Thought it might be helpful to consolidate and share some insights on capital markets more comprehensively as we navigate through this unprecedented crisis. A lot has been published, Zoomed, blogged, and rumored — and the dynamics cause changes in perspectives weekly. Our thinking will evolve, but here are some insights today.  

We know for sure that the Boston real estate market has gone from great fundamentals, conservative leverage on our balance sheets, and the biggest development cycle in history of our region to an effective shutdown. The health crisis is a full-on economic crisis. And it’s global — permeating not only business but also social norms.   

Some observations intended to create clarity on the markets: 

• Sales volumes are down big time. Nationally, April volumes surprised many by being down 71%. Buckle up: May and June are going to be worse. 
• But some “optimism” is gradually returning to the market. Valuation activity (BOVs) has increased as of the past few weeks. Assets are being prepared for early summer launch (both small audience and wide). 
• Of the few transactions are closing or going under contract, most are between $10–$50 million, and the majority of buyers are private (high net worth, syndicators, etc.), not traditional institutional investors. 
• Most transactions are being negotiated directly in lieu of the auction process. 
• Given the dearth of data points in either leasing or sales, price discovery remains problematic in general.   
• Office REITs are off significantly, 30%–40%. Even after taking leverage into account, it appears to be exaggerating public market real estate pricing, which probably will not be replicated in private office valuations.  
• Pricing metrics: no major change in return expectations or exit cap rates. Underwriting will be more conservative around growth rates, lease–up time frames, and starting rental rates.  
• Industrial: limited amount of small to medium transactions holding close to pre-COVID-19 pricing. 
• Life Science: rents and demand continue to be similar to earlier in the year, albeit with longer transaction cycle times.  
• Office: no clarity, just theories postulated. Majority of leasing activity is short–term renewals. Suburban expected to fare incrementally better than urban. 
• Debt: Financing remains crucial for a return to traditional sales volumes. At the beginning of the crisis, lenders retreated to the sidelines — new business was virtually nonexistent. Pricing talk for 10-year money increased from pre-COVID-19 sub–3% to 4.5%. Today 10-year pricing has come back in to 3.5% — albeit for more conservative LTVs of 55%–65%. Good trends overall in financing markets.  

What to expect…a peek around the corner  

• There is generally a wide bid/ask spread for trophy assets. No major waves of distress outside of retail and hospitality.  
• Don’t expect huge discounts. Those looking for bargain deals will be frustrated. 
• There will be an opportunity to buy quality real estate at a fair price. 
• Buyers need to take a leap of faith on underwriting and long-term value.  

Boston Strong 

• Boston remains a well-diversified economy and a leader in the manufacturing and inventory of talent. Innovation starts here.  
• The amount of capital invested in science is unprecedented; the world is focused on biology and virology.  The research being done today will advance medicine for decades to come — Boston is at the epicenter of this historical acceleration.