How will wild fluctuations on Wall Street affect the local real estate market and development in Boston?
Globally we’re in a sluggish economic time continued austerity with few economic drivers on the horizon. Much like the slow climb out of The Great Recession, I expect there will be continued intense focus by investors on the few markets where there is less perceived risk. The federal government has pledged to keep the cost of capital down hence investors will be betting on increasingly narrow margins and lower cap rates. The bifurcation between the primary and secondary market will again widen. Fortunately, the Boston market remains among the top five US markets with DC, New York, San Francisco and LA and will continue to attract investors.
Our local economy is driven by the educational institutions, technology and healthcare. Recent austerity measures should hit these sectors hard with a pullback in federal spending. If they lose an expected 5-10% of federal funding, this will surely impact these job growth engines. On the other hand, multi-family residential is standing strong at 4% vacancy with rents trending up at 6-8% annually. This is driven by the local demographics, economics, and the Gen Y lifestyle and their fresh take on the American Dream.
With Massachusetts leading the country in job growth, office demand will slowly rebound with the greatest benefit accruing to the Downtown Boston, East Cambridge and inner suburban sub-markets with tech growth companies like Waltham. Combine this organic growth with a significant roll in large tenants over the next few years and we may see vertical development of a new office tower commence in 2012. In the meantime, residential will continue to drive development.
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