Building On Spec? Not Just Yet, Real Estate Experts Say
Despite declining vacancy levels and rising rent, Central Massachusetts real estate investors still aren't looking to build or renovate commercial and industrial properties without a tenant, local brokers say.
But speculative development could return to much of the region within the next few years, most experts said.
Low vacancy levels and high rental rates spur speculative development, said Bill Manley, CEO of Calare Properties in Hudson. Such activity makes it possible for companies to relocate to the area on very short notice.
“Speculative development is just a sign of a healthy business ecosystem,” Manley said.
Developers in Central Massachusetts would need to see vacancy rates of less than 8 percent, industrial rents of at least $6.50 per square foot or commercial rents of at least $7.50 per square foot to make speculative activity worthwhile, Manley said.
Those figures have rebounded since the worst of the recession, Manley said, but vacancy rates for the region still remain at 12-20 percent and industrial rents $5.25 to $5.75 per square foot.
“We're still in the hangover phase of ... economic malaise,” he said.
Investors need the potential for large profit margins to justify the risk of developing property without a guaranteed occupant, added Steve Elliott, owner of appraisal firm Elliott, Gottschalk & Associates in Framingham.
Such a return on investment can be achieved in Boston, Waltham and along the Route 128 corridor, said Garry Holmes, president of R.W. Holmes Realty in Wayland.
However, it has been very rare for investors west of Interstate 495 to buy or build on speculation, said Tim Norton, president and founder of Apex Properties in Leominster.
“You're throwing up the building and crossing your fingers that the right tenants will come at the right time,” Holmes said.
But that's a risk that would benefit Central Massachusetts developers should they take it, said Tom Kelleher, senior vice president of Kelleher & Sadowsky in Worcester.
Good Deals From Contractors?
Property and building materials such as structural steel can be acquired very cheaply, Kelleher said. And contractors in the Worcester area are willing to cut prices to land more projects, he said.
Yet the leasing market has improved enough for developers to get a good return on investment after some remodeling, he said.
“The market's gaining speed at a slow pace,” Kelleher said.
A few experts reported some recent speculative activity. Elliott said he saw some speculative dabbling from the start of 2012 until interest rates and property values began to rise in the middle of this year.
Devon Kinnard, an attorney with the business law firm DarrowEverett in Worcester, said investors have been picking up medium and large commercial and industrial properties in Greater Worcester and North Central Massachusetts over the past year with the intent of renovating and leasing.
Holmes expects the market to be strong enough by the end of 2014 to permit speculative development in the Framingham-Natick area.
But the few developers willing to undertake speculative projects during the recession have hit obstacles.
In 2008, Apex purchased the 90,000-square-foot former Army Intelligence Center at 27 Jackson Rd. in Devens after Bristol-Myers Squibb announced plans for a pharmaceutical plant across the street, Norton said.
The company leased 65,000 square feet in 2009 to Mount Wachusett Community College and R3 Education Inc., Norton said. But despite at least three serious conversations, Apex still hasn't been able to find a tenant for the remaining 25,000 square feet.
In early 2010, First Colony Development finished construction on a four-story, 100,000-square-foot hub for life sciences and high-tech firms at 100 Crowley Dr. in Marlborough, said CEO Jon Delli Priscoli. The top two floors remain unoccupied.
“My timing couldn't have been worse,” Priscoli said.
Calare purchased a bank-owned 140,000-square-foot office building at 417 South St. in Marlborough at a discounted price of $1.8 million — or $12.85 per square foot — Manley said. New office construction in the area would have cost roughly $100 per square foot, he said.
Calare still upgraded the empty complex, Manley said. The company secured its first tenant for 35,000 square feet of space recently.
Though speculative development can attract new businesses and modernize outdated buildings, some experts said the activity poses its own set of risks.
Excessive speculation can distort the market by leading to major swings in property values, Elliott said.
“People are purchasing property not for the basic reasons,” he said.
And while the region experienced some speculative activity during the 1990s and mid-2000s, Central Massachusetts avoided the rampant speculation taking place at that time in places like Florida, Nevada and Arizona, said Jeff Borus, vice president of Glickman Kovago & Co. in Worcester.
“It softened the blow we ended up taking during the recession,” Borus said. “We weren't overdeveloped here.”
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