With cap rates at rock bottom and interest rates rising, many investors believe we are at or beyond the peak of the current market cycle. Add a resurgent stock market to the mix and investors may see more attractive yield alternatives beyond real estate. That said, opportunity still exists to add value and grow rents in selected Class-B and Class-C assets throughout the Northeast. In 2017 we will be hosting a series of investor workshops in New York, Boston, New Haven and Hartford/Springfield to address these issues and more.
Employment and lending
Nationally, unemployment rates hit a nine-year low of 4.6% this December. While job growth fuels demand for all real estate product types, the 2017 market may face significant headwinds as interest rates continue to rise. Heftier annual debt service payments will create downward pressure on investment real estate values, and many investors will turn to value-add rent growth opportunities to make up the difference.
What’s happening in the Boston investment real estate market?
Home to mature biotech companies, a highly skilled workforce, and some of the nation’s leading higher education institutions, Boston’s future is bright. Economists predict that sustained job growth will help to offset the recent rise in interest rates. The office market in Boston and neighboring communities also looks strong, due in part to a sustained interest from biotech companies seeking space in Cambridge, as reported by Bisnow. One example: Shire Human Genetic Therapies signed a 12-year lease for 343,000-square-feet of office space in Cambridge. CoStar also reported that Akamai Technologies signed a tentative lease for a 486,000-square-foot space in Cambridge, its potential new U.S. headquarters. Also attracting companies to the region is the 17,000-square-foot Boston Innovation and Design Building, which was recently renovated. Among its newest tenants is Flex, an electronics and connected devices manufacturer, which celebrated its opening there this past November. The company employs 200,000 worldwide and grossed $24 billion in revenue during its past fiscal year. GE, which formerly called Fairfield, Conn. home, will also soon plant its roots in Boston, relocating its headquarters to the City’s waterfront.
What’s happening in the New York investment real estate market?
Much like Boston, New York City is a prime example of how prices skyrocketed while borrowing costs were low, rent growth was brisk, and demand outpaced supply. Astute New York City owners who sold assets in 2016 at record high multiples and investors have been exploring opportunities to reinvest proceeds in nearby Westchester and the Hudson Valley. A July 2016 report from the State Department of Labor Statistics showed the Hudson Valley is the state leader in year-over-year job growth. While several economic development projects are underway in Dutchess County, as previously noted on our blog, nearby Ulster County has announced the availability of financing opportunities to help businesses in its growing food and beverage cluster expand. Ulster County also recently signed a film tax credit extension, which offers tax incentives to help grow the motion picture industry. More good news for the New York metro market, in particular the five boroughs, is the return of the 421-a property tax break, which is designed to encourage development of multi-unit properties on vacant land in designated areas of New York.
What’s happening in the Connecticut investment real estate market?
Connecticut’s investment real estate cycle reached its peak in 2016. That said, the demand for Class-B and Class-C assets remains strong as investors chase opportunities to add value. As we embark upon a new cycle, tighter lending requirements safeguard against an influx of foreclosure properties from entering the market, preventing a recurrence of the 2008 market crash. Also a good sign for Connecticut is the continued discussion at the legislature about raising the minimum wage to $15 by 2022, which will help to increase demand for workforce level housing and multifamily units. Connecticut’s job market, however, stands to negatively impact the appetite for investment real estate in 2017 and beyond. Despite lower national unemployment rates, Connecticut reported four consecutive months where the number of new jobs had fallen in 2016.
As 2016 draws to a close, it is critical for investors to keep an eye on market trends and identify overlooked markets and properties which offer the potential to add value and maximize returns. Whether you are looking to find a Class-B or Class-C investment property that is prime for capital improvements and increased operational efficiencies, or exploring building and tax credits for new development or utility conversions, understanding the key market drivers remains key to success.
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