At long last, Boston’s commercial real estate market is showing signs of an honest-to-goodness recovery. Vacancy rates are starting to drop across the city, rents are steadily rising, and there are some exciting developments underway.
Some of the credit goes to the broader market – major metropolitan markets have seen commercial real estate prices recover twice as quickly as non-major markets.
But Boston deserves special recognition for the steps it took to avoid overbuilding during the boom. The Boston Redevelopment Authority, for instance, took a very conservative stance in approving development proposals, where their counterparts elsewhere let deals sail through. The city’s diverse business community – particularly its healthcare and biotech firms – also helped insulate the market from the financial services fallout.
As a result, Boston is one of three major metropolitan areas – along with New York and Washington – CIT identified as providing the best opportunities in its 2012 US Commercial Real Esate Financing Outlook.
But just because local market conditions are ripening and developers are lining up, that doesn’t mean capital will be as available as before the downturn. Some of the nation’s biggest lenders are still struggling to digest billions in commercial loans they extended during the real estate boom during a time when overleveraging was just as common as overbuilding. In fact, approximately $1.4 trillion in commercial mortgage backed security (CMBS) transactions are coming due over the next four years, and commercial banks that are saddled with large portfolios will be more likely to sit out the CRE rebound while they work through those issues.
So, what is a developer looking to break ground on a new project supposed to do? How about the owner-operator trying to add value to an existing property? Renewed access to the credit market remains critical for businesses that need additional capital to pay down their debt and begin growing their businesses again.
The good news is there are a number of financing alternatives available to high-quality sponsors with a track record of good financial performance. CIT is among a host of new entrants in the commercial real estate finance arena that are looking to pick up some of the slack and tap new opportunities in attractive markets like Boston.
While each transaction we consider is unique, there are common qualities in those we decide to finance. They can be broken down into three main categories: quality of the sponsor, quality of the project, and quality of the location.
Quality Of The Sponsor
Bigger doesn’t always mean better. At CIT, we look for high-quality mid-market sponsors that are well-capitalized and have significant experience in the type of project they are developing or refinancing. As critical is whether the sponsor’s past projects were developed on time and on budget. When construction is delayed or the sponsor is plagued by prolonged sellout or renting periods, that increases the likelihood that we will have to restructure the loan or are forced to call on a guarantee.
Quality Of The Project
The cost of financing across most segments has increased because of the long and uncertain nature of the economic recovery. Even so, we see significant opportunities on the retail side of the business, and select opportunities in the office sector. Multifamily remains challenging – because banks often cannot compete with government sponsored entities, such as Fannie Mae and Freddie Mac – but private deals are still getting done. The onus, however, is on a multifamily sponsor to show it has the value-add capability to manage zoning and other restrictions.
On the acquisition front, lenders are going to be hard-pressed to finance any CRE deals that aren’t below replacement cost. There is a giant resizing going on in the marketplace, and the majority of pending commercial mortgage-backed securities (CMBS) deals will need to be restructured in some way. In that light, lenders are going to be looking for low-leverage purchases of properties that leave enough wiggle room to serve as a buffer against future price declines.
Quality Of The Location
Not all new projects are going to be sited on the corner of “Main and Main.” Though vacancy rates in downtown Boston are fairly high right now, there could be opportunistic instances with long-term leases or where the asset is being acquired at very low levels. Infill locations in the Boston suburbs are pretty attractive, at least in areas where there are very strict constraints on development and there aren’t many other competing properties operating at low levels.
All in all, the Boston CRE market is clearly improving. As activity picks up, it’s an ideal time to examine your lending relationships of the past. In an environment of constant flux, it will be important for you to find a lender who will be with you from cradle to grave and not just pass you on down the line from salespeople to portfolio managers to underwriters and administrators. You need a partner who can move quickly and clear obstacles, not create new ones. So, as you begin the process of restocking your development pipelines, make sure you’re being as aggressive in the review of your financing partners as they are sure to be with you.
