Investors are attracted to Boston due to its diverse economy, education base and strong market fundamentals. In fact, major corporations like GE, Reebok, New Balance, and most recently Asics have all relocated to the city or are in the planning to relocate or rebrand here. As a result of this heightened interest in Boston as a global headquarters destination, the city is expected to grow, which in turn creates housing demand.
Christopher Sower, Colliers International
Rhythm between Cap Rates and Interest Rates
As investors know, there is a direct correlation between cap rates and interest rates. However, while a correlation exists, not all buyer profiles are necessarily affected in the same way in a shifting interest rate environment.
Highest impact: Leveraged buyers would be most impacted by rising interest rates since they are typically trying to maximize leverage when pursuing an acquisition. With shifting interest rates, higher rates have a direct impact to potential returns. If leveraged buyers can borrow less at high rates, this has a direct impact to pricing/cap rates. Within the leveraged buyer profile, groups possessing strong balance sheets and banking relationships will be less impacted than groups not necessarily in the same financial position.
Moderate impact: Cash and low-leverage buyers will not be impacted in the same way as leveraged buyers. Unlike leveraged buyers, cash/low leverage buyers are not relying on debt to drive returns. Buyers included in this profile would include institutions, pension funds and high net worth investors.
International buyers have an edge: International buyers typically see the least impact of interest rates and cap rates, as they are likely to be cash buyers focused on asset preservation. As such, they have the advantage of time and execution on their side.
Who’s Buying
In 2016, investors’ focus on the Boston market was generally in the core/infill market within the Route 128/I-95 belt. With a high concentration of equity chasing deals meeting this geographic criteria, the market has been very competitive and difficult for investors/developers to penetrate. The core/infill market will still be a preferred location in the years ahead; however, we are beginning to see investors/developers and equity sources look to non-traditional markets that offer more yield and opportunity.
Investors like Mount Vernon Company and Post Road Residential are establishing and investing in markets that have not been considered top tier markets until later in the cycle. Such markets include, but are not limited to, Allston/Brighton, Everett, Chelsea, Somerville, and Dorchester. Not surprisingly, some common denominators among these markets include access to transit, stability of the local economies, and strong tenant demand.
Product of Choice
What can we expect key buyer profiles to focus on in 2017?
Institutional investors: Institutional investors continue to focus on core/infill opportunities, ideally with access to public transportation. Institutional investors will consider an investment in the suburban market, depending on the investment vehicle they may be using and the story/stability of the opportunity at hand.
International investors: International investors tend to be most focused on the core market, looking for perceived opportunities proximate to employers and “play”/entertainment and retail stability. In addition to core opportunities, they see strength in Boston’s coveted Red Line, which provides immediate access to the intellectual capital at Harvard University and Massachusetts Institute of Technology as well as the bio/pharma employers in Cambridge’s Kendall and Central Squares. One deal of note was the sale of Schoolhouse at Lower Mills in Dorchester, which presented an opportunity with a prominent increase in activity due to its Red Line-friendly location. With existing, core market opportunities in high demand but relatively low supply, international investors are now also increasing their involvement with local partners on development deals.
Private capital investors: Private capital investors are typically looking for better returns through value-add opportunities in the core/infill market, as well as suburban markets. The influence of adaptive reuse in the urban core for either apartment or condominium opportunities is also a strength that attracts private investors.
Overall, we anticipate a positive outlook for 2017 in the multifamily investment market. We look forward to seeing how these trends and drivers evolve and shape the market this year.
— By Christopher Sower, SVP of Multifamily Sales, Colliers International, Boston. This article first appeared in the January/February 2017 issue of Northeast Real Estate Business.