Successful Boston Development Volatility Relies On Embracing Volatility

Thursday, March 24, 2011, 11:14am

By Jim Cronin

Banker & Tradesman Staff Writer

Boston's dependency on the financial services and technology sectors for job growth makes the city's commercial real estate market a volatile one, and developers need to embrace that volatility to succeed here.

Panelists at this morning's "Booming in Beantown" event sponsored by NAIOP Massachusetts discussed the things that make Boston both an ideal and a difficult place to operate and develop commercial real estate.

"In Boston, you want to embrace that volatility, because Boston always recovers, at least historically," said Peter Merrigan, CEO of Taurus Investment Holdings. "It has tight controls on supply. If you can buy in the dips and sell at the peaks, you can do fairly well. Now is a good time to buy in Boston, so we're buying again."

Merrigan, whose firm has bought and sold 20 million square feet of real estate around the globe, said he was more optimistic a month ago than he is now about the country's economic recovery because the housing market has not bounced back, as well as effects from the disastrous tsunami in Japan and unrest in the Middle East. While markets in Israel, Canada and many other places are recovering, the U.S is much slower overall, he said.

Boston, however, is a bright spot. While population growth is stagnant and taxes are high, the restrictions on supply and the educated workforce keep overbuilding in check and help fill vacant space in the city when jobs are created.

"We follow where the brains are," said Frank Wuest, president of Forest City Boston's science and technology group, which created the 2.5 million-square-foot mixed-use University Park at MIT. "Boston's a better place than most. We want to do more [retail and residential development] in Boston."

Boston is also an expensive city to develop real estate, which makes it less desirable for back office space that can be found "alot cheaper elsewhere," and explains why so much of Boston's vacancy occurs on the lowest levels of the city's towers, Wuest added.

Another major factor locally is healthcare's dominating presence. With that in mind, Kathryn West, vice president for Partners HealthCare, which owns 16 million square feet of real estate, said there are projections that 64 million square feet of new space will be needed to accommodate the 32 million new people who will be covered through healthcare reform. However, with new technology that allows more and more healthcare to be had at home, and procedures that formerly took a few days being completed as outpatient care, those projections are highly uncertain.