Meeting the challenges of 2013

Developers, owners and lenders are seeking higher returns to hedge against continued risks

One of the benefits of being a Counselor of Real Estate is gaining access to some very smart and talented people. In the Boston chapter, one of the brightest is Ray Torto, former partner of Torto-Wheaton and now global chief economist at CBRE, one of the largest national real estate firms.

Most winters, about this time, we get to sit down for lunch with Ray and listen to his views on things. For the past several years, this has coincided with his return from Dubai, where he goes with other CBRE muckety-mucks to pitch their services to wealthy Middle Eastern investors and sovereign wealth funds. This year, too, they came back with dollars to invest in U.S. real estate. Alas, none of that is going to be spent in New Hampshire, but more on that shortly.

Ray began by stating we have the same problems as last year, but he sees less systemic risk for recession in 2013. That is not the same as saying it could not happen, but that it is not likely/probable — think of the glass now being half full.

We will continue to have low interest rates (more dollars than places to spend or invest them). For savers and pensioners, this is financial repression. Nonetheless, we are collectively muddling through.

A key factor is a strong sense that we need liquidity. We learned four or five short years ago how quickly financial markets can implode. So a sizable amount of cash will be staying on the sidelines.

In the strong urban “A” markets, like Boston, New York City, Washington, Chicago, Los Angeles and San Francisco, this recent recession has only been a speed bump. I witness this weekly with my work in New York City, doing lease deals in the South Bronx, Queens, Brooklyn and New Jersey for $25-$30 a square-foot. This is true for office, retail, multifamily, industrial/warehouse and commercial (mixed uses and everything else) as well.

In metro Boston, there were about 3 million jobs in 2000. In 2012, there were 2,975,000, so we are almost back. But the current jobs may be lower-paying than in 2000 (more work to be done here).

New Hampshire market

After four-plus years of the Great Recession, firms are beginning to spend again. CEOs are being told they are paid to run the business, not sit on hoards of cash.

So cap rates (essentially the projected returns on capital put at risk) remain in the 5-6 percent range in Boston and similar “A” markets, but are higher in “B” and “C” markets, also known as secondary and tertiary markets. Hence, the UAE Sovereign Wealth Fund is not investing in New Hampshire.

What about local pension funds and insurance companies? We do see limited activity from them, but mostly for multifamily, and often as lenders (mortgage holders), not straight equity investors.

But the rush for large-scale multifamily is now prompting new construction and, like most cycles, the first guys in will make out OK, but the second or third wave, maybe not so much.

We have learned in recent months that New Hampshire is slowing down relative to its New England neighbors. As I often say, it takes jobs to fill buildings. Technology improvements, coupled with rising costs and a serious push for lean operations, have shown signs of decreases in square-footage leased (and owned). Back in the ‘80s, we talked about 4/1,000, meaning four employees for every 1,000 square feet. In the ‘90s and early 2000s, that became 5/1,000. Today, it is tighter/denser still.

Office sizes (and cubes) are getting smaller and employees who travel up to three days per week may no longer be eligible for a permanent office — hence the term “hoteling.” The portable nature of technology and communicating makes this trend even more robust.

For landlords, these are challenging times. Their space needs to be efficient, with ample power and good HVAC. Very old buildings can't get there. They are functionally obsolete, and very soon will be financially obsolete, so owners and lenders need to think of economically viable adaptive reuses.

Retail, too, is under siege. What do you do with a closed Bed, Bath and Beyond? How is Best Buy going to shrink its footprint? Is Sears going to make it? What happens to the Tilton Outlet Mall when Merrimack Outlet Village becomes an intervening opportunity?

All of these questions spell risk, so developers, owners and lenders want/demand higher returns to hedge against those risks.

But all real estate is said to be local. It is not mobile or liquid. So the adage — location, location, location — still applies.

Bill Norton, president of Norton Asset Management, Manchester, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at

Categories: Real Estate