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What’s in store for the Commercial Real Estate Market in 2017?

05 Jan

 

Equity markets typically disdain uncertainty yet, as of this writing, the S&P is up about 6% since the US election even with the anticipated uncertainty that a President Trump administration brings. The S&P increased over 13% in 2016 (including dividends). One thing that does appear to be certain is rising interest rates. US Treasuries are up 50 basis points in December alone. “Investors are hurrying to dump government bonds in the US, Asia and Europe pushing prices down, according to the Wall Street Journal.”*  Logically, such dramatic rise in interest rates would typically pull in the reins on the real estate sector. The residential market however remains brisk as we witnessed the month of November experience the highest level of sales in 18 years. This can be explained by pent up demand caused by diminished supply and the millennials finally entering the market.

However, experts say the boom that commercial real estate has enjoyed over the last few years was driven by investors desiring better returns than what they could find in bonds, but now that dynamic could be shifting as safe government bonds start to offer yields more in line with real estate returns, and without all the risk. A dramatic pull back in equity markets, such as the historic fall at the start of 2016, could alter this scenario. Indeed, as mentioned here previously, the stock market may be due for a correction. Investors have been betting that the Trump administration and Republican controlled Congress will boost infrastructure spending, cut taxes and relax regulations that negatively affect businesses. Countering this statement, the Fed is expected to raise the Federal Funds Rate, the rate at which banks and other depository institutions lend money to each other, an additional 3 times in 2017 to 1.25%. Still this remains below historic levels. As lending rates rise and, in turn, increase in Treasuries, demand for investment property shall wane. My observation is that investors have in fact have become more cautious recently. In addition to concerns of rising rates, there is increased skepticism of the level of property valuations. Investors will continue to scour the market for deals and have a preference for well located commercial real estate with sound fundamentals. A steady flow of 1031 exchange investors will continue to permeate the market in 2017 and specific asset classes such as industrial real estate shall remain strong. Investors should continue to keep a close eye on the direction of interest rates.

Buyers of commercial properties by end users will be less skittish than investors. In my August 17th blog post, I referenced several economic indicators that were positive. This remains the case today. Indeed most economic forecasters see faster growth ahead: unemployment is low, albeit with stubbornly high numbers of workers remaining on the sidelines, GDP is up, consumer confidence (at a 13-year high in December) and spending is rising. The 2016 holiday sales increased 4.9% over last year – the largest increase in a decade. I have continued to see a correlation between the direction of the economy and commercial real estate fundamentals. So with a stronger economy, we will continue to see increasing demand by end users searching for properties to purchase. Similar to the residential market, there is generally limited inventory of properties for end users. This dynamic will continue through 2017. If you are an end user seeking to acquire property to accommodate your facility requirements, pounce on opportunities that are a good fit. Interest rates, while having increased about 50 basis points, remain at historically low levels enabling a compelling reason to own versus leasing space.

Please contact me to sort out and find the best solution to your specific commercial real estate requirements.

Warren Brown, President, Boston Commercial Properties, Inc.

*Source: 11/23/16 Bisnow

Reflections on the Current Market: Summer 2016

17 Aug

In my November blog post, I described the how the commercial real estate industry is in sync with the economy. Good economic times are good for the commercial real estate market while recessions are definitely not. But what do current signals in the economy portend for the future for the commercial real estate market? Following extreme turmoil in equity markets at the beginning of 2016 and the Brexit vote in June, many of my clients have been inquiring about my prognosis for the future. Given current turmoil and uncertainty around the world, at this mid year point it would be a good time to look ahead.

First some basic important data points:

The greater Boston industrial market experienced 1,467,488 sf of positive absorption in the 2nd quarter. Vacancy rates decreased from 7.2% at the end of the first quarter to 6.9% at the end of the second quarter. Lease rates increased to $6.65 average quoted rate which is an increase of 1.7% from $6.54 per sf at end of the first quarter.* These are extremely impressive numbers with now three consecutive quarters of record-setting low vacancy rates.

The greater Boston office market experienced 770,417 sf of positive absorption in the 2nd quarter. Vacancy rates decreased from 8.7% at the end of the first quarter to 8.5% at the end of the second quarter. Lease rates also decreased to $20.47 average quoted rate which is an decrease of 3.5% from $21.21 per sf at end of the first quarter.*  While these numbers are more subdued than those seen in the industrial market, I see this more as a temporary pause in the market than a more severe event.

My observations of current economic conditions and connection to the commercial real estate include the following: There is an abundance of capital sitting on the sidelines. Investors are not comfortable with equity markets. Passive investors are suffering with ultra low yields. Historically low lending rates continue to act as a stimulus to the residential market, for investors and for owner/occupiers of commercial properties. Foreign capital is chasing both residential real estate including high-end condominiums such as Millennium Place where it is reported that 25% of buyers are from overseas, as well as multi-family and Class A office properties. All of this is generating a flight of capital and increased demand for real estate as a preferred asset class.

Many other economic indicators are positive. Employment is up, as evidenced by a robust July employment report, and jobless claims are way down. The GDP is positive and has improved quarter after quarter. Inflation remains low, while oil prices have more than substantially recovered. Foreign investors are investing in U.S., which is viewed as a safe haven.

Overall, I have an optimistic outlook for the commercial real estate market as we head toward the homestretch of 2016 with no recession in sight for 2017.

Please contact me to discuss your specific real estate requirements

Warren Brown, President, Boston Commercial Properties, Inc.

*Data source: Costar Realty Information.

Selecting a Full Service Commercial Real Estate Brokerage Firm

23 May

The most effective commercial real estate brokerage firm provides a full spectrum of services to its clients. Companies that require assistance with leasing or purchasing of properties and relocation can benefit from working with a firm that will assist with its search for property, i.e. tenant representation, and provide guidance throughout the relocation process.

A fully qualified tenant representative focuses on the client’s best interest, has thorough knowledge of the relevant marketplace, and deep experience in the industry. With the client’s best interests in mind, the tenant representative will provide the client with recommendations to procure the best solution to solve the client’s real estate objectives. An effective tenant representative will negotiate on the client’s behalf to secure the most favorable deal terms as well as augment the client’s legal team with review of lease and purchase and sale documents to avoid pitfalls in such contracts.

A full service tenant representatives job is not done when a lease is signed or a sale is closed. The client has the sometimes daunting task of relocating its business. This can be a stressful, time consuming and overwhelming task. A skillful tenant representative has the capabilities necessary to provide assistance to the client throughout the moving process. Such capabilities include the following:

  • Relocation scheduling and budgeting.
  • Facility planning services and financing of tenant improvements.
  • Obtaining the most professional vendors at the best pricing.
  • Provide guidance with purchasing of furniture, phones & IT.
  • Provide assistance with installation of Fixtures, Furniture & Equipment.
  • Guidance with miscellaneous items such as data storage management and new hires.
Real estate costs are typically the second highest cost on the expense side of a company’s P&L.  Identifying and finding the best solution for our client’s real estate requirements is critical to the success and profitability of the company. Boston Commercial Properties understands this and takes its client’s needs seriously.​ Please contact me to further discuss your real estate needs.
Warren Brown, President, Boston Commercial Properties, Inc.