Boston’s finance leaders share their thoughts on the booming commercial real estate market - by Laura Gregoriadis and Michael Videira

Laura Gregoriadis, DiCicco Gulman & Co. LLP

There’s no doubt the Greater Boston real estate market is hot right now.  Boston has joined the powerhouse rankings for real estate investment alongside other major metropolitan areas like New York and San Francisco. Claudia Piper, senior vice president at Webster Bank, spoke at DGC’s 4th Annual Real Estate Panel and stated the Boston market, “is so active, whether it’s from a development standpoint or just an investment sale standpoint, there are a lot of opportunities out there.”  These opportunities have been driven by the emergence of Boston’s technology sector, in addition to its long standing educational and medical institutions. 

The Boston skyline is being reshaped with 25% of the existing real estate inventory in Boston changing hands over the past year and there’s a substantial amount of new development in the pipeline. The Seaport District, being one of the areas with the most development, continues to expand its’ office, retail, hospitality and residential inventory. Adding to this inventory is JP Morgan in a joint venture with The Drew Company, who are near completion on a 236 unit 20 story project, right outside the Seaport Hotel. Sara Cassidy, acquisition officer for JP Morgan, noted 50% of the housing stock in Boston was built prior to 1980 and over 65% built prior to 2000 creating demand for their quality luxury product. The Back Bay, Fenway, South End and Downtown Crossing are also seeing notable development activity. With South End homeownership at about 35% Maureen Joyce, director at AEW Capital Management, saw the opportunity to provide an apartment community to the vast number of renters. 

Michael Videira - DiCicco Gulman & Co.

Investment capital is coming from all angles but there are things to look out for

Institutional investors are very active in the Greater Boston real estate market. Foreign investment has been coming in droves aided by the federal EB-5 Visa program which grants residency to foreign nationals who invest in projects that lead to job creation including investment in real estate development. “A green card is the main driver [for foreign national investors], which is why EB-5 tends to be a lower cost of capital,” says Tinchuck Ng of Celona Capital. She went on to say, “A few things to be cautious about if you are considering that channel of raising money, are they [the EB-5 provider] a syndicator, how experienced is the regional center, do you have that single point of contact, how knowledgeable are they in terms of real estate as a manager and whether they have the direct access to the underlying investors.” One should expect at a minimum 4 or 5 year relationship with your EB-5 provider. 

Interest rates remain relatively low and LTV is more important than ever

Similar to the EB-5 program, “There have been a number of new initiatives that have come to light [in banking], one of which is having to deal with High Volatility Commercial Real Estate (“HVCRE”),” explained Margaret Mulcahy, senior vice president at Bank of America. Basel III’s final rule in July 2013 increased bank capital requirements which may impact availability, cost and relationship lending. Debt related to the acquisition, development or construction of real property may be exempt from the HVCRE classification if there is a LTV of less than or equal to 80% and the borrower has contributed capital in the form of cash of at least 15% of the “as complete” value prior to bank funding which must be invested for the life of the project. 

As it’s not a matter of if but when the Fed will raise rates, real estate professionals will need to qualify their expected rate of return going forward. Sara Cassidy added, “From the equity side, core returns that were once 7 [percent] are now 6 and they have held around there [in 2015]. Even with the eventual rise in treasuries, I think that if they normalize somewhere around 4 you still have a 200 basis point spread.”

The panel certainly agreed, Boston is experiencing one of the largest growth periods in recent memory with rents rising to unprecedented levels. However as Margaret Mulcahy put it, “we could never predict the last 3 cycles that got us here so I don’t think we are going to be able to predict what’s going to take us down the next time.” Although all major institutions are still lending, it’s not happening without a slight trepidation of what’s to come.

Laura Gregoriadis, CPA and Michael Videira, CPA specialize in real estate at DiCicco, Gulman and Company LLP, Woburn, Mass.