to just three years ago, Scott says. With the $16B Big Dig and Third Harbor Tunnel projects completed, the infrastructure has been vastly improved and view corridors opened to the harbor and downtown for the first time in seven decades. Soon Boston Properties will develop a $1B mixed-use tower. At year-end ’14, Scott’s team sold the old 43k SF office building at 151 Merrimac St (80% occupied) for $317/SF (then a submarket record). Three years ago, the ceiling on a sale price was in $200/SF territory; now, it’s $400/SF, Scott says.
In Burlington, once considered a second child to Waltham, 82% of the Class-A office properties have changed hands in the past few years. Vacancy is 7.2%, versus 8.2% for Waltham. This week, Scott’s team put on the market 128 Corporate Center. It’s 100% occupied, but the longtime family ownership has been charging below market rents—$21/SF compared to market rate at $30/SF. It’s an unusual fully leased value-add opportunity.
All the exuberance leaves plenty of unanswered questions that debt panel moderator Amy Fracassini, a shareholder attorney at Davis, Malm & D'Agostine, will dive into with the panelists. Where in the cycle is the Boston market? How is each asset class performing? What is the next hot submarket: East Boston, Chelsea, Revere? What are the terms for underwriting deals, and how are they affecting pricing? Are senior lenders continuing to take the lion’s share of debt? Is there room for mezz products? Get some answers tomorrow, 7:30am, at The Liberty Hotel. Sign up now!