Suburbs: the Right Stuff for Some
Some suburban and outer core markets are all systems go for investors, owners, and developers, we heard at Bisnow’s Future of the Suburbs event yesterday. But many face challenges: the scarcity of affordable housing and transportation infrastructure that needs upgrading. (You could have the perfect location, it doesn't matter if people have a hard time getting there, just ask North Dakota.)
Vacancy rates well below 10% in certain locations and cap rates falling into 4% territory, helped draw a crowd of 300 to the Quincy Links Golf Club to hear our panelists: Paradigm Capital Advisors CIO Steve Allison, Campanelli Partner Steve Murphy, The Davis Cos Managing Director Quentin Reynolds, Cabot, Cabot & Forbes CEO Jay Doherty, The Noannet Group prez Jordan Warshaw and Boston Realty Advisors Partner Chris Sower. Our moderator was DLA Piper partner John Rattigan who also was an event sponsor.
A trio of mayors gave opening remarks: Quincy’s Thomas Koch, Waltham’s Jeanette McCarthy and Marlborough’s Arthur Vigeant. In the host city, residential is hot with nearly 1,400 units in the pipeline and commercial real estate is coming back; Campanelli just bought a third office building in North Quincy. A multifamily building in the center assessed at $16M recently sold for $37M. For the mega project in the city center, there won't be one developer but several are likely to invest while the infrastructure work and planning proceeds. In Waltham, the Class-A office vacancy rate is 7.7%,and developers are building more retail and restaurants. Last year, Marlborough issued more than 370 commercial building permits for $100M in new construction; twice as much as in 2012.
Steve Allison, who has holdings elsewhere in the US, says Boston ‘burbs are doing really, really well because of the region’s job growth. Yes, traffic is a problem but that’s because the economy is strong. Paradigm (an event sponsor) recently bought Concord Farms for $50/SF and can now invest heavily in TI and adding amenities that will attract tenants. Historically, Boston and Cambridge prices and rents are higher, but suburbs and outer core locations have more spacious housing and good schools.
Steve Murphy, who is closing on a new North Quincy acquisition today, says Campanelli’s suburban office buildings are doing very well. The driver is young companies with solid balance sheets that are careful to expand into only as much space as they need. To catch tenants’ eyes, this landlord is hiring top ‘o the line architects i.e. Margulies Perruzzi. In Heritage Landing, (Quincy) they’ve gutted space and on the very rentable ground floor window line built a fitness center, Sebastian's cafe and a conference center with 24/7 access. The aim: create vitality, Steve says. He hopes that offices owned by Campanelli (an event sponsor) will help attract more retail and restaurants to give people “a reason to walk around.”
While office fundamentals are strong, suburban market performance is uneven, Quentin says. At Burlington Corporate Center, which The Davis Cos bought last December, rents are above pro forma and leasing is strong. It illustrates that there’s “deep demand” for high quality product in the best locations, with a full amenity base and efficient floor plates. But without that, it gets difficult to lease, he tells us. The long term challenge for our region: find a formula for producing workforce housing so we aren’t forcing our talented workers to leave for other cities.
Back in the day, smart young companies were born around M.I.T. As they began to produce, they moved to the ‘burbs. But now, Jay says, the innovation economy has shifted to Cambridge and the Seaport. Rents and values that once were in parity are now far apart. An investor can buy on Rt 128 South for $50/SF vs $1,100/SF in the city. No longer are skilled employees willing to follow the company that moves the office to a suburb near the boss’s house. To have a more vigorous Rt 128, he says, we need to dramatically upgrade the transportation infrastructure.
Where the office market is flourishing, residential property is also burgeoning, Jordan tells us. Of the top 20 markets in the region for the growth of single family home prices, 8 are in Boston, he says. The suburbs on the list have walkable centers and access to commuter rail or the T. The 'burbs may not be as popular as they were, but those with quality of life amenities still work for Millennials who can’t afford the big city or are concerned about schools for their kids, and empty nesters who want to stay in communities where they have roots. The success of communities on the MBTA’s Red Line and commuter rail illustrates how critical transportation is for both residential and commercial property markets to thrive.
The suburban multifamily investment sales market is still gaining steam, says Chris of Boston Realty Advisors, an event sponsor. Cap rates that were 5.50% 12 months ago are now dropping to 4.75% and may even dip into the 3% range, he tells us. Institutional trades—often all cash—focus on assets on the Red Line or with good Rt 128 access. Of the new multifamily supply, 70% is inside Rt 128 and 90% is apartments. The T-stop being built at New Balance’s Boston Landing will bring in a new generation of housing, retail and offices.
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