March
Madness
March 1, 2002
For
devoted fans - constant or transient - of college basketball, there is
nothing like March. It's a frenzied
overload of the mind and senses.
What
does this have to do with our real estate markets? To me, it does in fact
resemble many of Boston's current residential markets. But I can't speak
for those of Kansas, Indiana, Maryland, and Oklahoma, though.
Over
the past year and a half, market conditions within the office and
R&D/industrial sectors have deteriorated markedly. Within the first
class sub markets, the change appeared to be sudden and virtually
unpredicted. The fortunes of the business took a rapid change for the
worse and related real estate markets followed.
Part
of the change could not be readily foreseen. However, many noted that so
much of the office market had achieved record low vacancy through
companies renting more space than they could use.
The
feat was accomplished in part with the idea of filling the space through
continued rapid expansion of the company itself or by subleasing the space
to other growing companies at a higher rate than the original rental which
assumed continued rental rate appreciation. When neither proved to be
realistic, the space came back on the market.
Hence,
the extraordinary spread between primary, or direct vacancy, and total
space available, including sublease space. The result is that the sublease
space competes with the primary space, since, for many tenants, there is
no difference between direct space or sublease space and many landlords
are more than happy to extend the sublessee space as a primary tenant,
thus bypassing the original tenant.
The
madness out in the commercial/industrial markets is the scramble for
tenants to fill the substantial empty spaces throughout the Greater Boston
Market. As the economy begins to right itself after this recession, the
question remains is how long will the space glut continue? It doesn't look
pretty out there for the short term.
How
does this affect the housing sector in our markets? Housing, particularly
new construction, has not experienced the kinds of declines that office
sectors have experienced. While all markets paused during the aftermath of
9/11, the housing markets appear to be recovering as the new year wears
on.
Why
is this occurring? Several reasons. Consumers, remarkably enough, have not
reacted as they have in other recessions by curtailing spending. This
seems passingly odd as unemployment has increased and the loss of a job
tends to affect a household's disposable income.
The
actions of the Federal Reserve in lowering interest rates to 40 year low
lows certainly had the intended affect of providing a favorable
environment for consumer and business borrowing. Nowhere was this more
true than in the 1-4 family housing markets.
With
rates so low, homeowners went into a refinancing binge. And this after a
refinancing boom several years earlier. While residential sales lagged
during Fall 2002, refinancings took place furiously, keeping the financial
services sector profitably employed and providing a very clear stimulus to
the economy as a whole.
The
other positive aspects of the housing market have to do with the issue of
housing creation and overall supply and demand in the Greater Boston
Market. After the damaging glut created during the 1980's expansion,
housing creation has occurred in more measured fashion during these times.
More of this is related to difficulties in permitting, labor shortages,
and the lack of large land tracts on which to overbuild with impunity than
with prudence by builders and lenders, but the net effect is that housing
creation has taken place under better control this time around.
The
final issue has to do with supply and demand. The Boston area has always
been under served by major housing developers. For many reasons, the
markets have always been local. It hasn't been until this last cycle that
major, national housing developers have seen opportunity in these markets
and have developed a presence here. Housing
markets here have been local and reflect in many ways traditional New
England views on such things. As a result, over years of neglect and
underbuilding, house buyers stay active in the markets and keep housing
strong.
As
an aside, this is also true with retail as well: markets here have seen
rapid penetration by national companies where similar phenomena have taken
place throughout the country. After years of relative neglect, the New
England consumer is getting a chance to feel what the rest of the country
has been experiencing.
The
last words of caution have to do with remembering that real estate in
general tends to lag the business cycle. If in most cycles, each sector
has its ups and downs and we can say with some certainty that the worst is
offer in the office sectors and slow recovery will take place, then is
housing ready for its down part of the cycle.
Is
housing in for a fall? Given anecdotal evidence of this year's Spring
market, and the relative stability of the market during unusual times,
perhaps not. On the other hand, we have observed the overhang of housing
activity in the face of a declining economy before (1987-1990) and then
noted that housing followed belatedly but very decisively. Will this
happen this time? Maybe not if the recession was a mild as most observers
have described it and the recover will be similarly tepid. On the other
hand, if there are surprises in store, housing may be in for its share of
the down cycle.
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