JLL Capital Markets 2014 Boston Perspective

JLL Capital Markets
2014 Boston Perspective
Looking back, moving forward
Table of contents
Greater Boston overview................................................ 4
Office market
Looking back......................................................... 10
Moving forward...................................................... 14
Multifamily market
Looking back......................................................... 16
Moving forward...................................................... 20
Debt capital markets
Looking back......................................................... 22
Moving forward...................................................... 24
2013 featured JLL Capital Markets transactions.......... 26
Jones Lang LaSalle Boston Capital Markets team
Over the past 18 months, JLL has purposely built our
Boston Capital Markets platform to conduct business
with the perspective of seasoned industry principals.
Our senior professionals have extensive experience
in acquiring, managing, financing, investing, and
lending on behalf of leading institutional real
estate firms.
We now have 16 dedicated professionals on our
JLL Boston Capital Markets team focusing on office,
industrial, multifamily and lab properties. Our mission
is to provide clients with best-in-class guidance on
acquisitions, dispositions, equity placement, debt
financing, research, and marketing while delivering
access to domestic and international capital through
our global JLL platform.
2013
Looking back. Moving forward.
We are pleased to present our first annual JLL Boston Capital Markets Boston Perspective to our
valued clients.
Overall, 2013 was a very positive year in Boston real estate. Fundamentals continued to strengthen
across the board driven by strong employment growth, continuing economic diversification, and a new
surge of housing starts. $7.4 billion of real estate changed hands during the year as institutional and
private investors continued to regard Boston as an attractive 24-hour hub.
This improvement came with some headwinds, including the effects of sequestration early in the year.
We were shaken in April by the tragic events of Marathon Monday. Summer came and we endured
a two-week Federal Government shutdown. Through it all, Boston demonstrated its resilience,
determination, and spirit – and our beloved Red Sox won another World Series Championship.
We are pleased to say that Greater Boston enters 2014 on solid footing. Cranes are visible on the
horizon, the office and housing markets are heating up and investors, both foreign and domestic,
continue to expand their holdings in our city. At the beginning of the year, we bid farewell to Mayor
Menino and welcomed Mayor Walsh into office, catapulting the city into an exciting new chapter in its
evolution.
JLL Boston Capital Markets enters 2014 from a growing position of strength as well. This past year,
we executed capital markets assignments on $1.2 billion of real estate on behalf of our clients, and
this momentum is carrying through to 2014. As we move together through this year — developing real
estate strategies and anticipating trends — we hope this report allows you to reflect on the evolution
of 2013, while providing insight to help you navigate your real estate decisions for the year ahead
and beyond.
Best wishes for a strong 2014!
2014
job growth
innovation
development
Greater Boston’s transformation continues
Job growth in Greater Boston is occurring
across a much broader range of industry
sectors beyond the traditional professional
services firms, like legal and finance, and
attracting more innovative businesses
including social media, e-commerce, software
and technology companies. In fact, today
the “Financial District” is more appropriately
acknowledged as “Downtown” given this
new, diversified tenant base that has evolved
over the past two years.
With this growth occurring in various
industries and shifting tenancy, Boston is now
at the forefront of a development cycle. We
have already witnessed significant built-tosuit opportunity in the Seaport, and looking
forward we will see real, speculative office
development both downtown and the greater
metro area for 2014.
▪ 4▪
Urbanization trend:
Valuing access over ownership
3.1% v. 1.3%
Boston
population growth
Massachusetts
population growth
8,000
110
(under construction)
(1/11–6/13)
(4/10–7/12)
(excluding Boston)
New apartments
New restaurants
DEMOGRAPHIC SHIFT
A demographic undercurrent is influencing commercial real estate today. The
forces behind the record number of new restaurants coming to the city, 1,000
hotel rooms and 8,000 apartment units under construction are in response to
the trend in urbanization. Population growth in the city has been three times
that beyond the city borders since 2010. The millennial generation that is now
graduating and entering the workforce wants to live, work, and play within a
small radius. One in three Boston residents is under 30 years old. This age
group makes a smaller carbon footprint than previous generations and values
access over ownership.
▪ 5▪
JOB GROWTH MEASURED AND DIVERSIFIED
From an employment standpoint, 2013 marked the year that
Greater Boston recovered all “office-using” jobs, five long years
after the onset of the Great Recession. In addition, Boston is very
close to reaching employment levels last seen in the early 2000s
dotcom era – the metro area’s historical high. This time around,
however, the job growth is measured and diversified, coming
from not only high-tech, but life sciences, healthcare, education,
and many other sectors.
commercial real estate space trends as well. Smaller high-tech
firms seek less traditional office space bringing growth to some
secondary and tertiary submarkets in the city and suburbs. Some
of the large corporates are opting for built-to-suit projects as they
seek to gain efficiencies and evolve their work space to meet the
changing needs of their employee base. What these two tenants
have in common is that they will use their space to help define
their brand and attract and retain top talent.
The industry composition in Greater Boston is shifting as well.
While financial services remains a large portion of the economy
(8%), the mature sector has slowed in growth. The high-tech
sector on the other hand is growing at a rapid clip and may in
fact eclipse financial services in size within a year or two. This
changing face of industry concentration is manifesting itself in
Life sciences/biotechnology is another burgeoning sector in the
Greater Boston market and along with healthcare cushioned
the decline in the most recent recession. With over two million
square feet of lab space under construction, Greater Boston’s
life sciences sector continues to remain vibrant and continues to
support Boston’s competitiveness on a global scale.
Officially in growth mode, Greater Boston could reach historic employment levels by 2014
2.60
Almost back to dotcom peak
Number of jobs, millions
Great
Recession
-105k jobs
Dotcom bust
-179k jobs
2.55
2.50
2.45
2.40
2.35
2.30
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Boston-Cambridge-Quincy NECTA. Bureau of Labor Statistics (BLS) and Economy.com, Jones Lang LaSalle
▪ 6▪
2011
2012
2013
Innovation economy bringing sector diversification
200
180
Number of jobs, thousands
160
140
120
100
80
60
40
20
0
-6%
2003
Finance
2013
-4%
2003
+10%
2013
2003
Legal services
2013
High-tech services
Structural decline, but stabilizing
+34%
2003
Life sciences
Growth sectors
▪ 7▪
2013
$1.6 billion of
foreign capital
invested in Boston
in the last two years
▪ 8▪
BOSTON CAPITAL FLOW
Boston still remains a relative value proposition compared to
other world-class cities. Sales prices are approximately 20% of
the high-priced office markets of Hong Kong and London (West
End). Boston ranks fourth nationally in terms of pricing, behind
New York City but right on the heels of San Francisco and
Washington, DC.
continue to be boxed out of opportunities, while pension funds
and their advisors increase holdings.
International capital invested in Boston continues to increase
as target allocations from foreign sources have not been met.
In 2012 and 2013, Switzerland and Norway led the way for
foreign investors in Boston — when including some 50% interest
purchases.
Boston continues to be a targeted market for investors with
foreign and institutional capital focused on increasing their
allocation. As yields and going-in cap rates drop, public REITs will
Global Class A pricing: Boston remains a bargain
$3,500
Average price per square foot
$3,000
Average cap rate
7.0%
6.0%
$2,500
5.0%
$2,000
4.0%
$1,500
3.0%
$1,000
2.0%
$500
1.0%
$0
Hong Kong
London
West End
New York
Paris
San Francisco BOSTON
Investor class distribution: Institutional dominant
100%
80%
60%
User/Other
User/Other
Private
Private
20%
0%
Germany
$195.0
Switzerland
$624.1
Canada
$233.6
50%
Institutional
Cross-border
2010-2012 3-year avg
Houston
Chicago
Saudi Arabia
$14.5
Australia
$17.6
Public listed / REITs
40%
Los Angeles
Foreign sponsorship 2012–2013:
21% and growing
Public listed / REITs
Institutional
Washington
DC
Norway
$525.5
Cross-border
2013
Dollars in millions
▪ 9▪
0.0%
Office market:
Looking back
SIGNIFICANT INCREASE IN 2013 TRANSACTIONS HAS
GIVEN BOSTON NEW MOMENTUM
2013 was the best sales year in the past
decade, excluding 2006–2007 when
the real estate market was at its peak.
Sales volume was up 72% from 2012,
and the average deal size was $54.5
million, which is about $20 million more
than 2012. Sales in Boston accounted
for about 60% of the 2013 transaction
volume. Primarily Class B assets sold in
the city, and the three tower sales this
year were all partial sales.
In the suburbs, Burlington led the way with
65% of its Class A product in that market
trading this year. Cap rates continue to be
compressed and are at all-time lows due
to a combination of rent growth forecast
and a low interest rate environment
Transaction volume ($Millions)
Greater Boston office sales transactions:
2013 projected transaction volumes will exceed all but 2006–2007 volume
$12
10%
$10
9%
$8
8%
Average cap rate
$6
7%
$4
6%
$2
5%
$0
2001
2002
2003
2004
2005
2006
2007
▪ 10 ▪
2008
2009
2010
2011
2012
2013
4%
Greater Boston
2013 sales up
$2 billion
from 2012
▪ 11 ▪
40 Broad Street
As the real estate market continues to
recover, pricing has returned to historic
highs of 2006–2007. In Boston, Class B
pricing has risen from about $200 p.s.f. to
upwards of $400 p.s.f., higher than most
comparable sales in 2006–2007. Class A
tower pricing is approximately $600–700
p.s.f., nearing peak levels of 2006–2007.
Cap rate compression downtown has
led to significant yield premiums for
investors migrating to Class B and outer
suburbs. With continued improvement
in fundamentals in these less than core
locations and product, the current riskreward arbitrage opportunity will be
mitigated in 2014.
Class B pricing: On the rise and surpassing peak levels
$273 p.s.f.
$233 p.s.f.
% Peak 84%
pricing
12/2012
2 Oliver
$305 p.s.f.
$345 p.s.f.
$327 p.s.f.
$363 p.s.f.
$380 p.s.f.
$400 p.s.f.
$232 p.s.f.
204%
JLL
11 Beacon
78%
62%
JLL
2 Liberty
45 Milk
120%
130%
175%
JLL
110%
JLL
230 Congress One Liberty One Washington 30 Winter
136%
11/2013
51 Sleeper
Expected returns and pricing across Boston area submarkets
$661 p.s.f.
9.5% Target unlevered IRR
$609 p.s.f.
8.1%
7.7%
7.4%
$385 p.s.f.
6.8%
$319 p.s.f.
$232 p.s.f.
$385 p.s.f.
6.9%
$270 p.s.f.
5.5%
5.5%
$110 p.s.f.
495
1 & 2 Executive Dr
CBD – Class B
11 Beacon St
128 – Class A
Seaport
128 – Class A
25 Mall Rd National Development / Riverside
Angelo Gordon
Center
▪ 12 ▪
CBD – Class B
40 Broad St
CBD – Class A
One Financial
Center
CBD – Class A
One Post Office
Square
Downtown Boston
Class B values
up 50–75%
from 2011
▪ 13 ▪
One Washington
Moving forward
2014
Downtown and Greater Boston will continue to be a
targeted market by local, national, and international
investors this year.
Our 2014 forecast anticipates even greater inventory of assets than was available in 2013.
Expected sales should approach $8 billion – a 70% increase over this past year.
EXISTING ASSETS
DEVELOPMENT OPPORTUNITY
Downtown
■■
■■
Downtown
The remaining EOP portfolio will be a major volume
driver with nine assets totaling 6.5 million square feet and
value greater than $4 billion
■■
■■
Continued acquisition of properties by long-term
holders will take assets out of the typical circulation cycle
Suburbs
■■
■■
Economics now justify speculative development in
periphery of downtown
Anticipated increases in construction
higher rent requirements
costs could force
Suburbs
Suburban sales activity expected to increase
including both individual and portfolio asset sales
■■
Route 495 assets will reappear in offerings enticed by
strong pricing on Route 128, while yield premium will be a
key driver of buyer interest
■■
More build-to-suit activity in the suburbs with
some consideration of speculative development in fortress
submarkets (Mass Pike, Waltham, Burlington)
Land is becoming a more valuable and in demand
commodity as development across product types becomes
more rational
▪ 14 ▪
Forecast:
Office sales
to increase
$2–3 billion
▪ 15 ▪
20 Ashburton
$900
million
of institutional
trades in 2013
Munroe Place
▪ 16 ▪
Multifamily market:
Looking back
2013 MARKED A RECORD SETTING PRICE PER UNIT IN THE MULTIFAMILY MARKET
Sales ticked up slightly in 2013, with 22
institutional sales totaling approximately
$900 million. Although pricing records
have been set, the current investment
climate looks very different from the
2006–2007 peak. Despite the high pricing
on an absolute basis, relative returns
remain very attractive. This is very unlike
2006–2007 when many purchases were
made with negative leverage. Metro-
wide rents continued their upward trend
in 2013 having risen a total of 19% over
their 2008 peak. Vacancy has remained
extremely low at 4.4%, increasing only 20
basis points from 2012.
Due to the lack of urban product on
the market, investors have adopted a
new mantra, “If I can’t buy it, I’ll build
it.” Accordingly, the distribution of
development between downtown and
suburbs has shifted. During the last
development wave, 61% of new units
were built in the suburbs. That trend
has nearly reversed itself, with 57% of
development now occurring inside the city
limits. This is not an overbuilding of our
urban core; it is an appropriate reaction
to rising demand and the lack of Class A
rental housing in the city of Boston.
Build-to-core dominates the
downtown pipeline
Rent growth and vacancy remain strong
25
$2,000
8.00%
Rent
Vacancy
20
6.00%
$1,500
4.00%
$1,250
2.00%
$1,000
0.00%
2006
2007
2008
2009
2010
2011
2012
▪ 17 ▪
2013
# of Units (thousands)
$1,750
15
Suburban
61%
Suburban
18%
Outer Urban
25%
10
5
0
Outer Urban
25%
Urban
57%
Urban
14%
2004-2008
2009-2012
2013-2016+
7,000
Over
new renter households
expected each year
Reading Commons
▪ 18 ▪
After a decade of modest household
formation, things are looking up for
Boston. Although population growth will
remain relatively flat at 0.5%, the real
driver of demand is household formation,
which will double from 0.5% to 1.0%. This
will create a record increase in housing
demand. According to these statistics, we
will need over 7,100 new rental units per
year in Eastern Massachusetts to keep up
with the influx of new renters.
Rental housing in Boston is on the front
end of a demographic surge. There are
two cohorts who will drive increased
demand for rental housing over the next
decade: baby boomers and millenials.
Both of these cohorts are more prevalent
in Massachusetts than nationally and are
displaying a distinct preference for urban,
transit-oriented properties.
In Massachusetts, both baby boomers and millennials drive greater demand for rental housing
8.0%
Baby boomers
% of population
7.5%
Millennials
7.0%
6.5%
6.0%
US
Massachusetts
5.5%
5.0%
<5
5-9
10-14
15-19
20-24
25-29
30-34
Age
35-39
40-44
45-49
50-54
55-59
60-64
Household formation
1.0%
0.5%
0.5%
0.4%
Population Household
growth
growth
Population Household
growth
growth
2003-2012
2013-2017
Current renter households* 717,000
+ Annual growth
1%
=7,170 new renter households per year
*Includes Suffolk, Plymouth, Bristol, Norfolk, Middlesex and
Essex counties
▪ 19 ▪
Forecast:
Low inventory
levels will propel
surging condo market
Fenton Building
▪ 20 ▪
Moving forward
2014
Though there is concern over rising interest rates and the wave of downtown development, our
outlook remains bullish for metro Boston. Barring an unforeseen economic shock, we expect
exceptional fundamentals and strong pricing to continue.
EXCEPTIONAL
FUNDAMENTALS
■■
“BLUE SKY” OUTLOOK
TEMPERED
Demographics will continue to
provide a tailwind, bolstering
■■
the impact will not be one-for-one as
most investors have built in a cushion,
recognizing that accommodative
policy forced rates artificially low.
Diversified economic growth will
reduce the “brain drain”, resulting in
more high-income renters.
■■
■■
Interest rates will cause a marginal
increase in cap rates. However,
fundamentals.
■■
STRONG PRICING
CONTINUES
■■
Well-located suburban
properties will benefit from the relative
lack of new suburban supply.
The wave of downtown deliveries
won’t crest until 2015 and 2016.
Occupancy will only be a short
satisfy institutional demand.
■■
■■
term issue as new buildings lease
up. Downtown rents will likely soften
when the deliveries hit and the battle
for tenants begins.
Investor appetite will remain strong,
as there will never be enough core
Class A product on the market to
Expect record-setting perunit pricing to continue on well-located
Class A product inside of Route 128.
Absolute pricing will remain steady
on Class B and value-add product as
rising rents will offset the effect of
rising interest rates and cap rates.
Condominium market heating up
$450
3,500
$429
Inventory
2,500
$407
2,000
$386
1,500
$364
Pricing
1,000
$343
$321
500
0
2006
2007
2008
2009
2010
2011
2012
▪ 21 ▪
2013
$300
Median price (thousands)
Units of inventory
3,000
The Downtown Boston condominium
market is experiencing all-time low
inventory levels coupled with record
setting pricing, especially at the highest
end of the market. With the low inventory,
a surging local economy, and increased
urbanization, pricing will continue its
upward trend.
Debt capital markets :Looking back
INCREASED AVAILABILITY OF CAPITAL
From 2012 to 2013, CMBS issuance has
doubled. The stability in cost of capital
will likely lead to further increases in
CMBS issuances in 2014. Because of
increased competition between lenders
in 2014, we can expect senior leverage
levels to increase across all lender
types. Additionally, we anticipate that
subordinate debt (mezzanine) rates will
continue to compress into the new year.
Overall cost and availability of capital
should remain favorable to support
growth in transaction volumes.
2013 new debt commitments
FHA
$20
Other
$13
CMBS
$90
Life companies /
Pension funds
$55
Commercial banks
$56
Fannie Mae
$31
Freddie
Mac
$26
Dollars in billions
Lending parameters
Capital Sources
CMBS
Commercial banks
Life companies
Preferred loan size
>$5 million
$3–$100 million
>$10 million
Cost of capital
SWAPS + 185–225 bps
Libor + 150–300 bps
Treasuries + 165–200 bps
LTV
Up to 75%
50%–65%
50%–65%
Debt yield
8%–10%
9%–11%
9%–11%
▪ 22 ▪
CMBS issuance
more than
doubled
from 2012–2013
▪ 23 ▪
141 Longwater Drive
Moving forward
2014
MODEST PROJECTED GROWTH BODES WELL FOR
INVESTORS
Treasuries have stabilized and continue
to remain at historically low levels. There
is currently a 339 basis points spread
between cap rates for Boston office
properties and the 10-year Treasury
compared to a 91 bps spread in 2007 at
the peak of the market.
Our newly appointed Federal Reserve
Chair, Janet Yellen, is anticipated to
emulate her predecessor’s approach to
quantitative easing; hence, we do not
anticipate any dramatic shift in policy
strategy. The recent announcement
regarding the $10 billion reduction
in monthly purchases of MBS and
Treasuries will not likely put significant
upward pressure on rates beyond 50 bps
rise.
Projected interest rate increases are limited
4.00%
3.50%
3.00%
2.50%
2.00%
Dec-13
Jun-14
source: The Wall Street Journal 10-year forecast
Dec-14
Jun-15
Dec-15
Rationalizing peak pricing: Cap rates significantly above Treasuries
10%
Boston office market cap rate
8%
6%
Pricing peak
91 bps spread
4%
Current pricing
339 bps spread
10-year Treasury
2%
0%
2004
2005
2006
2007
2008
2009
▪ 24 ▪
2010
2011
2012
2013
Forecast:
50 bps
rise in rates
▪ 25 ▪
11 Beacon Street
2013 featured JLL Capital Markets transactions
4
6
5
7
1
9
2
10
3
8
Office sales
1. 230 Congress Street; $49.7M; $236 p.s.f.
2. 549 Albany Street; $49.5M; $469 p.s.f.
3. 5 Burlington Woods; $23.8M; $203 p.s.f.
4. Braintree Exec. Park; $17.2M; $137 p.s.f.
5. 201-207 South Street; $14.4M; $224 p.s.f.
1
6. 2 Liberty Square; $17.6M; $267 p.s.f.
7. 40 Broad Street; $110M; $385 p.s.f.
8. Providence Industrial Portfolio; $6.8M;
$28 p.s.f.
9. One Washington St. $56.7M; $364 p.s.f.
5
3
4
2
Debt Capital Markets transactions
1. 11 Beacon Street; $23M
2. 141-143 Longwater Drive; $37M
3. Hotel Marlowe; $38M
4. 230 Congress Street; $36.5M
11
12
10. 11 Beacon Street; $34.9M $232 p.s.f.
11. 7 Oak Park Drive; $2.0M; $49 p.s.f.
12. 7-9 Channel Center; $9M; $108 p.s.f.
1
6
2
7
3
5. New England Rehab. Hospital; $15M
6. Braintree Executive Park; $11M
7. Boston Metro Industrial Portfolio; $11.7M
▪ 26 ▪
Multifamily sales
1. Windsor Green at Andover; $62.5M; 193 units
2. Charlesbank Residences; $15.1M; 44 units
3. Reading Commons; $63M; 204 units
JLL Capital Markets
One Post Office Square, Boston, MA
jll.com/boston
Office, Lab, Flex / Industrial
Frank F. Petz
Managing Director
+1 617 316 6440
[email protected]
Jessica C. Hughes
Managing Director
+1 617 531 4132
[email protected]
Robert Borden
Vice President
+1 617 316 6509
[email protected]
Multifamily
Michael Coyne
Senior Vice President
+1 617 531 4298
[email protected]
Travis D’Amato
Senior Vice President
+1 617 531 4156
[email protected]
Financing
Jonathan Schneider
Senior Vice President
+1 617 531 4119
[email protected]
One Post Office Square, Boston, MA
jll.com/boston
ABOUT JONES LANG LASALLE BOSTON
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in 2012.
©2014 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed
reliable; however, no representation or warranty is made to the accuracy thereof.

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