Boston office/lab forecast - Its occupiers will drive this market through uncertain world conditions - by Web Collins

Webster Collins, CBRE/New England

This forecast is prepared at a time of worldwide uncertainties; China’s 20% stock market drop in the first 14 days of 2016, the potential of further currency devaluation, oil at $30 per barrel predicted to go to $20 per barrel, the realness of both the Isis threat and government mismanagement. When the world looks at Boston, they see a strong anchor to windward and see the city as strong and growing.

To write this article, I have attended CBRE’s January 7, 2016 Market Overview and the Commercial Brokers Association (CBA) January 15, 2016 program titles “The Real Deal,” featuring the CEO/presidents of Boston Properties and Oxford Properties, a major Canadian real estate investor. Between the two, they own over $60 billion in property. In this article I will address the issue of “the basics of why” Boston is a growing world class city.

It’s Planning The 1980s “Big Dig” planning unlocked over 200 acres of land in what is now known as the Seaport District. The 1970s planning in Cambridge created a new city within a city; East Cambridge. These areas were improved with basic infrastructure in the form of boulevards, utilities, rapid transit, and the ability to move people in and out. Raw land existed within Boston’s dense urban core that could accommodate growth. For 2016, projections are for 47,000 new jobs. In 2016, we have within the twin cities over $7.3 billion in new construction. 3,800 new units of apartment/condominiums were completed in 2015 (1,072 affordable units) and an additional 4,900 units are underway.

It’s the Millennials When I use the term millennials I am not just referring to ages 20-35. I drop down to age 14-16. These are young people who are tied electronically to the world with their Asus computers, laptops, iPhones and iPads. It is the quality of their education, public schools, charter schools, an educational mecca of Boston’s world class schools that set the tone for the next issue I will address.

It’s Occupiers Traditional internal job growth is long gone. Employers are seeking out Boston for its talent. Microsoft and Google have a major presence in Cambridge. For the first time since WWII, a major Fortune top ten company will move its headquarters to Boston – GE. We are now driving jobs from the outside in; a major structural change in real estate, not seen in New England. The best companies in the world are chasing space in Boston, the direct result of the Baker Walsh team.

It’s Boston’s Market Boston’s market is funded by worldwide capital. The first nine months of last year, $8 billion in transactions took place, 75% of which was from outside sources. Commentary in the market indicates we may be in the late stages of the 6 year recovery to date. I do not agree. As long as Boston’s huge inflow of capital continues, its property market will remain strong.

Capital markets are different. Capital markets are impacted by real estate interest rates. Interest rates will impact second tier properties, not prime properties like in Boston Properties/Oxford Properties portfolios.

I am a great fan of Fantini & Gorga’s interest rate surveys. They report a 20 BP to as much as a 50 BP increase in loan rates. Insurance company loan rates in Q1 2016 over Q4 2015 for 30 years moved from 4.30% to 4.70%. With higher rates, second tier values will be adversely impacted. When cash flows are reduced and equity rates of return increase, values decline.

And it’s in Boston’s Numbers Year end 2015 market statistics are proof of the Boston/Cambridge heavy Life Science and technology market growth. For the market overall, Q4 2015 total absorption was 4.6 million s/f up from 3.3 million s/f year end 2014 and 1.85 million s/f year end 2013.

The cities of Boston and Cambridge Q4 2015 average vacancy against a market size of 102.7 million s/f was 5.45%, down from 7.6% the prior two years.

Average rental rates for Boston office were $52.69 per s/f, Cambridge office $58.34 per s/f and Cambridge lab $73.38 per s/f, up from $49.25 per s/f, $54.26 per s/f and $50.24 per s/f respectively in 2014. The astonishing number is the Cambridge lab growth in rent of 46% in only one year!

Conclusion From 2010 to now, commercial real estate property values are reported to have increased 93%. Because of increase in rents for most product types, good returns are now being created from Class A real estate.

When you have the very best assets located in one of the top 5 cities in the U.S., Boston, real estate is an excellent anchor to windward as an offset to stock market volatility.

Webster Collins, MAI, CRE, FRICS is an executive vice president and partner in the valuation and advisory group of CBRE, Boston.