Who Knows?

  Wednesday, January 7, 2009

"I don't think anyone has the intellectual horsepower to figure out what's going to happen over the next 24 months in the macro-economy. " -- Jones Lang LaSalle managing director Bill Collins.

Ah, but we try.
And nobody tries harder
than the men and women at Jones Lang LaSalle, in their annual market update and forecast for the media, held this time of year.
Usually, the experts from within the real estate services firm gather, and we go through the downtown numbers, then those from the suburbs, investment sales, Cambridge and lab, and maybe the industrial belt.
But on Monday the talk was all macro. 
All the specialists were there and contributed, but in 90 minutes nobody felt the need to drill down too deeply into any of the traditional categories -- heck, we're all worried about the future. Immediate and otherwise.
"The thing that's affecting the market is psychology," said Collins. And that nobody can predict.
The psychology itself of the current economic crisis is controlled largely by the media, he and others agreed.
"There's more access than ever to the media," Collins said, to all those media folks scribbling.
"And there's no good news in the media."
JLL execs can usually see pretty clearly about 18 months out, he said. But, "Our crystal ball got pretty murky."
Some things we do know, and -- if you didn't focus on how little money is moving around out there, lubricating the economy, and how much debt is coming due soon for many investors ... well, if you put that out of your mind things don't seem too bad in Boston.
"Statistically the market is still in good shape," Collins said.
Vacancy in downtown office buildings for the fourth quarter of that awful year just passed is only up about a percentage point, to 13.6 percent, from 12.5 percent in the third quarter. And from 12.5 percent a year ago.
If we could only lock that in for 4Q 2009.

*******
 

Everybody's playing it safe now.
"Landlords are focused on one thing and one thing only," said Collins. "That's occupancy." Keeping those tenants in place.
"Landlords with vacancy are struggling to figure out how to finance T.I.," the tenant improvements that will entice.
They have a bit of an advantage today, because, "Anytime you move, it's a capital event for tenants."
The average asking rate for space -- $53.21 per square foot annually -- has stayed about the same, though it's expected to drop.
Though "asking" is stable, leases being signed are down 10-15 percent. Hope springs eternal.
For the last two quarters, tenants have been sticky -- staying in place. There's about 20 percent less space being sought in the market than there would be normally. They're riding out the storm. Usually it's around four million square feet looking at any given time.
Some of these normally would be moving. So if the ones who have delayed moving, often by extending their leases for a short,one- to three-year terms, and the ones whose leases will be rolling a little later -- if they're all looking at the same time, guess what. 

It's a landlord's market again. "They'll really smell blood in the water," Collins said.
Dan Cordeau, who handles life sciences and knows Cambridge but was speaking generally about the market, said a lot of the tenants could get stuck in a tight market in 2010-2012. "Landlords will change their attitudes."
But now, "Velocity's crept to a standstill. It's really driving landlords crazy."
As for building, "All development has stopped in its tracks," he said.
With the exception of Fan Pier's new tower, recently topped off and ready in 2010, there won't be new places to go for tenants.
"Supply can't screw things up" like it did in the early-'90s days of a glut, Collins said.

*******
 

Another positive thing -- so far -- is we haven't seen a huge amount of sublease space go to market. 
With a couple of exceptions, small amounts from 8,000 to 2,500 have become available.
There's about 1.1 million of sublease space in the downtown market now. JLL predicts it will rise to 1.5 to 1.7 million this year.
There's been about half a million square feet of negative absorption this year -- some 700,000 predicted for the year.
"There are a lot of deals going on hold," said Mike Smith, who oversees capital markets.
"For our generation in business, it has never been seen before," said Collins.
Tamie Thompson, who knows the suburbs, said landlords were covering moving expenses and new furniture too in some cases in 2008. That's drying up.
Executives agreed the waterfront is in good shape. "The waterfront did better than most of the submarkets," said Lauren Picariello, director of research.
Vacancy is only about nine percent (including sub space), and supply is "good" (read: limited).

*******
 

Tenants in general are continuing to use space more efficiently, or less space. The 300-square-foot plot per employee of years back is shrinking in some cases down to 125.
"You had 20 people in 60,000 square feet during the dot-com bubble," said John Osten, a senior vice president, who knows leasing in Cambridge. "You don't see that anymore."
Partly because it costs so much to move, leases are getting longer.
Downtown used to be 7-10 years. The suburban leases were typically 3-5 years, but there are more seven-year contracts now.
Smith said what's driving all this is "capital preservation."
"It's the global credit crunch. This is unprecedented."

It's not there for auto loans, businesses, lines of credit. "They just can't get their hands on the cash."
And the considerable debt many property owners have is not replaceable.
This is where the uncertainty is. What happens when it comes due and they can't repay?

Some of these buildings were leveraged at 80 percent. The best the owners will do today is about 60. So they've got to come up with cash for the difference, and that may mean selling. And some disappearing equity. Maybe even some of that borrowed money will evaporate.
Even if you want to sell, "It's very hard for lenders to understand where pricing is," said Smith.
The safer cities -- largely because they're the ones foreign investors like -- are typically New York, Boston, Washington, Los Angeles, and San Francisco.
Things are getting tough in New York, largely because that is such a financial center.
In Boston, there's only been a one percent drop in pricing, based on (the few) deals done.
The opportunity is there for someone with cash, and a little faith. 

"You're going to see a lot of restructuring," said Smith.
You can buy debt, though a barrier, JLL execs say, is the lack of transparency -- who has control? -- of the securitized loans on some of the distressed property.
Added Collins: "The opportunity to get control of a trophy asset in the next few years is never better. But who do you talk to?"
 
*******
 

When does it end?
"I would love to think it's going to be the second half of this year," said Smith. But that wasn't a prediction for recovery and liquidity as much as a hope.
For now, many may sit back and plan for the time when money is available.
Flexibility is important, said John Myers, managing director. Planners are working with the Boston Redevelopment Authority and other agencies to permit buildings that could be hotels, could be office -- depending on whose crystal ball is right.
If you're buying property, "You need to be able to carry the cost of the land" for as long as it may take, Myers said.
"Mixed-use development financing is the most difficult puzzle out there -- just ask John Hynes," who along with Vornado is working hard to redevelop the old Filene's building in Downtown Crossing.
Despite high construction costs, higher if you build green, it's a must, the team agreed.
"The big tenants insist on some level of LEED certification," said Collins.
In general, expectations for 2009? Not high, said Smith.
"No acquisitions guy is going to get fired for not doing a deal in '09."