We are one month into 2016 and, from all accounts, things will likely be different compared to 2015, but not much has really changed. Reports throughout the metropolitan Boston commercial real estate markets are generally positive and the outlook for the coming 12 months is cautiously optimistic; which has been the new norm during and after recovery. The FED raised rates in mid-December and announced at their January 27th meeting that labor market conditions further improved even as economic growth slowed through the year-end.
Market participants met for the NEREJ Capital Markets Summit on January 21, for a recap of 2015 and an outlook for 2016. The banking system is on solid footing and deal flow will likely be on pace with 2015. Most bankers agreed that 2016 will mimic 2015 in volume and scale and few expect significant additions. Regional banks are pulling the cart in New England with strong performance under $50 million with CMBS, insurance companies, and pension funds competing for core assets above $100 million. Sources of capital are strong and varied, competition is good, and deals are getting done. All good news for Boston.
REFA gathered in Boston for their annual Forecasting Luncheon on January 27, with economists, brokers, developers, and lenders sharing predictions, insights, and a few war stories. Most agreed that 2016 looks promising. However, most are cautious not to overextend optimism. Participants spoke about recent trends from pension funds and insurance companies looking to hold assets for the foreseeable future (7-10 years); a reaction to current lending and cap rate environments. Slow and steady being the tone. These trophy assets acquired and held by big players will likely provide stability within the market and reduce volatility, resulting in decreased deal flow and transaction volume.
It is as important as ever that all participants take a holistic view of the markets. As real estate markets become more and more efficient and sophisticated, they begin to mirror their securities alternatives and need to be analyzed with similar diligence and care. In Richard U. Ratcliff’s 1965 book Modern Real Estate Valuation, he wrote that as valuation experts “We need to understand the valuation process as a form of economic analysis or research leading to a prediction of the most probably selling price of the property under conditions of uncertainty.” and he went on further to state that “We must view real estate valuation as investment analysis, a counterpart to security analysis.” This is truer today as secondary and tertiary markets begin to feel the pressure of the expanding core. As appraisers, analysts, and valuation experts, we must act with the benefit of hindsight and sound judgment in forecasting.
Being engaged is not a luxury. We have all experienced the agglomerative impact of individual participants and the aggregate impact of each transaction that can amount to a colossal economic force with global impact. The lessons learned in the last decade should not be soon forgotten. All participants, from start to finish, need to be diligent, responsible, and thoughtful. Boston has become a favored market for foreign investment, however difficult to quantify. These buyers are not only in the residential market, but they’re deploying capital to buy commercial properties, hotels, apartments, and sites and are often competing with veteran institutional investors. As the alternatives in the worldwide market continue to experience volatility and uncertainty, core markets in the United States provide relative security and value to international buyers.
The foundation of a valuation assignment starts with understanding the real estate problem to be solved, applying a sound methodology for diligence, and understanding the markets as they relate to, and impact the problem. As the users of valuation services become ever more sophisticated, we must raise the bar or our analysis and provide value and service to our clients. We look forward to what 2016 will continue to bring as the year pushes on.
Brett Pelletier is a senior analyst with Kirk & Company, Real Estate Counselors of Boston, Mass.