Boston, MA The New England Chapter of the Society of Industrial and Office Realtors and MA NAIOP held its end of the year review and 2017 commercial real estate forecast at the Westin Hotel in the city’s Seaport district on Wednesday, November 30, 2016. Here is a quick summary from a panel of experts of the relevant points as it relates to 2017.

Capital Markets The demand for investment real estate stays high. There are a great deal of industry articles suggesting that cap rates are way too low and that prices are too high. However the data suggests otherwise. The spread between interest rates and cap rates are still wide; about 4.5% (450 bps). There is no correlation nationally between cap rates and interest rates. If you look back 14 years, the cap rates are actually pretty flat. Expect the appetite to continue for commercial real estate especially as the alternatives (stocks, bonds, mutual funds, T-Notes) are not matching up to commercial real estate returns.

International foreign capital is still strong. The top three international countries that investors came from were: 1) Germany; 2) Japan; 3) China. Germany has negative yields on its savings accounts and the U.S. commercial real estate market is a great choice. The city is ranked as #3 as an attractive market for the international capital.

Multifamily Multifamily sales in The city have far exceeded the $1,000 per s/f. Units are selling in the $2,500 to $5,000 per s/f range. Rents however are down in The city and in the U.S. from a year ago. Vacancy is flat. Annual rent escalators have declined. We have peaked in multifamily and The city is starting to feel the difference. Cap rates on multifamily have risen. Millennials migration to the suburbs as they age, have kids and don’t want to pay $50,000 a year to send their kids to private schools, has to be a concern. Rentals may experience a higher vacancy while the Millennials seek better suburb location. It’s a demographic shift that should be watched. There has been a spike in multi-family construction in the city but it has been mostly focused in downtown and Waltham and is not ubiquitous. There is still a need for affordable housing.

Industrial Market Overview The city and inner core market is extremely tight on space. Taking out of the inventory survey any obsolete buildings, the vacancy is only 1%. There is only 150,000 s/f of industrial space available. Many of the industrial properties are being sold and transformed into higher and better uses such as apartments.

The city port has continued to dredge its port to accommodate larger ships since the completion of the third Panama Canal. The city is the last stop or the end of the road from Shanghai. Ships are coming to drop final deliveries. Only ship sizes of 8500 TEUs have been accommodated. The largest ship in the world can accommodate 19,000 + TEUs.  The city is trying to accommodate up to 12,000 TEU ships. Each ship represents the need for an additional 170,000 square feet of warehouse. Conley Terminal in The city has seen increased activity and the need for nearby warehousing is increasing.

The industrial rents in the suburbs and The city are all over the gamut. Recently in Norwood, an industrial lease was just signed at $8.00 NNN per s/f while yesterday a large industrial lease was signed in Everett at $19.50 per s/f. Yes, $19.50 NNN per s/f. Inner The city industrial rents are in the $14.00 to $20.00 NNN per s/f range as companies seek to be closer to Logan Airport and sea cargo. The high rents are not being driven by the quality of the building but rather the location value. Obsolete buildings in key locations are still renting.

Urban industrial rents for new construction are now leasing at $15.00 NNN per s/f or higher. The port is being dredged and larger ships can now accommodate up to 12,000 TEUs and there is a need for nearby warehouse. As a point of reference, the suburban industrial rent is typically in the $4.00-6.00 per s/f NNN range. New construction might be priced in the $7.00-9.00 per s/f, NNN range.

The forecast is that industrial vacancies will still continue to drop. With only 150,000 s/f available within the Inner Core area, there is 500,000 s/f of manufacturing demand.

Office and Lab Space as it Relates to Watertown Everything starts with Cambridge. The office and lab market in Cambridge is almost identical. There is a 5% vacancy for both. The office rents are $80.00 per s/f while lab space is $80.00 NNN. The city office rent is only at $61.00 per s/f which is still below the high mark of $80 per s/f.

The office demand for Cambridge is currently double the space available. There is about 1 million s/f of demand and only 500,000 s/f available. For Cambridge lab, there is a 5 time ratio. There is 5 times the demand to available space. There is 3 million s/f of new development in Cambridge planned over the next 3-4 years to accommodate the demand. The problem is so bad that current tenants that are about to move into new office space have already outgrown the space they leased in advance. Yes, the space is already too small for tenants who signed leases months ago.

So these tenants are being forced to look elsewhere (such as Boston). But the city’s vacancy is tight (7% vacancy) and rents are ranging from high $40’s to low $80’s so it is not cheap, just cheaper and available. Backbay is not a hot market either as it used to be with traditional insurance and finance companies.

It was specifically mentioned that office and lab companies are now looking at other inner core towns. It’s an Inner Core location, cheaper rent and available space. The suburbs, such as Waltham, are also in the last two months losing prospective office tenants who were looking at Rte. 128 and now reconsidering a Cambridge, Seaport and yes Watertown. It’s a reverse thinking from years past.

So what about the Seaport and sublease space? Seaport is not cheap. Office rents are in the $70 per s/f range and is difficult to find any space below $50 per s/f. Class B space is in the $40’s per s/f. There is an increase of sublet space however.

The city is having issues with large blocks of high rise space. The young companies don’t want to be in upper floors, I guess it’s not cool anymore. So upper floors are experiencing higher vacancies and rents are decreasing. Sublet space is increasing in the city as companies do not want to be in the Back Bay. The overall office The city vacancy is 7%. There has been lab migration as well to The city due to the lack of space in Cambridge.