Continued recovery for housing; a push for better office space

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By Sam Bonacci

While residential real estate in the Bay State continues to recover, 2014 saw commercial organizations grabbing office space in and around Boston, which led to increasing focus on the Interstate 495 corridor.

In 2015, there will be more of the same slow recovery in housing as prices and sales claw their way upward. On the commercial side, there are signs that more businesses will seek higher-quality office space while many companies look to own rather than rent.

HERE ARE FIVE THINGS TO WATCH IN 2015:

1. Residential real estate continues slow rise
Following a successful 2013, the recovery of the residential market stumbled slightly in 2014, according to Tim Warren, chief executive officer at The Warren Group, of Boston. In the spring of 2014, hopes for a quicker housing recovery were muted as the spring market "fizzled," he said, and sales fell 10 percent during the first quarter while prices rose.

"We've seen some of the expectations for a rapid recovery (turn) disappointing," he said. "I expect modest gains in sales and median prices next year."

But there's still plenty of room for growth, with only 30 communities in Massachusetts - less than 10 percent - having reached the peak pricing that the market soared to in 2005.

"That leaves another 300 communities or more where there is room for growth to get back to the peak pricing," Warren said.

2. Foreclosure activity will remain high
As banks continue to work through a property backlog left over from abnormally low foreclosure rates in 2013, foreclosure activity will remain high for the first half of the year, according to Warren. Through October 2014, there were 6,384 initiated foreclosures in Massachusetts, according to the Warren Group, a 36.5-percent increase over 2013.

"I think it was artificially low (in 2013) because lenders were leaving stuff in the pipeline because they were unsure about some of the regulations that forced them to give people another chance," Warren said. "It is old distress that is coming home to roost."

3. A rush to commercial ownership
While many companies and investors have put off major real estate purchases since the recession, they will take advantage of low interest rates in 2015 to make themselves owners, said Dan Mancini, principal at Kelleher & Sadowsky, the Worcester-based commercial real estate brokerage.

"We saw a lot of businesses that had been renting space and had been sitting on the sideline for the last five or six years that are now taking the plunge to purchase facilities and equipment," he said, citing increased lending support from banks as a contributing factor.

During that tighter loan market, businesses were forced to make the most of what capital they had, Mancini said, leaving them to postpone large purchases, such as real estate. This move toward purchasing will have broad-reaching benefits, he said, pushing up commercial property values throughout 2015.

4. Commercial flight to quality and efficiency
A continuing trend into 2015 will be an active pursuit by businesses for higher-quality rental space, according to Mancini. When that takes place, along with efficiency and consolidation, businesses end up with not only more modern and well-appointed space, but often a savings over their previous location, he said.

"We are seeing tenants that are moving from lower quality industrial and office buildings and they are upgrading their facilities," Mancini said, explaining that, for the most part, these are moves within the same communities.

Tenants moving from older Class B or C office or manufacturing locations can fit more into modern Class A space, whether that means more efficient seating configurations or higher ceilings for more vertical storage, and the capacity to handle larger equipment, Mancini said.

Through this strategy, a company can move to a space that rents for more, yet save money by taking up less space.

Efficiency is the primary consideration for every business Kelleher & Sadowsky talks with, Mancini said. This will lead to increasing competition for that Class A space, while the vacancy rates for lower-quality space will remain higher in 2015, he said.

5. Suburban-to-urban switch
The recession put many people's plans to move on the backburner, including those looking to downsize and simplify their lives. Recent - and not so recent - college graduates were moving home, with a record 36 percent of the country's adults ages 18 to 31 living with their parents in 2012, according to the Pew Research Center.

In 2015, the improving economy could help many of those post-college students move out of their parents' homes, which would allow them to start thinking about downsizing, according to Warren. An urban environment is increasingly appealing not only for baby boomers moving from larger homes, he said, but anyone looking for a more compact neighborhood.

"A lot of people want to return to more urban living and walkable neighborhoods," Warren said. "You see the new construction of luxury condominiums in the Boston area. People used to think of the city as dirty and dangerous, I think that is going away to a large degree. Now they think of it as hip and exciting and lively."