Robert Brown
It doesn’t take a real estate expert to see that development has been going strong throughout Greater Boston. There are cranes all across the city and new construction and redevelopment projects are popping up in urban and suburban areas alike.
Even Amazon’s decision to choose another city for its second headquarters and the continued decline of big retail brick and mortar stores hasn’t hindered our region’s strong real estate economy.
As we look ahead into 2019, whether it is ground-up construction or the redevelopment of existing supply, this widespread development activity does not seem to show any signs of weakening. Still, external forces could have dramatic impacts on the area’s continued growth.
Our region’s strength is largely due to the diversity of New England’s industry sectors. Financial services, food and beverage, higher education, health care, technology, tourism and more help our region weather economic ups and downs. We are especially strong because of our incredibly talented labor pool. Boston-area employment continues to grow above the long-term trend and the city’s unemployment rate of 2.9 percent is slightly better than the 3.5 percent unemployment for the state. Since the pre-recession peak, Massachusetts has added more than 350,000 jobs with the primary growth areas being professional and business services as well as manufacturing and construction.
Yet these strong statistics also come with increased pressures on commercial and residential rents. Low unemployment and strong household formation are pushing both apartment and office rents upward. Given the limited supply and strong demand, rents will likely continue to rise in our region. With real estate development sites decreasing and construction costs escalating, it’s possible that rents will grow at a slower pace than in recent years.
Downtown Boston office vacancy rates are at less than 6 percent and just over 10 percent for suburban office vacancies. Boston and the suburbs are experiencing ongoing strengthening rents of $50 per square foot and $30 per square foot, respectively. There are more than 50,000 new households earning over $100,000 since 2009. The strength of our local economy and the related new construction that results from it will continue to drive demand for more apartments and office space.
At the same time, significant demand by commercial real estate investors will continue to compress yields and push prices higher. External factors like volatility in the equity markets are impacting the treasury yields which in turn will impact the CRE market over the long term.
Over the past 12 months, there appears to be very little impact on CRE prices. The bigger issue appears to be the volatility of interest rates across the yield curve for both shorter and longer durations, which seems to slow transaction volume. For CRE investors, well-located assets that meet their criteria are becoming more difficult to acquire at reasonable prices.
In many sectors small businesses are making the difference, especially in commercial locations that once were home to big box stores. Larger blocks of contiguous commercial space will require more creativity to reposition for alternative uses or will incur additional costs to be repositioned.
Some of these spaces are reinventing themselves with alternative uses as fitness centers, medical or general office uses. Some are being subdivided into smaller retail stores.
As new technologies come to market and consumers’ interest change, retail concepts that provide flexibility to innovate and adapt will be able to meet changing needs of the consumer in the future. While some tenants come and go, retail properties that provide experiential opportunities and convenience will position themselves to withstand online competition while maintaining customer demand.
As we move forward into 2019, a combination of entrepreneurship, small business ingenuity, economic diversity, skilled labor and smart banking will help Massachusetts remain strongly positioned to weather outside factors. It’s an exciting time to be a CRE banker and a great region to do business.
Robert Brown is senior vice president and division executive of commercial real estate at Brookline Bank.
