By Aaron Jodka | FEBRUARY 2019
At Colliers International’s 40th Annual Trends In The Real Estate Market Seminar, “Connecting The Dots,” Executive Vice President Jeff Black zeroed in on the key drivers of Boston’s capital markets. He noted that in this interest rate environment, volatility is a given. The good news is that long-term rates (which are pegged to the benchmark 10-year Treasury) are still at historical lows, with the 10-year T-bill ending 2018 roughly where it started. On the other hand, the 1-month LIBOR escalated throughout the year, which had a pronounced impact on shorter-term, floating-rate deals.
Fortunately, the amount of capital is staggering. As of Q4 2018, an estimated $292 billion in uninvested equity capital was accumulated by U.S. funds, with opportunistic and value-add strategies accounting for 65% of that. Debt funds stockpiled another $57 billion of dry powder—their originations soared by 42% last year to about $60 billion—rivaling the market share of life companies and CMBS.
Along with debt funds, there are four other key drivers of Boston’s market today:
1. Sovereign wealth and long-term holders accounted for more than 80% of all Class A office acquisitions since 2015. Many of these deals were purchased with cash, and of those with debt, 78% had life company backing. The biggest players in the core large-loan space were TH Real Estate, New York Life, MetLife, and Northwestern Mutual—with at least $2.3 billion in aggregate exposure.
2. The rise of the family office for private wealth management. We are also closely tracking the rise of the single-family office practice (or SFO), the most important part of the investment landscape that people have never heard of and even fewer know how to access. SFOs have the power to move markets and are increasingly comfortable with build-to-core strategies, underpinned by transformational development and multi-generational return horizons.
3. Opportunity Zones created by the federal government are coming into focus. This type of investment will surge in 2019, but investors need to stay disciplined. The tax benefits, while compelling, don’t necessarily make a bad deal good. They will, however, push a lot of good deals over the goal line.
4. Disruptors: Don’t bet against them. Technology-empowered real estate investment platforms such as Fundrise and Cadre have democratized access to institutional-grade real estate investments and are here to stay.
Refinancing continues to accelerate as capital remains plentiful and owners seek to hold and/or position assets with long-term assumable financing, in anticipation of higher debt costs in the future. And as long as property owners can monetize their assets by tapping into the massive demand in the debt markets, that will support elevated valuations.
As a result, any lack of local sales due to limited inventory should be more than offset by increased transaction velocity for spec development, recapitalizations, and cash-out refinances. On that note, debt funds and major money-center banks are making Boston’s development market tick.