Inflation and fast-rising interest rates are taking their toll on commercial real estate transactions in Greater Boston.
Real estate investors bought $4.6 billion in commercial properties in the Boston metro area in the third quarter, a 27% decline from the same three-month period in 2021, according to new data from MSCI Real Assets. It’s only the second time that quarterly dealmaking has fallen year-over-year in the region since late 2020, when sales came to a halt during the pandemic’s first months.
Sales are slumping across several property types, including development sites, office buildings, apartment properties and senior housing. (Commercial life sciences labs are split across the office and industrial categories in the MSCI data.) Experts believe deal volumes could remain muted for the next 12 to 18 months.
The Federal Reserve’s rate increases have slowed deal flow, said Tucker White, the Northeast regional manager for Avison Young’s innovation and insight research group. Not only is the cost of capital more expensive, it’s uncertain how those costs will soon change, given that rates could jump multiple times before a transaction can close, he said.
“Without having a horizon on what the interest rates are going to be, it’s really hard to get a deal done. A lot of local shops, including life sciences, are ‘pencils down’ right now,” White said.
Redevelopment-minded transactions have taken a particular hit. Last year during the third quarter, investors purchased $2.76 billion in office properties in metro Boston, according to the MSCI data. Many of the deals were made with lab conversions in mind. But this past quarter, office sales fell to $1.22 billion, a 56% year-over-year decline.
“You’d see transactions where, say, a less-experienced life sciences operator is coming in and trying to make a quick buck by flipping a property. There’s none of that now,” White said.
Properties in prime locations continue to change hands, however. In September, Boston Properties Inc. bought a six-floor Kendall Square lab building from Biogen Inc. for $603 million, or $2,225 per square foot. The same month, GI Partners acquired a life sciences property off Western Avenue in Cambridge for $151 million, or over $1,900 per square foot.
“Given the level of uncertainty in the marketplace, investor sentiment is shifting toward stabilized laboratory assets,” Newmark research director Liz Berthelette and her team wrote in a recent research note. “Pricing is at an all-time high as a result.”
The sales slowdown is not being felt equally. Industrial property sales in metro Boston climbed 6% in value year-over-year, to $1.02 billion, according to the MSCI data. Buyers remain more bullish on industrial than other property types, with rents still increasing and vacancies below pre-Covid levels, Berthelette noted in another report. That said, property pricing has been declining, though the average price remained above $200 per square foot in the third quarter, according to Newmark.
While apartment sales volume dropped 20% year-over-year locally, according to MSCI, at $1.4 billion, it remains far above pre-pandemic levels. Multifamily buildings in dense, transit-friendly cities will continue to see demand because of the tight housing supply and the increasing cost of buying a home because of rising interest rates, White said.