Steady as she goes: Strong, steady, sustainable and moderated markets - by Brett Pelletier

Brett Pelletier, Kirk & Company

Although the rain may persist, sunshine is right around the corner and Boston’s commercial real estate markets are strong, steady, sustainable, and moderated as we enter the summer season. New players and foreign investment interests are expanding the power and influence of capital in many real estate markets nationally. Boston, and the US markets in general, are safe havens for European and Asian capital while the market influences change at home. Global changes, dips, and droughts have very real and very strong impacts on US markets; with Boston near the top of the list.

In April, the Federal Reserve Open Market Committee (FOMC) reported that economic activity has slowed slightly, however, labor market conditions have improved. There FOMC reported mixed signals in household spending, real income, business spending, and net exports, but overall the economy has moderated and appears steady. The FOMC commentary suggests a long-term outlook for rate increases as they decided to maintain the target range for the fed funds rate at 0.25%-0.50% with the goal of a return to a 2% inflation rate, which will further stabilize and moderate economic conditions. In the Federal Reserve’s Beige Book report for April from the First District (Boston), contacts reported generally positive outlooks and generally increasing sales and revenues. Commercial real estate participants reported mixed emotions with Boston occupancy up slightly and rents increasing at a modest clip. More moderation in the market means more stability as we move closer to economic and market equilibrium, however, contacts also reported that construction activity in Boston has increased significantly in the spring months in almost all sub-sectors of commercial real estate; the majority of which is pre-leased or build-to-suit space.

The Real Estate Finance Association (REFA) recently presented a panel on foreign capital in the US. The topic raises questions of logistics, local impact, and regulation that resound throughout the commercial real estate markets throughout the US. Chinese insurance giant Anbang has recently abandoned their $14B bid to acquire the massive Starwood Hotels and Resorts portfolio. Anbang already owns 18 landmark hotels in the US valued at approximately $8.5B, including the Waldorf Astoria New York. Already a serious player in the space. This could be an indication of the market for foreign investment, especially from China, cooling off, but it serves as a reminder of the volume and velocity of impact on US property markets. According to estimates by Real Capital Analytics Inc., foreign investment in US real estate topped $87.3B in 2015, the highest level of foreign investment on record. From most accounts, industry experts feel 2016 will be on par or exceed that of 2015 deals. Time will tell.

There are many external forces that impact foreign investment in US real estate as investors and institutions seek out returns in stable markets with the potential for up-side.

Currency volatility, uncertainty in domestic markets, tax implications, and loosening US regulations are some of the noticeable and observable factors. Two- and five-year German treasuries are still paying negative yields and ten-year bonds are barely in the positive column. They aren’t the only Euro zone country facing similar metrics. It serves as a reminder of the economic outlook and situation that persist outside of the moderate and tempered recovery back home and sheds some light on the motivations for outside investment in stable markets in the US. Boston is no exception and has long been a favorite city for international business, education, and investment.

International buyers have been in residential markets in Boston for decades and now are more regularly deploying capital to control commercial properties, hotels, apartments, and sites and are often competing with veteran institutional investors and local legends. As alternatives in the worldwide markets continue to experience volatility and uncertainty, core markets in the United States provide relative security and value to international buyers. As ever before, it is an exercise in diligence and thoughtfulness for all involved. We learn in real-time and react to what the market is saying. The flowers are blooming and the cranes are moving. Happy Spring!

Brett Pelletier is a senior analyst with Kirk & Company, Boston.