2016: The Year Boston Clinches Superstar Status
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The amazing rebirth of Boston from a second-tier, provincial city to a top target for global property investors is well underway. At Bisnow’s Boston Forecast 2016 earlier this week, real estate legends and experts told a packed house what the new year will bring.
The crowd filled the Ritz on the Commons. Next year, fundamentals will stay strong. The Dow is hitting historic highs, and Massachusetts unemployment is hovering around 5%. The supply of Class-A offices and luxury residential still will be constrained. For the first time in decades, the city’s population is growing, as The Hub evolves into a more alluring place—especially for Millennials—to live, work and play. Capital is rediscovering the city on the hill and since they’re finding a scarcity of product, they’re driving prices up and cap rates down. More investors are landing here from abroad: China, Norway, Sweden and Canada.
With the scarcity of core assets, investors may shift toward middle market properties, says Boston Realty Advisors founder Jason Weissman, who gave the 2016 economic forecast. Office vacancy rates will keep declining and cap rates will continue to head south by about 50 basis points.
Last year, four out of five deals were by companies in industries that previously were only minor players downtown: life science, pharma and healthcare. Millennials accounted for about 75% of Boston’s population growth, Jason says. Look for office vacancy rates in Boston and Cambridge to drop by 200 bsp and rents to rise. Since 2010 in the popular East Cambridge and Seaport office markets, asking rates have jumped nearly 65%, he tells us. In the severely supply constrained luxury condo sector, the only major projects are Millennium Tower, One Dalton, 50 Liberty and Pier 4 (for which BRA's Advisors Living is the marketing consultant).
Goodwin & Procter partner Ed Glazer (moderator), NB Development managing director Jim Halliday, HYM Investment Gp managing director Tom O'Brien, The Druker Co president Ron Druker and Carpenter & Co CEO Richard Friedman. They're all developing iconic projects. Jim is working on Boston Landing (TDC of about $600M); Tom on the $2B Government Center Garage complex; Richard has the $800M mixed-use complex One Dalton. Ron has 1.3M SF of development approved in one project in Back Bay and another in the South End.
Ed, a partner in Goodwin Procter's Tax Practice and Real Estate Capital Markets Group, has a client list that includes Boston Properties, Archstone, Donahue Schriber Realty Group, Gaming and Leisure Properties and Rockwood Capital.
The 61-story, $800M One Dalton that Richard is developing in Back Bay is key in catapulting Boston into the stellar orbit of New York, Paris and London. One Dalton is delivering ultra-luxury condos (priced $3M to $40M) and the city’s second 5 Star, Four Seasons hotel. There’s so much liquidity in the market that his pre-construction buyers are not asking for mortgages. The live/work/play motif may be sounding a bit worn, but it is a huge factor in bringing people back to downtown Boston and other US cities, he says. The 2016 presidential election will be critical in determining the flow of funds into Boston research and infrastructure.
Boston tops the list for foreign investors because it's safe and stable but also dynamic. A year ago, it took just 24 hours for Citibank to raise $200M of equity from high-net-worth individuals (80% of them in 39 foreign countries) for One Dalton, Richard says.
The nearly $600M Boston Landing is unique: it reflects the determination of one investor, New Balance, to create a new 18/7 neighborhood. In its recently completed HQ building, the glass-clad exterior is modern, while the interior was inspired by the historic mill in Lawrence that New Balance has long used for production. With the high cost of Boston land and construction, it’s a challenge to build mid-market housing but critical for keeping the area’s growth spurt going, says Jim, who’s a leader on the team building the mixed-use project in Brighton. He's looking forward to a dialogue with the city regarding Mayor Walsh’s 2030 Housing goals to build more workforce housing.
The condo market is risky, says Ron, who has 1.3M SF of potential mixed-use development approved in the South End and Back Bay. Any developer who misses the condo market window may face catastrophe. While the historic amount of multifamily development underway has led developers to offer incentives like a period of free rent, rental apartments are a safer, long-term investment, Ron says. The wave of multifamily mixed-use projects downtown is creating value for each individual project and for the neighborhood as a whole. National Development brought a Whole Foods Market into its Ink Block in the South End near Ron’s site. “Thank you,” Ron says.
Neighborhoods undergoing radical change include New Balance’s Boston Landing site that was part of an industrial district. Downtown Crossing, a now hot residential/retail/office neighborhood once co-habitated with the seedy Combat Zone where hotel rooms were rented by the hour. (To watch Jeopardy and Wheel of Fortune back-to-back, we presume.)
Boston and Cambridge (another location that's on fire) saw scant multifamily development from post World War II years through 1992 when rent control was in force, Tom says. Even with the addition of thousands of apartments during the current cycle, demand is still strong and supply constrained.
The vastly increased service from Logan to foreign destinations is another major economic driver.
New York is coming after Boston's life science and tech jobs by supporting industry growth and building a new subway line in Manhattan, Tom says. To keep its edge, Boston must get serious about upgrading the T, not just making it functional. Even the stunningly successful Seaport District is being hamstrung by inadequate rapid transit, he says.
A big thank you to our event sponsors: Boston Realty Advisors and United Services of America. We could not produce events without you!