Commercial

What is a Cap Rate?

One commonly used metric for evaluating investment property is the capitalization rate, or cap rate.  Overly simplified, it’s what your annual rate of return would be if you purchased a property with all cash (no mortgage).  Put another way, the cap rate is what investors are willing to pay for a dollar of net operating income (NOI).  It is calculated as follows:
 

Cap Rate  =     Net Operating Income   
                   Purchase Price


The main value of a cap rate analysis is its ease and simplicity.  By knowing or estimating the annual rents and expenses, and considering the asking price, you can quickly gauge the “asking” cap rate. 

Market cap rates vary significantly by property type (e.g. multifamily/residential, retail, office, etc.), by location and other factors (e.g. creditworthiness of tenants, length of leases that are in place, etc.).

Other important considerations:

  • Consider whether you are (or should be) evaluating the current/in-place net operating income or the projected net operating income.  If the property is under-rented/substantially vacant, then looking at just the current cap rate may not provide a reliable assessment.
     
  • Consider what expenses you are including, and excluding, in your calculation of net operating income.  This will have a direct impact on the cap rate analysis.  For instance, if you are analyzing a property that shows no property management fee in their operating statement but you are planning to hire a property management company, then that needs to be factored into your analysis.


If you have questions about buying or selling investment property in or around Boston, please contact us.  We are also happy to share recent market reports with cap rate trends.

 

 

Tourism and Boston's Commercial Real Estate Market

Tourism is a huge part of Boston’s economy, so monitoring the number of travelers is important in evaluating the health of Boston’s real estate market.  Due to COVID-19, the number of travelers, not only at Boston-Logan Airport, but throughout the country, has decreased dramatically since the beginning of this year. 

 With the holidays around the corner and the number of cases on the rise, many are expecting flight traffic to remain low as people plan to travel by car instead of plane.  In order for Boston’s commercial real estate market to rebound, we will likely need to see passenger traffic return.

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Cap Rates for Boston Commercial Property

We are frequently asked: “what’s happening with the market?” and “where are cap rates going?”  We’re still in the midst of the pandemic and we expect to continue seeing the effects for several months/quarters, so it is difficult to predict.  However, we wanted to provide an update with the latest data.

A quick overview for those that are unfamiliar, the cap rate - short for capitalization rate - is a quick and easy way of gauging investment opportunities.  Essentially, it is calculated by dividing the annual net operating income by the purchase price.  (It is a little more complicated than that, so please reach out to us if you would like to have a better understanding.)

The lower the cap rate, the more investors value the asset – a lower cap rate means that investors are willing to pay a higher price/accept a lower rate of return to own it.


Source: Based on data compiled from CoStar on 9/29/2020

 

In Boston, investors’ order of preference is projected to remain the same as it has for the past several years: Multifamily, Office, Retail then Industrial.  As the chart illustrates, cap rates for multifamily properties have been substantially lower than the other property types – Boston multifamilies remain highly sought-after by local, national and international investors.

Due to the pandemic, many are predicting cap rates to increase over the next few quarters for all property types, followed by a return to pre-pandemic levels.  The projections depicted in the chart are always subject to change – they are provided by CoStar, one of the main commercial real estate databases.  

Based on what we are seeing/hearing though, it is surprising that the retail and office markets are projected to follow similar paths.  Retail vacancies seem to be spiking more quickly and severely than office vacancies, as we seem to see another business close each day.  On the office side though, even if a company is in “work from home” mode and not in the office, they are likely still paying their rent – accordingly, the vacancy rate for office space is likely to increase more slowly, as companies’ office leases expire and they choose not to renew or to decrease the size of their space.

The projected path of industrial property is also surprising.  While things have been shut down, there has been a substantial increase in online/website ordering.  If sales are not happening in retail stores, grocery stores, shopping malls, etc., then there will likely be an increased demand for industrial space so that businesses can store inventory and fulfill orders.  Accordingly, cap rates for industrial space may not see the sharp increase that is projected - industrial space is seeing greater demand and its an asset that investors are becoming increasingly interested in.

For investors looking for opportunities to capitalize on current market conditions, it is prime time to set up a search plan.  Over the next several months, there are likely to tremendous deals – the key is to have an organized search in place so that you hear about the opportunities as soon as they become available.  

For owners that want/need to sell, it would be best to bring your property to market as soon as possible, since many are projecting that cap rates will continue rising for several quarters (meaning lower sale prices).  We have closed deals in the midst of the pandemic and are happy to offer a free consultation to discuss a proposed marketing strategy.

 

CRE Update: How has the Pandemic Impacted Boston's Office Market?

The COVID-19 pandemic has impacted the relationship that landlords have with their tenants across all property types. This article focuses on the office market. With many people working from home, companies are now questioning how employees will use office space moving forward. 

 
 

Short-Term Leases: 

  • For leases that have expired during these uncertain times, many companies have sought to sign short-term leases, while trying to evaluate the future needs of their employees. 
     
  • While traditionally preferring long-term leases, landlords have been very receptive to short-term deals. Keeping a space full or filling a vacancy for a short-term is typically preferable to guessing on how long an office space may remain empty. 

Wellness & Airflow: 

  • Many tenants have concerns regarding wellness, cleanliness and air flow, so they have been making special requests in those regards to landlords. These requests may include an increase in frequency of common area cleanings, availability of hand sanitizer and masks for building visitors, and improving or replacing HVAC systems.
     
  • Landlords have generally been flexible with these requests, provided they are reasonable, as they want to work with tenants to ensure a safe and clean environment for everyone. 

Parking: 

  • With some employees returning to the office, the demand for parking spaces has increased as many do not feel comfortable/safe taking public transportation. 
     
  • Landlords are working hard to come up with parking alternatives for tenants, but this will likely get more challenging as more and more companies begin to return to work.  Additionally, the increase in driving will almost certainly lead to an increase in traffic in and around Boston. 


With companies evaluating their office real estate strategies, this has tended to increase the level of communication with their landlords. Due to the nature of these conversations, they can be stressful, uncomfortable and challenging. As real estate agents, we understand our role is as important now as ever. We are experienced in representing both landlords and tenants. If you would like assistance with addressing a challenging office situation, please don't hesitate to contact us.

 

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COVID-19 Update: Boston's Largest Employers

There is still a lot of economic uncertainty across the country, and the globe, in the midst of the COVID-19 pandemic.  Every day seems to bring new bankruptcy and business closure announcements.  Even if there were a miraculous turn-around in the second half of this year, our economy in Massachusetts has already lost a lot in 2020.

But how do things look in the long-term? 

The chart below was compiled from Boston Business Journal data, identifying the 20 largest employers in Massachusetts.  While this is just a snippet of the overall picture, it shows the diversity of our economy – a mix of health care, higher education, technology and other industries.  


 

To be sure, some of the businesses on this list are facing challenges and others may join them as the pandemic wears on.  

Some of the hardest hit industries nationwide have been the Accommodation and Food Services industry and the Retail Trade industry.  According to a recent report by the Boston Planning & Development Agency, those industries made up only 8.0% and 4.6%, respectively, of the State’s total jobs.  Here, as elsewhere, those industries will continue to face headwinds in the coming months.  However, Boston – and Massachusetts – seem well-positioned to persevere. 

From a real estate perspective, it is important to understand who these large employers are and how they are faring. News from these companies can impact the real estate market positively (growth/expansion means more jobs, commercial space occupied and generally more demand for housing) or negatively (layoffs/closures lead to fewer jobs, commercial space vacancy and negative pressure on the housing market).

 

 

How is COVID-19 Impacting Boston's Multifamily Market?

There are articles out there on opposite ends of the spectrum opining on how the multifamily market will fare during and after this COVID-19 pandemic.  Some say that the multifamily market will be among the hardest hit; others believe it will be one of the best performers.  Things are changing every day, as we progress through the re-opening stages.  Here is a look at a few metrics we have been tracking.


 

The number of multifamily properties that have come on the market in recent months is well below last year's levels.  This is likely due to a number of factors - for instance, owners and tenants have been cautious of having people into their properties, and many sellers have taken a wait-and-see approach in terms of timing for putting a property on the market (trying to wait for the most opportune time).


 

The beginning of this year saw more closings than last year - which is similar to what we have seen in Boston's condo market.  These were mainly deals that had been struck prior to the COVID-19 outbreak.  Since sales typically take 30-60 days to close, it is likely that we will continue to see the dip in closed transactions in April and May continue, since the number of properties that came on the market was low. 

Interestingly, sale prices do not yet seem to have been impacted.  The chart above captures Boston as a whole and depicts an average price per square foot.  We are closely monitoring pricing.  On the one hand, the Fed's insistence that they will keep interest rates at low levels for the next few years is working to keep cap rates down (and therefore prices up).  Additionally, the inventory/supply has been low - until there's data otherwise, it seems that demand is still outweighing supply, which is also keeping upward pressure on prices.  On the other hand, vacancy rates are increasing and rent rates are starting to slip, so even if cap rates do remain firm, that could have a negative impact on prices (lower annual net operating income at the same cap rate translates to a lower price).

We will continue to watch the market closely.  If you are interested in specific neighborhoods/areas or would like to discuss potential multifamily investments/sales, please feel free to contact us.  You can also start your search here with multifamily properties in Boston's "core" or multifamily properties in Boston's "emerging" neighborhoods.

 

 

 

Boston Office Rents – March 2020 Update

Demand for Boston office space is still high, and we have seen rent rates continue to rise.  The chart below is based on available data, but in practice we generally are not seeing the large gap in rents between Kendall Square and Harvard Square from Back Bay and the Seaport District that the chart indicates.
 

Office Rent Rates

Source: CoStar

 

With companies' office needs changing, many tenants are seeking to do shorter term leases than the 3-5 year minimum commitments that landlords generally prefer.  Companies looking for a long-term lease may consider one of the neighborhoods that has not seen rents increase as quickly as others, since they can present opportunities to lock in at a lower rate than that area might see.  

As rent rates continue to rise and with interest rates at record lows, it is also a great time for businesses to evaluate options to buy their office space rather than leasing.  Those opportunities can be harder to find, but they are out there - contact us to help you with that search.

 

 

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How Much are Retail Rents in Boston - January 2020 Update

Most retail rents in Boston are quoted in terms of rent per square foot per year.  For example, leasing a 1,000 SF space for $60/SF would mean the annual rent is $60,000 - or $5,000 per month.  Most retail leases in Boston are triple net (or NNN), meaning that the tenant also pays all or a portion of the real estate taxes and common area maintenance (CAM) for the building.
 

Market Rent for Retail Space ($/SF)

Source: CoStar, January 24, 2020


Boston's Back Bay, driven mainly by Newbury and Boylston Streets, is still the priciest neighborhood in Boston.  The average numbers shown above are just that - "averages" - and we see deals close above these levels on Newbury and Boylston Streets.  Overall, neighborhoods/areas have mainly all followed a similar cycle.  As the chart shows, retail rents in most areas are expected to level off and remain steady for the next few years.  

The "best" retail location for a business is not necessarily in the neighborhood offering the lowest rent.  It's great if the rent is lower than in other neighborhoods, but your sales must still be strong enough to support the rent (generally speaking, rents are lower in areas where most businesses expect sales to be lower due to various factors, such as foot traffic and daytime population).  As part of your site selection process, it is important to consider your target consumer(s) and determine whether you will be able to effective reach/serve them at the locations you are considering.  This is something we are happy to help you evaluate and consider - feel free to contact us to discuss.

Are you searching for retail space for lease in Boston?  You can start your search here.

 

 

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Planning for a New Office in the New Year?

The end of the year is a time when many businesses start planning for the year to come. With 2020 almost upon us, here is a quick look at the market conditions in a number of Boston's most popular areas for office space. We organized them in the order that we typically receive questions from businesses that are curious about the Boston office market.
 

"How Much is the Rent?"

Office rent rates within and around Boston can vary quite significantly. Cambridge (particularly from Kendall Square through Harvard Square) and Back Bay continue to be the most expensive areas in Boston. The chart above shows the Financial District as one of the most expensive, but that is also somewhat misleading since it is by-far the largest area in terms of office inventory; there are some good deals that can be found in the Financial District and Midtown.
 

"Should My Company Rent or Buy Our Office Space?"

We do not get this question asked enough, but we do try to encourage businesses to consider whether buying is a viable option for businesses. Particularly when a business is looking for a long-term lease and/or they want to make substantial customizations to their workspace, owning rather than leasing can offer a substantial financial benefit. 
 

For a free consultation to evaluate your current office space and expected needs, please contact us.  

If you are ready to dive right in, you can start your search for office space for lease or your search for office space for sale.

 

 

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A Look at Boston's Most Popular Areas for Office Space

When evaluating “Boston” office space, some of the most popular locations companies consider are: Back Bay, Seaport, Financial District and Kendall Square (which is actually in Cambridge, not Boston).*  How do these areas compare?

 

Market Rent Rate ($/SF)

Source: CoStar
 

Sitting between two of the best educational institutions in the world – Harvard and MIT – Kendall Square is highly sought after by companies looking to source from the highly educated workforce in the neighborhood.  Kendall Square continues to have the highest average office rental rate in the area. 


Vacancy Rate

Source: CoStar


The vacancy rate in the Kendall Square office market is also the lowest, which is understandable given the high demand for this space.  Projections show that the vacancy rate is expected to increase substantially in the next few years.  That is primarily due to the large amount of space currently being developed (see chart below) – it is expected that this supply will outpace demand.  While the rent chart forecasts steady to slightly lower rent rates for Kendall Square, it is foreseeable that rents will drop even more. For landlords, this means they should consider locking tenants into long term leases now at the current, higher rent rates; for tenants, this means they are motivated to sign shorter term leases and then negotiate more favorable lease/rent terms in a few years.


Under Construction

Source: CoStar


The amount of office space under construction in the Back Bay and Financial District has remained low. Back Bay is predicted to regain its position of having the lowest vacancy rate in 2021 – partly due to this lack of new construction, but also because many companies have a strong desire to be there.  

While the rent chart indicates the Back Bay, Financial District and Seaport will all follow a similar pattern in terms of rent growth/stabilization, based on the office space currently under construction and forecasted vacancy rates, it is likely that Back Bay office rent rates will increase at a greater pace.

Understanding Boston’s office market trends is critical for both landlords and tenants to understand in making leasing decisions.  Please let us know how we can help you complete an evaluation for your company.  Start your search for Boston office space here.
 

* Certainly, there are other areas and neighborhoods that should be considered as well.  If you are planning your Boston office move, please contact us and we can work with you on a complete assessment based on your requirements.

 

 

 

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