News
Yesterday's State of the Market
September 28, 2011
| Despite the hand wringing over the economy, it's a good time to be in CRE, say the panelists at yesterday's Bisnow Real Estate Summit. Whether it's multifamily in Boston, offices in DC, or industrial in LA, opportunities abound for those who know how to play the game. | |
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| On the Boston markets panel, EOP managing director Andrew Maher says he's redeploying capital. EOP just acquired office buildings in the Alewife section of Cambridge, which he calls one of the hottest markets in the world thanks to its knowledge industries. (Knowledge is power... and money.) Year-to-date, EOP rents are up 20% over '10 and he expects another 5% rise. But leasing is and will be net zero until the big companies start to grow. In Boston, with its ample low-rise space, Andrew says it's tough to justify much new development. AvalonBay development VP Michael Roberts expects to sell multifamily in the ?burbs and buy urban infill sites. With revenue up 9% versus '10, he has one high-rise under construction downtown and two in the wings. He sees 6% rent growth in ?12. | |
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| Goulston & Storrs co-managing director Doug Husid (our moderator) with Springer Architects owner Marcus Springer, Mike, and Brookfield Office Properties leasing VP Duncan McCuaig. Next year, Duncan expects rent growth of 5% to 15% (in low-rise to high -rise respectively). He says that while Boston led the nation in job growth in the past year (professional services, biotech),financial services may not return to their prior glory as market moving tenants. Turning the tables, Duncan says the Financial District may benefit by reeling in tenants who find the hot Back Bay offices too pricey. Asked to rate Boston metro activity next year on a scale of 1 to 10, Andrew says: it's a 7 going to 8. Mike: 9 stabilizing at 8. Duncan: 7 to 8.5. Marcus: 6 to 8. (Chances of the Sox making the playoffs: 5 going on who knows.) | |
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| The capital markets panel, AEW? managing director Marc Davidson, New Boston Funds chief investment officer Jim Kelleher, and BlackRock managing director Shelton Getter are finding opportunities in different sectors. Marc is looking at cash flow, Jim at opportunity and value add, while Shelton likes quality, core. Marc says location still counts. For instance, in the Rte. 495 market, rents haven?t grown in years and a building that costs $130/SF to build new may only cost $30/SF to buy. Meanwhile, in Boston, there's real demand and rent growth so Marc is willing to accept lower returns. Usually, he says, he's pleasantly surprised. | |
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| Marc (with moderator DiCicco, Gulman & Co principal Bob Calzini) says core can give back. AEW acquired a new, foreclosed property in Silicon Valley that the lender rented out for 30% to 40% below market. AEW paid about $300/SF and today could sell it for nearly $400/SF. He says the Boston office market is ?very challenged? with demand coming from big corporate tenants with cash. Smaller tenants, he tells us, are still unsure about the future. For the next three years, AEW assumes little leasing and '90s level rents. But, he says, industrial in the right locations may well return to peak. | |
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| While the US economy barely grew year-to-date, capital is still flowing into real estate, says Shelton. He says BlackRock?s investment strategy still leans toward core in gateway cities although it has moderated its view of rent growth. With values only 10% recovered from the recessionary 30% drop from peak, there's still 20% upside in valuations. Jim sits on the other side of the fence doing a lot of distress deals. He's buying value; looking for quality real estate with structural problems and finding more than a year ago. Near Miami, NBF bought a new office for $98/SF that was built for $320/SF and brought it from 10% to 70% occupied. | |
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| Discussing the national markets were Intercontinental chairman and CEO Peter Palandjian, Wells REIT II?s Nelson Mills, Normandy?s Jeff Gronning, and moderator Reznick Group's James Naber. Peter says that artificially low interest rates allow investors to pay more for core, further bifurcating the market. Intercontinental is underwriting cash flow but still, Peters says, in the tricky markets of the past two years investment committee meetings have been rancorous. Nelson says from a global perspective, US CRE is still seen as low risk. In the next 24 months, he says Wells will seek higher returns by assuming a bit more more risk. Jeff says that while Normandy?s investors talk about turning to secondary markets, the company still focuses on the gateway cities with high barriers, liquidity, and performance. That includes Boston, of course. | |
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| New England Construction's David Sluter, one of our sponsors, says his 26-year-old family business has an array of clients—from Brown University to Penske Auto Group. Regardless of their business, all clients get NEC?s value proposition: if it's the lead construction manager, it will bring in the project at or under budget. | |
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