Matthew Jones, DiCicco, Gulman & Company

The real estate market is booming: This is a phrase that many in the industry hear frequently. Across the country, real estate values are continuing to increase and new construction is up, a trend certainly true in the Greater Boston market. Each week it seems there are new headlines about another real estate sale or new developments breaking ground. As prices have reached record highs and new developments soared, some have begun to ask how high the market will go. Will prices continue to increase? Will the flood of new supply result in prices crashing down? To evaluate the state of the real estate market we have to look at fundamentals.

Strong fundamentals drive high valuations: Although real estate prices have continued to hit new highs, the fact is the underlying fundamentals have supported the high valuations across nearly all market segments. According to Cushman & Wakefield’s 2015 fourth quarter reports, the office and industrial markets, (both nationally and in Boston), closed the year with low vacancies, high asking rents, and positive net absorption.

Strong economic growth in Boston stems from technology, life sciences and biotech industries – boosting jobs and the local population, leading to a sharp increase in prices for renters and buyers. What drives prices higher is the competition in the market for quality assets. Rates remain friendly for borrowers, and capital has been easy to obtain. In addition to debt financing, the market has been flooded with capital from institutional and foreign investors, not to mention extension of the EB-5 program.

A period of intermediate stability: Based on the balance of the high prices with strong fundamentals, the market appears to be approaching a period of intermediate stability. Prices in the Boston market don’t have much room to grow given the historically low cap rates, but the economy doesn’t appear to be slowing either. With volatility and uncertainty in the market, it is difficult to predict what 2016 will hold this election year. Political outcomes may have significant long-term effects on the economy and the strength of the real estate market.

Matthew Jones, CPA is a manager at DiCicco, Gulman & Company, Woburn, Mass.