What’s next? How CRE is poised to perform amidst a downshifting economy.
By CoreNet Global - New England Chapter Education Committee Members Cerise Marcela and Sandra Gucciardi
On June 6th, 2024, the CoreNet New England Education Committee hosted an insightful panel discussion addressing the state of the corporate real estate (CRE) market and its performance amidst a downshifting economy. Esteemed speakers from various sectors, including industry experts, academics, and representatives from the Commonwealth of Massachusetts, gathered to share their perspectives on Boston's future. The discussions revealed cautiously optimistic views, particularly concerning inflation and interest rates, which are fundamental to labor growth, investment, and business activities.
Boston stands strong in terms of employment and economic growth, benefiting from its significant presence in life sciences and professional services. However, the city faces critical challenges, such as a high cost of living, an aging workforce, and slow population growth. The hybrid work model continues to impact office growth. Still, there is a growing consensus on the value of collaboration and in-person interactions, which may eventually stabilize the office vacancy market.
Key highlights from the session:
State of the US Economy and CRE Market - Rebecca Rockey, Cushman & Wakefield
- Inflation: Inflation remains high but is trending in the right direction. Cushman & Wakefield predicts that interest rates will remain elevated for an extended period, potentially for the next decade, due to factors such as deglobalization, tighter labor markets, aging demographics, swelling budget deficits, and an AI productivity boom.
- Labor Market: The US white-collar job market lags as big tech companies pause hiring, with significant declines in tech employment in cities like LA, Atlanta, Minneapolis, San Jose, and San Francisco. Boston sees a 6% decline, similar to NYC, Austin, Nashville, and Raleigh.
- CRE Market: The impact on the CRE market varies across states. The industrial sector leads in leasing activity recovery, while office market vacancies continue to rise.
State of Boston Economy - Mark Melnik, UMass Donahue Institute
- Industry: Massachusetts' recovery from the pandemic recession has stalled, with leisure, hospitality, and retail sectors being the slowest to return.
- Income: Massachusetts’ per capita income reached $84,945 in 2022, 30% higher than the national average. Despite having the highest per capita income in the country, Massachusetts struggles with a high cost of living.
- Unemployment: Knowledge-based industries continue to be important in the state’s growth, and this is reflected in the Massachusetts data on the current unemployment rate bouncing back to the pre-pandemic low (2.9%) compared to the national average of 3.9% in April 2024.
- Job Growth: Demographic challenges will limit economic growth due to a labor shortage. The labor force in Massachusetts is projected to grow slowly over the next 30 years; thus, international migration will play a key role in population growth. Immigrants in Massachusetts are unique as the percentage of migrants who attained advanced degrees is higher than that of the native-born population.
- Labor Force: Massachusetts is experiencing a historic disconnect between job openings and hires. There are twice as many job openings (5.7%) than jobs being filled (3.2%). There are simply fewer jobs filled than available jobs in the market. Our labor force growth has slowed dramatically compared to the past 30 years
State of Boston CRE - Chris Skeffington, CBRE, and Ashley Stolba, Commonwealth of MA
• Recovery of CRE Sectors: Industrial and multifamily sectors are preferred by lenders, while office liquidity is very limited. Lenders with significant exposure to troubled office assets are hesitant to issue additional loans.
• Office Building Debts: Banks hold 35%-40% of outstanding CRE debt. The strategy of "kicking the can" is no longer viable, and private and foreign capital is aggressively pursuing acquisition opportunities.
• Life Science: Leasing demand has decreased since its peak in 2021 but shows signs of stabilization. Despite cautious approaches from companies, favorable long-term demand drivers will support sector growth. Life science remains an attractive investment for institutional capital.
• Industrial: Leasing fundamentals are stable, though there is increased attention on supply pipelines. Investor interest remains strong, with value funds being the most active, followed by core and core+ capital. A lack of market velocity leads to a scarcity premium for quality offerings.
• Boston: We began the process of our economic development plan at the beginning of the administration of Governor Maura Healy, focusing on three key pillars: fundamentals, talent, and sectors, which can be accessed here. The two sector investments that the cabinet has made were in life science and climate tech, in addition to the availability and accessibility of incentives for companies to stay in Massachusetts.
This session underscored Boston's resilience and strategic positioning in the CRE market while also highlighting the challenges and opportunities that lie ahead.