News
Everyone Craves Boston
September 25, 2012
| Wow. 650 people joined us at Bisnow’s 3rd Boston State of the Market late last week. And after hearing owners and investors gush about the vitality of our market, we have to ask, does anyone have an extra copy of Rosetta Stone? Investors from around the world (and our own country) love Boston. | |
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| The panelists spanned the political spectrum yet agreed that many Boston-area office markets are stabilizing and some are trending up (Seaport, Back Bay, and East Cambridge) with a pullback in concessions. Unfortunately, it's been slow going raising rents. Nevertheless, office cap rates have compressed to below-market rate in some neighborhoods like the Back Bay. As far as the hotel market, while Boston long has been among the Top 5 US markets, its resilience during the recession has helped RevPAR rise in double digits in recent years. | |
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| We gave Panel 1 a huge speaker, in case any wanted to rap about the market. Alas, they all chose a more formal presentation: New Boston Fund chairman Jim Rappaport, Oxford Capital CEO John Rutledge, Normandy Real Estate Partners principal Justin Krebs, moderator and Reznick Group principal John Mackey, and The Davis Cos CEO Jonathan Davis. All panelists have properties in Boston and say our market is especially strong. Four reasons it wasn’t hurt badly during the recession: 1) It has some of the highest barriers to entry; 2) no over-building; 3) low unemployment; 4) a regional economy poised atop a rock solid foundation of enduring institutions immersed in education, healthcare, and technology. | |
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| Justin, here with attorneys Henry and Andrew Kara during the pre-game schmooze, says that the Millennials (aka Gen Y) are driving new preferences in the use of office space, which guides how existing properties are renovated. Since the younger generation prefers open, collaborative spaces rather than traditional enclosed offices second and third generation spaces often require extensive renovations. While uncertainty still pervades, Justin expects that to lift in a year or two. Companies have “historic” levels of capital that will be spent on CRE, which is a small expense compared to attracting/retaining employees. A “ton of capital” is searching Boston for core deals, but is more scarce for riskier value-add transactions. | |
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| Jim Rappaport, whose New Boston Fund has closed on $3.5B in transactions in the past 15 years, has a few worries. He’s concerned that the pension funds investing in CRE won’t realize returns large enough to meet their future obligations. As we face the fiscal cliff early next year, when sharp cuts in the federal spending may go into effect, he says that Massachusetts could face a steep tax hike while Virginia and Connecticut may be eviscerated by cuts in military contracts. One day, meanwhile, the feds will stop printing money and interest rates will rise, bringing down the curtain on an era of low cost money and perhaps reintroducing inflation. | |
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| Jon, who portrayed himself as a liberal counterpoint to Jim’s conservatism, says Boston is poised to take advantage of “incredible vitality” in some measure, thanks to government actions. At the local level, planning has encouraged livable cities and towns. Local, state, and federal officials have joined forces over the years to attract $20B-plus to invest in cleaning Boston Harbor and in the Big Dig that built a modern, multimodal transportation infrastructure. The Federal Reserve has succeeded in putting a floor under a plummeting economy since ’08. Now, an amazing amount of capital is chasing CRE. For its part, TDC closed on land in Brooklyn last week to develop “micro housing.”Rents, he says, are close to $5/SF. Absent a horrible surprise, he expects cap rates to keep falling. | |
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| Oxford Capital’s John Rutledge, a national developer who acquires offices, apartments, and hotels to reposition, recently purchased the former office building at 59 Temple Pl in Downtown Crossing to convert to a boutique hotel. John’s been buying with all equity (from the US, China, and Europe) to do “deep redevelopment with no cash flow.” In Downtown Crossing, John says that Oxford is drafting off the success of several other projects completed and under way. Millennium Partners is building a luxury condo mid-rise (due for completion fall '13) and is planning a $615M mixed-use project at the former Filene’s site. | |
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| Flying the flag for event sponsor Goulston & Storrs were Rick Talkov and Jack Eiferman. The firm’s HQ overlooking Boston Harbor gives them a bird’s eye view of a project that they’ve helped shepherd along: New England Development’s acquisition of the Pier 4 site and its strategic partnership with The Hanover Co to develop multifamily housing. The law firm and its CRE experts also repped National Development in its lease to Whole Foods at the development being planned on the Ink Block in the South End. |
