Odds Favor A Diverse Economy Like Boston's In The Painful Recovery

The future of Boston commercial real estate is facing a barrage of hard questions. A recession is here, but how deep will it be and for how long? How will turmoil reshape the local commercial market, and will recovery be as painful as everyone now fears?

Boston Realty Advisors Managing Principal Wil Catlin said on Bisnow's Boston Town Hall webinar Thursday that right now, making solid predictions is nearly impossible. You can listen to the event in its entirety here.

"We get data from peers in our industry and the transactions we perform, which is a market comp," he said. "We use that data all the time when we think about what a transaction looks like, or how a transaction might price, but the problem now is we don't have any data." 

For instance, Class-B product in Boston was leasing at around $50/SF to $60/SF, Catlin said. Looking forward, there is no way to know how to price the next transaction.

"Then we wrap that around the problem of supply," Catlin said. "Boston is a supply-constrained market, and it was tough for tenants to find good options. Now, how much office space is going to be given back? We don't know."

But perhaps the most pressing question for landlords and tenants alike is when and how workers will be able to return to work. "It might be a rolling return, county by county, city by city, but we don't know now," Catlin said. "That makes it extremely challenging."

Michael Klein, William L. Clayton Professor of International Economic Affairs at the Fletcher School of Tufts University, who also participated in the webinar, stressed that the economy's current turmoil is unprecedented.

"All the jobs that were created between 2010 and today have been erased within a month. The IMF has said this is the worst downturn since the Great Depression," Klein said.

In the early 1980s, there was a deep recession, Klein noted, and the economy had a V-shaped recovery. The downturn was caused by demand, and the Federal Reserve raised interest rates to wring inflation out of the economy, spurring the recovery in fairly short order. The recession after 2008 was worse, because it was a financial crisis and a demand crisis, so recovery took a lot longer, Klein said.

Now, the economy is suffering from all of those factors, as well as a supply problem. "The typical tools policymakers use to get out of a recession aren't going to be operative for a while," Klein said.

The infusion of cash from the federal government isn't a stimulus, Klein said, but a lifeline, because it is money that people need to pay the rent and buy food. Assistance will become a stimulus when people can go out again, but it would be dangerous to open the economy before the disease is understood. 

"When can we open, what kinds of places can open and what jobs can be done. I'm afraid it will be slow and piecemeal," Klein said.

Even so, Boston stands to do better in a recovery than a lot of places, the speakers agreed, because it has a diverse local economy, with some parts particularly suited for recovery.

"We're a little more resilient than a lot of places," Klein said. "If we were in Orlando or Las Vegas, I'd be more worried."

Catlin agreed, saying that many of the city's industries are primed for a quicker rebound.

"We've diverse across financial services, life sciences, medical, higher education and technology," Catlin said. "I feel great in regards to Boston being one step ahead in recovery. Also, from a real estate perspective, Boston is far more of a global city than it has ever been, just in the last 10 years."  

The coronavirus pandemic isn't going to be the end of office space, but it will mark a major change in attitude, Catlin said. While 15K SF to 20K SF of cool creative space used to be hard to find, now some that of space will be up for grabs in the near future, resetting the market. Some of that edgy space will be available again, and there will be a demand for it.

Attitudes about where and how people should work are also changing. The old idea that if you can't see employees, you can assume they are probably goofing off is dead. There is a fair amount of upside from working at home, including boosted efficiency and productivity, so that is going to stick to some degree. But not totally and not forever.

"The part that you miss is handing off intellectual capital from one person to another," Catlin said. "My clients say, we absolutely have to have an office, yet we're going to support work from home. So maybe they take 10% less in square footage. Yet exchanging intellectual capital, participating in that conversation, is going to be mission critical."