Bisnow's State of the Market II
At Bisnow’s fifth State of the Boston Market event on Wednesday, our 400 guests learned from some of the region’s top developers/investors, that our market is extraordinary, amazing, and extremely competitive. Panelist Taurus Investment Holdings CEO Peter Merrigan (4th from left) says that “extraordinary” prices for commercial property are being fueled by equity investors unafraid of falling cap rates. Taurus is buying and selling here but developing in Europe and in the southwest i.e. Austin, where costs to build are half of those in Boston, job growth is strong and taxes low. Taurus is building residential in New York, also expensive, but where demand is deep.
Normandy partner Justin Krebs (a panelist) says that the “amazing” cap rate compression reflects the ardor among investors to have a stake in Boston. In our expanding downtown, we’re back to ten-day due diligence (distant cousin to the oxymoronic practice of drive-by due diligence), even for good quality B product. Investors unsatisfied with a 5% cap rate, are looking in the more active suburbs. Within Rt 128, from Burlington to Needham, demand and rents are ready to rise and Normandy is close to starting construction of a new 225k SF office. But Justin cautions: don’t go too short; be able to weather market ups and downs.
The dynamic and increasingly popular Seaport is a major mover in the market, says Boston Global Investors CEO John Hynes III (right, with JH IV). This emerging neighborhood where BGI and partner Morgan Stanley are investing $3.5B to develop 6.3M SF Seaport Square, is attracting commercial tenants from outside the city and the region. That’s a first for JH III in his 31 years in commercial real estate, he says. But, John says, the Seaport needs a school and Mayor Walsh has been "receptive and open-minded" about the development of a private international grade school. But for the city to grow and attract new businesses, we need to find ways to develop more lower-cost housing perhaps with some type of public subsidies.
The B product downtown is strong because it’s tough to afford to build new, says Federal Realty Trust Boston prez Don Briggs (right with Sanborn Head’s Stan Sadkowski). As downtown rents rise, inner suburbs like Alewife, Allston, Watertown and Somerville are vibrant while on Rte 128, Waltham and Burlington are starting to heat up. As competition for job growth, Boston can look to places like San Francisco and Austin. A regional approach—with Rte 128 mayors collaborating—might help meet the challenge of housing affordability. Also, it’s time to invest in building world class transportation infrastructure, he says. The 2024 Olympics; a great motivator for investors.
The hot market doesn’t reflect insatiable tenant demand; it’s about capital markets seeking to surpass fixed-income yields, says Intercontinental Real Estate CEO Peter Palandjian (right with CohnReznick principal Nick Ratti, an event sponsor and moderator). Pension funds, which determine the funding behind so much real estate activity, today want to jump from the 1.5% to 3% returns they derive from fixed-income bonds to the more attractive 5% to 5.5% yields they can get from core real estate. Recently, the dynamic that's made quality commercial property a darling asset class for large pension funds has been fueling much of the heated activity. The arrival of more retail and night life is validating the Seaport and suburbs like Burlington where Nordblom is doing the $1B redevelopment of Northwest Park.
Post event, sponsor Vidaris’ Tom Jakab, Jackie Manzer and Alexander Argento tell us that this specialty façade and sustainability consultant is working downtown, in the Seaport and in Cambridge. It’s on the job at Millennium Tower and as the sustainability consultant on 225 Binney St, helped snag LEED Gold certification in the summer. We’d also like to thank another of our great sponsors Qube Global Software.