Metropolitan Boston continues to enjoy robust economic expansion and exceptionally strong real estate fundamentals. Strength in local housing prices, wages and consumer confidence demonstrated during 2013, coupled with low inflation and increases in consumer spending, will enable the economy’s growth to continue well into 2014 and beyond. With an unemployment rate among the strongest in the U.S. (7.1 percent as of November 2013), Massachusetts continues to thrive due to the presence of world-class educational, medical and research institutions.
State GDP grew an estimated 3.5 percent in the third quarter of 2013, according to MassBenchmarks, following a revised 1.7 percent increase in the second quarter of the year. The publication forecasts 3.4 percent growth in state GDP from October through March. Commercial real estate saw falling vacancies, rising rents and new construction across most property types. In 2013, 5.5 million square feet of new inventory was delivered, including 3.1 million square feet of multifamily residential and 1.9 million square feet of office. More than 16 million square feet is under construction — three times greater than the previous five-year average in metro Boston — including 7 million square feet of multifamily residential, 6.9 million square feet of office and 2.2 million square feet of new retail developments.
Office Overview
Overall office vacancy fell 2.6 percent year over year to 11.9 percent while rents increased 5.5 percent to $24.23 per square foot in the market as a whole, and 7.7 percent to $44.70 per square foot in the CBD. Broad-based demand is bolstering this market recovery, and we expect rents to continue increasing as there is little speculative construction underway in this cycle. Of the office space under construction, 78 percent is preleased to notable credit tenants, including Vertex Pharmaceuticals, PricewaterhouseCoopers and State Street Corp.
In the suburbs, limited construction and strong leasing activity brought vacancy below 14 percent for the first time since 2008. Suburban office rents grew 1.6 percent year over year to $19.82 per square foot overall on the 11th consecutive quarter of occupancy growth. Prime suburban submarkets from Waltham to Burlington are leading the way with double-digit percentage rent growth. Demand for live/work/play centers continues to drive construction of new urban and suburban mixed-use developments.
Mixed-Use Development
Significant new suburban lifestyle centers are underway in Burlington, Lynnfield, Westwood and Littleton. Each of these incorporates elements of retail, housing, and office. Urban mixed-use projects at Seaport Square, the Ink Block, New Balance’s Boston Landing and Assembly Row in Somerville all have similar components. Major development and redevelopment projects at both North and South Station, as well as Landmark and Fenway Centers bordering the Back Bay, will add another 500,000 square feet of retail to areas with limited existing services. Five new supermarkets are coming to Boston to feed the demand created by more than 10,000 approved new housing units, including 1,346 apartments already delivered in 2013.
Investment
While final full-year numbers are not yet available, through third quarter 2013, market investment activity in the four primary product types (office, retail, industrial and multifamily) totaled more than $5.4 billion and based on our analysis should surpass $7.5 billion for the year. Investment in office property makes up more than 57 percent of this total. This rate of activity is on pace with 2012 and slightly below 2011, but still well off the historical peak of 2007 when close to $18 billion in assets traded.
A major driver of sales activity this year stemmed from Blackstone’s decision to start shedding assets it acquired in the 2006 EOP acquisition. Iconic assets such as the New England Executive Park, Wellesley Office Park, Riverside Center, and a 50 percent stake in One Post Office Square traded in 2013. Collectively, Blackstone’s seven dispositions (five in the suburbs, one in Cambridge, and one in Boston) totaled $1.25 billion or 29 percent of all office sales activity marketwide. 2014 promises more of the same, with Center Plaza in Boston under agreement for more than $300 million and the office tower at 225 Franklin Street now on the block (anticipated pricing in excess of $600 million) and other holdings expected to follow.
While core product remains the most in favor, some investors are now seeking and buying vacancy hoping to capture increasing rents. Increased sales activity extended out to Route I-495 (outer beltway) for the first time in more than five years as investors seek enhanced yield in markets showing signs of recovery. Look for more owner/user deals as a hedge against that rent growth, like athenahealth’s $168.5 million purchase of its Watertown campus.
Low interest rates continue to support capital flowing into U.S. commercial real estate in general, and specifically into gateway cities like Boston, which remains a top target for investors worldwide. Foreign capital, particularly from Canadian sources, sees Boston as one of the top U.S. investment markets and will continue to be a major player for investment offerings.
— By Scott Jamieson, Principal, Capital Markets, Avison Young. This article first appeared in the January/February 2014 issue of Northeast Real Estate Business magazine.