They are seen as warring factions, but e-commerce and the commercial real estate industry should consider uniting for each other’s benefit, according to a panel of experts speaking last week at Rowe’s Wharf in Boston.
“The marriage between the two is going to create some very interesting opportunities for those of us in real estate,” said Dale Anne Reiss, a partner with Ernst & Young and keynote speaker at the event. The mid-year overview was sponsored by the Society of Industrial and Office Realtors and the National Association of Industrial and Office Properties.
According to Reiss, the advent of e-commerce presents a range of scenarios in which real estate providers can improve efficiencies, bolster services for tenants and even generate additional profits. She noted, for example, that a new law will allow real estate investment trusts to invest up to 20 percent of their assets into services companies. While initially envisioned as a way for such players to operate janitorial companies and similar building-related services, Reiss said many REITs are forming entities to offer high-speed Internet access and other telecommunications services for their tenants.
“It’s a must-have,” Reiss said, maintaining that office tenants will be joined by multifamily renters who will demand Internet access in their residences. The vehicle will also be used by tenants seeking to lease office space or apartments, so much so that Reiss predicted any commercial real estate provider who does not offer a Web site will ultimately lose significant business.
“We believe [the Internet] is a tidal wave washing over everybody,” Reiss said. “We all need to learn to swim in its wake.”
Reiss also reviewed a bevy of Web sites aimed at providing market information, economic indices and even building supplies that she said will change the way real estate firms do business. Building owners will realize bulk savings that reduce operational costs, she said, while improved communication will enhance construction projects, reduce overlap and enable investors to access capital quicker and more easily.
Reiss also predicted a blending of e-commerce companies and retail real estate players, a notion seconded by speaker Ted Chryssicas, manager of Meredith & Grew’s Retail Services Group. While noting that the prevailing theory last year was that “the clicks would smash the bricks,” Chryssicas said the $25 billion in Internet-based retail sales posted in 1999 was a mere pittance to the $2.7 trillion spent nationally overall. And of the 100 top-performing retail Web sites last year, Chryssicas said half of them were either joint ventures with existing retailers or operated independently by such firms.
The street is paved both ways as well, Chryssicas said, with Web-based operations beginning to consider physical locations from which to hawk their products. Such ventures have recently appeared on State and Congress streets in Boston, he said, while Gateway Computer has opened up 300 new stores nationally during the past year, increasing revenues by $4 billion.
On Target
At this point, local retailers have as much to fear from their own sector as they do from the Internet, with Chryssicas maintaining that such firms as Bradlees and J.C. Penney will be hurt by the arrival of Target Department Stores to the market. Target currently has six stores open in Greater Boston, with plans for another dozen by year’s end.
“They are really going to affect the retail climate around here,” Chryssicas said of Target. He also predicted the arrival of such firms as Kohl’s, Mars Music and Lowe’s, a direct competitor to Home Depot. Best Buy is also in an aggressive growth mode, while Wild Oats has recently made its foray into the market with the acquisition of a similar Star Market health-food concept known as Wild Harvest.
Tenant Squeeze
Last week’s overview also provided snapshots of the local office market, and according to Insignia/ESG Managing Director Michael Ripp, the images are not pretty for most tenants. Speaking on the suburbs, Ripp said the market has seen “hyperinflation” of rents in 2000, with 25 percent hikes during the first six months and asking rates now surpassing $50 per square foot along Route 128.
“Many would agree that we have never experienced market conditions like we see today,” Ripp said. He placed the vacancy rate for the 54 million-square-foot suburban market at 7.2 percent, and said the 850,000 square feet of net absorption to date should expand to 1.5 million square feet by year’s end.
Among the major trends occurring in the suburbs, Ripp said, are required security deposits, re-trading of deals in mid-stream, and tenants so desperate for space that they are offering to sign letters of intent upon the initial tour. Internet and dot-com companies make up the majority of the leasing demand, he said, adding that “there are so many of those requirements that they are creating their own bidding wars.”
Ripp said “demand still far outstrips supply” in the suburbs, noting that the 5.8 million square feet of space underway along Route 128 is 64 percent committed, while 1.5 million square feet in the Interstate 495 pipeline is 50 percent spoken for. Nonetheless, Ripp also said he is concerned about a potential downturn in the market, citing one statistic that estimates there are 250 high-tech initial public offerings circling above Wall Street waiting for the capital runways to open up.
“I believe we are on the verge of a correction, the magnitude of which is uncertain,” Ripp said. “Statistically, we may be overdue.”
For the time being at least, both Boston and Cambridge remain among the top office markets in the country, Trammell Crow Principal Charles S. O’Connor said during his presentation. O’Connor called the record low vacancies and skyrocketing rents in those communities “frightening,” attributing much of the imbalance to the early and mid-1990s when virtually no new supply was added to the market. Boston’s vacancy rate is currently 5 percent and falling, O’Connor said, while the core East Cambridge market is at just 1.6 percent.
When the year began, tenants had several large space options available in the Hub, with significant blocks at such properties as 125 Summer St., Exchange Place and 10 St. James Ave. Today, however, all three of those properties are nearly 100 percent committed, O’Connor said, putting additional pressures on those firms that must find new quarters. A 180,000-square-foot swath at One Federal St. should be gone this week, O’Connor said, while Fidelity Investments is reportedly committing to a similar block at 100 Summer St.
“It’s a difficult time for the lower-margin firms,” O’Connor said, noting that the Class B and C space is also shrinking because it is being eaten up for alternative development such as hotels and residential uses. In addition, so-called new technology companies are bringing virgin demand to the Hub, with O’Connor identifying more than 700,000 square feet of such requirements in the market at present.
On the investment front, Spaulding & Slye Principal Jeffrey Swartz said Boston remains among the country’s top draws, adding that, “We’re very optimistic about the real estate market here.”
“It’s onward and upward,” Swartz said, predicting that Greater Boston will see between $4 billion and $4.5 billion of commercial sales activity in 2000. While slightly below the $5 billion traded in 1999 and the $6 billion posted during 1998’s record campaign, Swartz said it is still above the normal pace of $3 billion in sales annually.
Still recovering from the feeding frenzy of real estate investment trusts in the mid-1990s, REITs remain largely on the sidelines, Swartz said, with most focusing on buying back stock rather than acquiring new assets. Overseas capital has had its own difficulties of late, he said, with the most activity coming from domestic pension funds and private opportunity funds.
“They are getting very aggressive because they have so much money to push out,” he said. Significant deals to date in 2000 include 99 High St. ($168 million); 99 Summer St. ($66 million); and 451 D St. (72 million).
