While in the past I might have fired back with my canned residential-has-nothing-to-do-with-commercial speech honed over the years in response to hundreds of similar questions (and no, I'm not a Realtor either), I have instead found myself attempting to explain the inexplicable- the fact that the residential and commercial markets actually appear to be headed in opposite directions. While there's blood in the streets on the residential side, industrial and (non-tower) office properties are doing quite well right now. With almost 30 years in the commercial brokerage business, I finally have a little bit of a perspective on changing market conditions (OK, so some people are slower than others) and this new phenomenon is something I have not witnessed before. While residential value increases might have lagged behind commercial appreciation, or vice versa during past market swings, they've at least tracked in the same direction for as long as I can remember. The Boston Globe just reported (12/07) that there has been a 6.5% decrease in home prices in the Boston market during 2007. During that same period of time, I have sold owner/occupant single-story industrial properties for the highest per SF numbers ever seen in this market- north of Boston and north of $100.00 per SF. This is the first time I have ever seen values headed in opposite directions. Maybe I should have just delivered the old canned speech in response to that question, because this time there really is a disconnect between the residential and commercial markets.

While demand remains relatively weak on the industrial leasing side (the most common telephone call I get is from appraisers begging for industrial lease comps), that hasn't affected the health of the Northern Inner Suburban marketplace, for vacancy rates are below 4%. If you've not drifted off to sleep at this point, you might reasonably ask how sale prices could keep rising given continued weak demand on the leasing side. The answer my friend is interest rates. For close to seven years now, the lease and sale markets have also been inverted. Memories are short, but back around 2000, there were industrial deals cut at rates as high as $9.00-$10.00 per SF NNN. This, at a time when industrial properties were selling at $65.00-$70.00 per SF. As soon as the dot-com bust of 2000 forced interest rates through the floor, all of those single story industrial users who were panicking over rising lease rates started looking to fix their long-term occupancy costs- they started to buy instead. As a result, lease rates have slowly drifted downward to the $6.50-$7.00 per SF NNN range while sale prices have continued to rise due to increased demand and scarcity of product. The investors hate this scenario (how do you make sense of a $105.00 per SF acquisition price when you can expect a $6.50 per SF NNN rent) and the owner/occupants love it (20-25% down, I own it and my carrying costs are the same as leasing). It's a good balance- half the market is happy and vacancy is low.

I don't pretend to know much about the residential market beyond what every other Boston homeowner armchair real estate athlete knows, but I do know that a lot of people in this state have been living off their fallacious equity pulled out through successive refinancings since 2001, and for these people, the perfect storm of rising interest rates and decreasing home values has become their reality. Whether or not this nightmare eventually affects the commercial market here remains to be seen. I suspect that unlike other parts of the country, we will weather this storm better than most, and home values will again rise in the near future. It's a good time to consider that Florida vacation home.

Our local economy and the commercial real estate market here in Boston are intimately entwined with variables such as short term interest rates, VC spending, government spending on science and defense research, the next hot tech idea and housing costs. Widely divergent criteria in this mix for sure, but all relevant factors. Unlike other areas of this country where fortunes might rise and fall solely upon the price of oil, or the demand for steel, our economy is a complex and dynamic mix that can leave even the best prognosticators feeling as though they are throwing darts sometimes. I never thought I'd see a day when commercial prices rose as residential prices fell, but once again, the Boston market surprises.

~ Phil Burgess