Recap: 2017 CBRE/New England Boston Market Overview – Part 3

Next up in our Boston Market Overview recap series, our attention turns to representatives from our Capital Markets team. Brian Doherty, Senior Vice President/Partner, and Biria St. John, Vice Chairman/Partner, reflected on 2016 and selected their draft picks for 2017.

This past year, Boston made the list for “Best Metros for Investment 2016,” breaking into the Top 10 after previously being ranked out of the Top 15.

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* denotes metro previously not listed in the Top 15; CBRE Research, Global Investor Intentions Survey 2016

Draft Pick #1: Brian’s 2016 MVP = Urban Core & Value-Add Office

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“Boston had the home field advantage in 2016; some huge wins for a lot of Boston-based sponsors included Paradigm at 101 Tremont and Synergy at 101 Summer. These groups had great game plans, flawless execution, plus institutional exits.” – BD

Draft Pick #2: Biria’s Multifamily 2016 MVP = Value-Add Suburban & Urban Infill

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“The appeal for value-add space can be distilled down into a few key factors: fundamentals are still solid (outstanding employment market and inward migration) plus basis play that offers stability, durability, but upside with the opportunity to enhance the returns through upgrades.” – BSJ

Draft Pick #3: Biria’s Multifamily 2017 Player to Watch = Suburban Class B/C & Urban Infill

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“Millennials want an authentic neighborhood and like local flavor, not the sterile environment that is anchored by national chains and looking to catch a break on the $4.00-5.00/SF rents in downtown Boston.” – BSJ

 

Draft Pick #4: Brian’s Commercial 2017 Player to Watch = Industrial of All Shapes & Sizes

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“Looking back on 2016 and the deals we worked on, industrial product flew off the shelf. There were deep bidder pools, strong institutional interest and buyer support with multiple rounds of offers.” – BD

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Draft Pick #5: Brian’s Commercial Flex Pick = Fringe Core Opportunity Plays

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“Today, the market is a bit in flux with a Goldilocks Phenomenon occurring. The urban core appears to be getting more expensive by the day and the suburbs feel a bit too risky right now.” – BD

 

Draft Pick #6: Biria’s Multifamily Flex Pick = Unique Class A Core Assets

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“Because of a shift in capital towards value-add and core-plus opportunities, there is the opportunity to pick up some high-quality core assets at slightly higher yields than a year ago.” – BSJ

 

 

Stay tuned for our next post, where we will reveal what our Rhode Island experts covered at this year’s CBRE/NE Rhode Island Market Overview.

Did you miss the beginning of our BMO recap series? Click on the following link for Parts 1 and 2.

Still in the Thick of the Cambridge Building Cycle

by Lenny Pierce, Research Analyst

One of the most memorable building surges in the Cambridge market’s history occurred between 1999 and 2002, when it saw over 4.4 million square feet of new development across 27 office and lab projects. This spike in building activity, which was coupled with the later stages of the Dot.com era, was preceded by 3 years of only 1.2 million square feet of new construction and was followed by period from 2003-2012 that saw only 1.7 million square feet of new construction – allowing us to confidently identify the ’99-‘02 stretch as the definitive peak of the cycle. The 9-year lull that occurred after this peak period was broken in 2013 when Biogen singlehandedly rebooted the market with the preleasing of new 225 Binney Street and 17 Cambridge Center projects for a total of close to 512,000 square feet. These two developments have been followed by 11 more projects, totaling 3.3 million square feet. This recent uptick in building activity in Cambridge is grounds to assume we’ve entered another building cycle. What is less clear is where we are in that cycle. Without a single banner year as the previous cycle had in 2000 – which had 10 building starts  it is harder to say whether we are ramping up, plateauing, or slowing down. However, two key indicators, the scarcity of uncommitted space within the new developments and the demand for space in Cambridge that will need to be met soon, suggest that there is still plenty of building ahead.

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Source: CBRE Research

Of the 4.4 million square feet built during the ’99-’02 cycle, only 60% was precommitted or owner occupied by specific users prior to commencing construction. Examples of buildings being entirely preleased upon groundbreaking during this period included 500 Kendall Street with Genzyme (350,000 SF) and 35 & 40 Landsdowne Street with Millennium Pharmaceuticals (440,000 total SF), but the remaining 1.89 million square feet was entirely available when construction began. In the current building cycle, on the other hand, there is 3.3 million square feet either complete or under construction so far, with a full 3 million square feet or 90% of it precommitted. Cambridge users who have already spoken for this newly constructed space include Ariad Pharmaceuticals taking the entirety of 75-125 Binney Street (388,000 SF) and Sanofi doing the same with 50 Binney Street (258,000 SF). Owner-occupied projects in this cycle have included Novartis’ 550,000 square feet at 181 Massachusetts Avenue and EF Education’s expansion of their campus by 320,000 square feet at Eight Education Way. Projects like these have spelled a current gap between total developed square feet and precommitted square feet that is over 80% smaller than it was in the ’99-‘02 cycle. Much of this discrepancy in precommitment is due to the fact that the number of spec buildings going into the ground in this cycle is down considerably. In the ’99-’02 cycle, 8 buildings totaling 856,000 square feet, including 100 Technology Square (255,000 SF) went into the ground with no preleasing. Our current cycle, on the other hand, has seen only 2 spec buildings going into the ground, 450 Kendall Square (65,000 SF) and 150 Second Street (120,000 SF). 

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Source: CBRE Research

The lack of spec building and the 300,000 square feet of available space across these new developments is enough to signal that more shovels will need to hit the dirt, but the current demand in Cambridge bolsters this assertion even further. CBRE/New England considers tenant demand in Cambridge to be how much space the market’s current tenants are looking to expand into combined with how much space prospective new-to-Cambridge tenants are looking for in the area. The current net demand for these 70+ companies totals 2.6 million square feet. The overall availability in Cambridge was 2.6 million at the close of Q1 2015 and with the new uncommitted 300,000 square feet under construction that figure goes to 2.9 million square feet. Since this 2.9 million square feet is made up of small blocks across many buildings, the fact that the availability is technically greater than the demand does not mean much. A handful of big users could find homes in preexisting space, but with 9 different groups looking for over 100,000 square feet each, the market will still need to provide more options. 

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The answer for growing Cambridge tenants and tenants looking to find a new home in said market will be a willingness among developers to raise that 3.3 million square feet of developed square feet, an initiative that wouldn’t necessarily widen the developed-committed gap for long when considering the abundance of upcoming need. Even though each year so far in this cycle has seen building the 3-4 project range, could we see another 10+ project year like 2000, where close to 2 million square feet of space got under way? 2015 could wind up marking the middle or possibly even the beginning of this building cycle, but all signs point to it falling nowhere near the end.

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