Recent sales of newer core assets have shown cap rates in the low 4.0% range as investors compete intensely for quality properties.  This represents close to a 100 basis point drop since the last peak in 2007. If a new, core asset in a prime suburban location came to market today, we would expect it to sell at a cap rate below 4.0% based on a trended year one proforma. This extremely low cap rate environment coupled with the strong demand outlook will result in record-setting pricing. 

Don’t be surprised to see prime suburban deals fetching well over $400,000 per unit during 2013.The last wave of multifamily development in eastern Massachusetts occurred primarily in the suburban ring along Route 128 as developers took advantage of Chapter 40B. Close to 22,000 units were built from 2004-2008, nearly 70% in the suburbs. This time is different, as only 20% of our current pipeline is Suburban. 

Due to the imbalance of institutional demand and available product for sale, investors have introduced a “build-to-core” strategy. They simply cannot buy enough core product, so they build it instead. This increased demand coupled with a lack of existing product for sale has sparked a new development wave that started downtown and is expanding into the suburban markets. 

This is a distinct shift from the last development wave, which was largely funded by shorter term, build-and-sell capital sources. These investors demanded higher returns and had a more difficult time withstanding short-term ups and downs in a very stable long-term market.

We have been closely tracking development trends, and divide the Greater Boston markets into three categories:
• Urban – including Downtown, Back Bay, North Station, Seaport, and Fenway
• Outer Urban – defined by drawing a ring connecting the ends of the MBTA’s subways lines (not the commuter rail) and including close-in towns like Cambridge, Somerville, Medford and Quincy
• Suburban – covering anything further out from the city, generally ending at the towns on and around Route 495

The last wave of multifamily development in eastern Massachusetts occurred primarily in the suburban ring along Route 128 as developers took advantage of Chapter 40B. Close to 22,000 units were built from 2004-2008, nearly 70% in the suburbs. This time is different, as only 20% of our current pipeline is Suburban. 

-Michael

I just had the pleasure of serving on a panel at GreenBiz Media’s VERGE Boston conference, which focused on the convergence of buildings, technology and transportation. The panel, called “The Trillion-Dollar M2M Opportunity,” was about the dramatic impact of machine-to-machine (M2M) technology on four industry segments: energy, transportation, the built environment and agriculture. 

M2M technology, also known as the “industrial internet” or the “Internet of Things,” is the term used to describe the application of information and communication technology to improve and automate almost any business process. In the built environment or real estate world, this technology is enabling us to pull data out of building automation systems. It allows us to run real time analytics to fine tune the performance of all building systems and equipment and significantly energy consumption. 

The analytics also enable us to tell when the performance of equipment is beginning to degrade, and to correct small defects before a failure occurs. The Jones Lang LaSalle service that utilizes this technology is known as IntelliCommand. As discussed in the panel discussion, IntelliCommand consistently delivers 10% to 25% energy savings while improving operational performance for our clients. 

On a related note, The Carbon War Room recently released a white paper that further describes the exciting possibilities across all four industry segments, and describes the M2M industry as a potential trillion dollar industry. If you think that the internet changed the way we do business, the industrial internet is going to have an even more dramatic effect.

-Dan

Historically, Energy Star and LEED Certified buildings have outperformed the market . On average, vacancy rates for green buildings in Greater Boston are three percentage points lower than rates for their counterparts.

Since hitting a trough in mid-2010, rents for green buildings have climbed by nearly 13 percent. During that same period rents for conventional commercial buildings grew by just 4 percent.

Jones Lang LaSalle Chairman of Energy and Sustainability Dan Probst will be a speaker on the Trillion Dollar M2M Opportunity panel tomorrow as part of the VERGE Boston conference hosted by GreenBiz Media. Watch for his post here. Governor Deval Patrick delivered the keynote this morning.

The Boston multifamily market remains ones of the best performing markets in the country. As a result, institutional investors view Boston as one of the top three most desirable markets, alongside New York and San Francisco. 

Their desire to deploy capital into Boston multifamily has resulted in unprecedented asset pricing and has stimulated new development throughout the region. Despite many high profile developments rising before our eyes, opportunities exist, many hidden in undersupplied pockets in the suburbs.

Relative to most other cities, Boston’s employment remained insulated through the downturn thanks in large part to a heavy concentration of jobs in healthcare, high-tech, and life sciences. These sectors weathered the recession fairly well, and have taken over for financial and legal services as the primary drivers of growth in our local economy. In fact, as of September 2012, Boston had regained all of the 103,000 jobs lost during the recession.  This economic resilience, combined with a lack of new multifamily deliveries from 2009-2012, has caused metro-wide rents to grow by almost 15% from the last peak.  Some especially strong submarkets have experienced growth of over 30%.  Vacancy now hovers around 4%, indicating a short supply of quality product.

Boston is now on the front end of an unprecedented increase in demand for apartments due to improving renter demographics.  Baby boomers are becoming empty nesters and their echo boomer offspring are beginning to form new households.  Adding fuel to the fire, the median marriage age continues to rise and single-family credit remains tight. 

What does this all mean?  Household formation, the primary driver for housing demand, is expected to strengthen to 1% for the next five to ten years.  Close to 7,000 new renter households will be created per year in the Greater Boston area, double the historical rate.  This bodes very well for multifamily, as long as we don’t overbuild.

-Michael

From Chelsey Fitch
Property Manager
Jones Lang LaSalle

It’s not imperative for a building to be LEED Certified to attract tenants, but these days it definitely helps. Here is some food for thought regarding LEED .

On average, LEED Certified buildings have lower operating costs, higher assessed building values, and higher rental rates.

To achieve certification status the building is required to go far above and beyond minimum building code requirements.

While LEED Certification can present many large upfront expenses, the future savings over the lifetime of a building’s operations can create and attractive ROI for building owners and tenants.

Going LEED can be time consuming and difficult to attain. Therefore, the buildings that are certified are perceived as higher quality, and more likely to qualify for other industry certifications.

Let’s not forget the reason LEED Certification began. It was to improve our environment. While most decisions come down to dollars and cents and a compelling ROI, consider the oft forgotten  prophecy:  
Only after the last tree has been cut down.
Only after the last river has been poisoned.
Only after the last fish has been caught.
Only then will you find that money cannot be eaten.

The idea is clear that energy efficiency is important not only to the future of business but to the future of human beings. At the end of the day, without clean air and water there isn’t much of a future for business. Look at the big picture when deciding to LEED or not to LEED.

-Chelsey

Given recent gains, the outlook for construction in Greater Boston is bright. According to the Architectural Billings Index (ABI), which is a leading economic indicator for construction activity, the Northeast is leading the nation in billings with an ABI  of 56.7.  A score of 50 represents the diffusion center. This is a positive sign for the market.. Just 12 months ago our ABI stood at 46.

Residential construction continues to lead the upturn, with commercial/industrial firms remaining strong and nstitutional on the cusp of recovery.  The US ABI for commercial and industrial is 53.3, industrial 50.7, and residential a high of 60.0.

In a survey conducted by LinkedIn, 7,000 members were asked what workplace trends they thought will disappear in the next five years. According to the professionals, the top 10 items and office trends that are becoming rare and could even disappear in the next five years are:

Many at Jones Lang LaSalle are connected to those affected. Bobby Jangro, Patrick Riley, and Jodi Enggasser of JLL finished the storied race.  Patrick provided Bloomberg TV with an eyewitness account after crossing the line. The explosions didn’t impact our serviced properties.

In a show of unity and support, we reached out to our employees across the Americas to donate to The One Fund Boston or the Red Cross. The company matches donations through our matching funds program.

The Boston Marathon is a cherished tradition and an integral part of our community. Charitable donations have been pouring in from around the world.

Boston is moving forward. JLL cares.

The list of buildings in this week’s chart presents strong value-add investment opportunities. Particularly given their favorable downtown locations, and proximity to public transportation.

While the pace of recovery has varied across submarkets, the Greater Boston office market overall has seen strong and steady improvements. Its average asking rent has grown 1.8 percent over the year. For the second quarter in a row, the vacancy rate remains below 15%.

The outlook is bright. The effects of sequestration, however, remain to be seen in this market that relies heavily on NIH funding and defense spending.

Consumers appear to be weathering the impact of a rise in taxes. Firms continue to consider strategic real estate decisions that combine growth with space saving strategies.