When it comes to middle market sales, (properties priced between $3 and $30 million), there’s no denying that NAI Hunneman has been excelling. In fact, NAI Hunneman has been selling more mid-market properties than anyone else in the Boston area. In order to get a better understanding of our success and the market as a whole, Doug Jacoby, executive vice president and principal at NAI Hunneman, answers questions on trends we’re seeing in the sector.
Who is buying middle market properties?
Currently in the Boston area, many of the groups buying these properties are within the private client group, meaning private individuals with a high net worth, or smaller real estate private equity funds. Something that hasn’t changed is that there’s a demand for yield and also a demand for investments in something other than the stock market – which comes from a sensitivity to the 2008 stock market crash. Therefore, a lot of capital has been raised to invest in real estate so people will hopefully have a higher return than bond returns (which are at all time lows) and the stock market. With that, rates are still low and attractive to potential buyers. Years ago, properties were still selling yet interest rates were at 7 percent – interest rates don’t need to be 4 percent for people to make money.
What area is most desirable?
Since the crash of the stock market and the economy in 2008, the recovery in commercial real estate has been focused on the best properties and the best areas. These usually include institutional assets in the Cambridge and Boston area which go for a high price. Cash flow properties are still the number one choice, but there has been more interest from value-add investors. Whether they are assets controlled by special services or those that have vacancy, there are buyers sitting on the sidelines eager to invest. Rather than worrying about the economy, these buyers can look at the near future and make reasonable assumptions about how long it will take to lease a property and how they can improve the property. Assets in areas further from the “Hub” are less desirable as it is harder for investors to make the assumptions in these outlier areas.
Is there more middle market property available and is this the right time to sell?
There’s no denying that we’re far more active now with new listings than we were a few years ago. As buildings were leased up a little more, owners can now reasonably sell the asset. When asked if this is the right time to sell considering you are dealing with individuals’ money, there are a couple factors to consider. Tax rates have gone up while interest rates are low, allowing people to acquire assets for higher prices than normal. There is an overall “let’s sell now rather than wait for rates to go up,” mentality.
How fast are properties selling and what is the “sweet spot” price?
Cash flow properties move very quickly. In some cases, we had not even finished the marketing packages for the property and people were already putting down offers. The “sweet” selling price has been about $5 million, definitely under $20 million. For high net worth individuals, they are at the lower end and real estate private equity firms are at the higher end. For example, if a high net worth individual buys a $20 million property they will need $5 million of equity and transaction costs. That is a lot to put into one asset for most individuals.
What kinds of properties are selling? Apartments, warehouses?
Apartments are currently strong in the mid-market. Years ago, the housing market was split about 50 percent rent and 50 percent own. Before the crash, it was easy to get a mortgage, swinging the ratio to 60 percent ownership. Now, it is swinging back to the way it always was, 50/50. Also many people are choosing to rent rather than own, even if they are able to own, which is driving up rental rates and making apartments more attractive. In another asset class, industrial assets are also attractive because not a lot of additional capital needs to be poured into each transaction (i.e. tenant improvements). They are often multi-tenanted warehouse facilities that might have some high tech R&D space or manufacturing.
Overall, NAI Hunneman has increased the volume of square footage sold in the mid-market this past year. We are also about to close on several, large deals so stay tuned for those details.