Regulation, Congestion And Space Constraints: Boston CRE Navigates The New Year
Last year was one of Boston’s best for commercial real estate, but many in brokerage and development offices are worried that local politics are threatening the good times.
The Boston Central Business District’s 7.1% office vacancy rate at the end of 2019 was its lowest this cycle, according to Newmark Knight Frank, far below its long-term average vacancy of 10.7%. The region also continues to see significant life science development, with more than 1M SF of net lab absorption pushing metro Boston’s lab vacancy rate to a historic low of 5%.
Boston has been one of the most active cities in the country during this economic expansion, the longest in U.S. history. Analysts in recent years have said the only potential downfall to Boston’s economy were geopolitical tensions abroad, the trade war or political uncertainty in Washington, but signs now point to a few regulatory threats on the local level.
Boston Mayor Martin Walsh is pushing for an increase to the Inclusionary Development Policy's affordable housing requirement on market-rate projects beyond its current 13% rate. Walsh also signed off on a Boston City Council measure to charge a 2% transfer tax on real estate transactions greater than $2M. The bill, currently before the Massachusetts Legislature for approval, could raise $168M annually for affordable housing, according to the city council.
“If you were looking just strictly at real estate fundamentals in Boston, you’re primed for another good year,” said Crescent Heights Executive Vice President of the Northeast Simon Spira, who is speaking at Bisnow’s Boston 2020 Forecast event Jan. 15. “But if you force too much on the developer side like higher affordable housing rates and transfer taxes, projects become harder to build — especially with construction costs running through the roof.”
The Boston skyline is growing with new office and luxury condo towers, spurring criticism over developments pushing out longtime residents. But developers say they are limited by what investors are willing to pour capital into given the high cost to build in the city.
Construction costs increase between 5% and 7% annually, Spira said. Other developers have said a single residential unit can cost $450K to build.
“Thank God money is still cheap, so you still have margins to squeeze, but at some point, you won’t,” Spira added in reference to low interest rates.
While he doesn’t think the transfer tax or IDP will bring Boston’s building boom to a halt, Spira and other developers caution it could throw the current balance between the public and private sector off if there is too much regulation.
Real estate developers and the Walsh administration share common goals with respect to affordable housing, economic development, transportation, sustainability and neighborhood building, Samuels & Associates Chief Operating Officer and principal Leslie Cohen said. But the two groups need to find a compromise given the cost of construction for both new and adaptive reuse projects.
“We need to work together to find solutions that do not ultimately make it harder to move forward the new development that is a critical part of addressing housing needs, improving transportation infrastructure and advancing great new jobs,” Cohen said.
Despite the potential for increased regulation, Boston’s market fundamentals are strong. Along with low office vacancies, the city’s diverse economy includes strong healthcare and higher education sectors.
But developers continue to harp on issues like congestion, construction costs and space constraints.
Boston has been ranked as one of the worst cities in the country for traffic, so developers have moved ahead on projects close to transit stops. More than 60% of Greater Boston’s 9.6M SF construction pipeline is being built within a five-minute walk of an MBTA station, according to Perry data.
Cohen has been a part of Samuels & Associates' transformation of the Fenway neighborhood. The firm’s next project is 1001 Boylston, an air-rights development over the Mass. Pike and across from the Hynes MBTA station in Back Bay.
Along with developing the mixed-use project, Samuels is responsible for transportation improvements and public amenities like direct access to the Hynes MBTA station and improving the pedestrian experience.
“Developers are very focused on meeting tenant goals for employee experience. This includes transit, building amenities, community building, flexible public work spaces and more,” Cohen said. “Planning for walkability and transit is just as important as planning the exterior and interior design of buildings.”
Closer to downtown, MP Boston is confident in Boston’s future as the city benefits from growth in the technology and life science sectors. But the developer doesn’t see the city’s space constraints going away.
“The limitations on developing in downtown Boston are the complexities in how hard it is to do something,” MP Boston principal Joe Larkin said. “These projects take a long time. From design to development to construction to completion, that can be a four- to five-year cycle.”
MP Boston developed the 680-foot Millennium Tower luxury residential tower, the Ritz-Carlton Towers and Millennium Place in Downtown Crossing and is underway with Winthrop Center, a 691-foot mixed-use tower under construction on what was formerly a city-owned parking garage.
While Boston is known for its high construction costs, lengthy planning and approvals processes and high barrier to entry, MP Boston has managed to beef up its Boston portfolio this cycle.
While he remains bullish on the city, Larkin still isn’t ready to jump the gun on a flood of new projects just because Boston ended 2019 with a bang.
“Today’s data point is only today’s data point,” Larkin said. “Our job is to look over the horizon and determine how is Boston going to be trending. What we’ve always counted on is the current and long-term trend of Boston.”