Recently, prognosticators and pundits have suggested that the next commercial real estate Armageddon is just around the corner. If you are a regional shopping mall owner, those dire predictions look ominous. Could Boston could be an anomaly when it comes to the current uneasiness in the commercial real estate market? Maybe. First, Boston’s magic formula of a teeming innovation economy and low office vacancies mean investment should remain attractive for some time in the future. Boston’s lack of enclosed malls (one prominent exception being the Prudential, which is benefitting from “Eataly” exposure) may also shelter it from what could be a repeat of the 2008 crisis in the commercial real estate sector. It’s no secret that the struggling retail and mall sector has been a weight on investors for years now. In the words of Business Insider “Bearish bets against commercial loans jumped 50% year-over-year in February.”
So what are we to make of the rosy picture painted in this recent Commercial Observer article? Can we expect Boston to continue to be a commercial real estate investors solid bet for some time to come? The article offers some convincing reasons why Boston’s real estate market could maintain its equilibrium for some time. These include continuing job growth, office rents at their highest since the Great Recession — even in Class B office space — and a tight hotel market.
As interest rate increases loom on the horizon, we could see investors push to acquire commercial properties before rates go up, even overpaying – something which often becomes an issue several years later when they have to refinance all that “cheap” debt and the debt service costs, even if values hold, have jumped. If anyone has a crystal ball, check it out and let me know which pattern plays out.