Tag Archives: commercial real estate

2019 Forecast: Dark Clouds Forming

09 Jan

original photo by fiona graeme cook, boston commercial properties, dark clouds1/8/19

The risks to the downside for the commercial real estate market are currently outweighing the upside as negative indicators have increased. The first obvious concern is the return of high volatility with selling pressure in the equity markets. For 2018, the Dow was at -5.97%, S&P -6.24% and NASDAQ -4.38%. The S&P closed the year near bear market territory from recent highs. Now stock market sell offs are not necessarily an indicator of future economic slowdown, but the shock may lead to one in the near future as other economic factors mount. Current volatility may be similar to that of 2016, and we are just not used to the current roller coaster ride as the market in 2017 was so benign. We may be experiencing asset repricing as markets may have gotten ahead of accurate valuations. If assets do reprice to depressed levels, the impact on the psychology of investors will weigh on the overall economy.

Further, as Neil Irwin mentioned in his Boston Globe column on 12/25/18: “The sense of doom & gloom and pessimism has gotten ahead of the facts on the ground….[the economy may be] returning to old new normal of moderate economic growth that was completely normal from 2010 to 2017. ” However, there seems to be a “crisis in confidence.” On that latter note, there is a palpable sense of declining confidence in the political realm. Investment bank RBC Capital markets surveyed big investors in December about what kept them up at night,and Trump topped the list. Interest rates and trade war ranked second & third (Reference: 1/2/19 Boston Globe). Indeed, the irrational tweeting by the President along with misguided statements made by Treasury Secretary Mnuchin rocked equity markets at year end and left investors with a sense of a vacuum of leadership in the Executive branch which is not a good thing for financial markets. Equity markets do not like uncertainty and the uncertain political climate along with economic conditions will continue to weigh investors minds.

Other concerns include an inverted yield curve which has frequently in the past preceded recessions, future rate hikes by the Federal Reserve, Fed unwinding of its bond purchase program which tightens money supply, corporate earnings (e.g. Apple), slowing Chinese economy, trade war concerns, continuing U.S. government shutdown, weak ISM Manufacturing Index report, slowing service sector, unstable Brexit process, slowing European economies and record high corporate debt as companies feasted on historically low interest rates to finance expansion. Corporations may now look to correct their balance sheets, seek to trim expenses and cut back on hiring. On the trade war front, mark your calendar for March 1st which is the deadline for the U.S. and China to resolve trade differences.

In spite of concern of political leadership and the aforementioned indicators, other economic fundamentals appear to be very strong. Mainly employment is very a strong – a major factor of the economy. The December unemployment report indicated 312,000 jobs created which is a very strong number and far exceeded expectations but wages increased a strong 3.2%. While inflation is still under control, with rising wages, expect the Federal reserve to continue tightening short term interest rates which will have a negative effect on the mood on Wall Street and create a drag on the economy.

Let’s take a look at the current state of the residential market which is a main driver of the domestic economy. Locally, the Warren Group just reported pretty strong conditions. November showed both sale prices and sales volume at all time highs for the month of November. The median sale price for a single family home in Massachusetts is $385,000. But sale price increases are rising at a slower rate than earlier in 2018. With continued low levels of inventory, prices are reaching a point where many buyers cannot afford to buy. The condo market is experiencing increase in supply. In Boston, luxury home sales actually fell 4.7% in Q3 to an average of sale price of $3.6m (Source: The Warren Group). Anecdotally, my colleagues in the residential real estate industry report that homes are sitting on the market longer with fewer offers received.

In New York City, a correction has been underway for a while as in some cases, sellers have taken a haircut of 30%. The median price for a Manhattan apartment fell below $1m. This is the first time below this level since 2015 (Source: The Warren Group).

The residential market will likely begin to feel softer as more homes are put on the market. This will lessen the rise in sale prices and stabilize the market. The reality is the residential real estate market has been extremely tight for an extended period of time, is not sustainable and is cyclical. Expect supply to increase and softening in the residential real estate market with gradual decrease in median sale prices. As the residential market softens, expect the economy to slow given the huge impact the residential market has on the overall U.S. economy.

As with the economy and residential real estate market, the commercial real estate sector is cyclical, an eventual downturn is inevitable and expect commercial real estate to begin to soften this year. As interest rates rise, capitalization rates will rise thus lowering overall valuations. As companies seek to clean up their balance sheets, expect belt tightening, restraint on expansions and reduction of head counts. This will curtail demand for new space overall. Vacancy rates will begin to rise and the recent trend of lease rate increases will flatten out. The greater Boston economy has proven to be resilient with diverse industries including defense, biotech, enterprise, cyber security, fintech, education and healthcare. This resiliency will soften the blow of any downturn locally but weakening conditions will develop nevertheless.

Contact me to further discuss any questions and to review your specific space requirements to find the best solution to your needs and to provide a steady hand during turbulent times.

Warren Brown, President, Boston Commercial Properties, Inc.

Will WeWork Conquer The Real Estate Market?

28 Feb

Actually, WeWork wants to do more than just conquer the real estate market. The ambitious plans for this rapidly growing company includes expanding into residential real estate, high end fitness, and even education. A recent NY Times article describes the enthusiastic goals of  WeWork’s founder. One has to wonder if  WeWork will become the Amazon of the real estate market and change the paradigm of how companies of all sizes use space. This company is a real global landlord to contend with – 2017 revenues were $900m and it will continue to grow in 2018 as they plan on expanding from over 200 locations to 400.

By capturing the imagination of entrepreneurial as well as Fortune 500 companies, and fulfilling the desires of how millennials view the work environment, WeWork appears to have revolutionized how we work. Rather than occupying staid, plain, vanilla office buildings, at WeWork, employers now have the option to lease flexible, fun and creative work environments with chic decor, with many amenities, where their employees enjoy working, never have to leave the office, and are inspired as a result.

The WeWork concept includes flexible lease terms, comfortable, and creative spaces where the theme of the decor and amenities may change depending upon the location. WeWork offers facilities in hip downtown locations around the world including 303 locations in 62 cities. Amenities include free flowing beer, piped in music, fitness facilities, social networking venues and more. An elementary school and wave pool for inland surfing are other concepts currently being developed.

But will WeWork succeed in becoming a game-changer in how we lease space? While WeWork definitely serves a niche – and a growing one at that – there will always be a place for more traditional space alternatives. As an example, for now it appears that WeWork does not aspire to penetrate suburban areas. Leave other experienced real estate developers that are increasingly adding their own amenities to office parks for that. There will also continue to be a role for traditional landlords in downtown markets. For example, law firms, insurance companies and financial service companies that occupy large blocks of space for a lengthy period of time will need their own corporate identity, perhaps their own office tower, and with their own unique corporate image. As companies see the expanding trend of younger talent seeking employment in urban environments, this fast growing company is quickly becoming an 800 pound gorilla to contend with in downtown markets.

Not to be outdone, many upstart co-work facilities have also been expanding in downtown areas. Knotel in New York, the Cambridge Innovation Center, WorkBar and others in Boston are seeking to disrupt how we use space. Given this trend, we should be cognizant of the possibility of over saturation of the co-work concept.

Is the co-work concept right for your business? Contact me to further discuss this and to review your specific space requirements to find the best solution to your commercial real estate requirements.

Warren Brown, President, Boston Commercial Properties, Inc.

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