Blog

‘Brain clusters’ and new metro stops: how companies are benefiting in Boston

Boston ranks number 21 in the Schroders Global Cities 30 index. It is also one of America’s oldest cities, steeped in the history of the American Revolution. Today it is a thriving hub for healthcare and biotech industries; unemployment has fallen rapidly, and development is booming.

19/07/2016

Tom Walker

Tom Walker

Co-Head of Global Real Estate Securities

Boston ranks number 21 in the Schroders Global Cities 30 index. It is also one of America’s oldest cities, steeped in the history of the American Revolution. Today it is a thriving hub for healthcare and biotech industries; unemployment has fallen rapidly, and development is booming.

In May we visited some promising firms. This included a tour of a lab space rental firm, which is tapping into strong demand for “brain clusters” as well as an examination of how two other holdings may benefit from the opening of a new metro station just 15 minutes from the heart of Boston.

We came away from the trip more positive on the Boston market as a whole.  Based on conversations with local municipality officials, the infrastructure expansion of mass transit as well as government investment to support start-up businesses has helped to bring new employment to the area.  The unemployment rate has steadily declined from 6.2% in 2013 to 4.4% in 2015 and most recently to 3.9%.

With the creation of jobs for the Boston market, development has followed.  This is evident in the more than $7 billion of development projects currently under way, a new record for the city.

From our perspective, it’s imperative to focus on the dynamics of the submarkets of our key holdings in order to establish where the best prospects lay. 

Case study one:  Alexandria and the ‘brain cluster’

Cambridge, a few miles north from the centre of Boston across the Charles River, has 24 million square feet of office and laboratory space.

East Cambridge, where Alexandria, a lab space developer, is primarily positioned, contains approximately 18 million square feet, or 30% of the total space available there.

The lab space submarket commands a 3% premium on office rents and the vacancy rates are less than 1%. It is also a sticky market: tenants undertake specialist refits so tend to stay in properties longer and it typically takes 30 months to prepare a property.

Supply is limited in the market outside of Alexandria’s developments which are pre-leased. Supply will remain constrained given Harvard and MIT control around 20% of the available land for development in this tight submarket. 

Demand shoud remain high for space in Cambridge, driven by the buoyant life sciences and tech sectors.

This helps explain this submarket's near zero vacany rate.

We continue to carefully watch the life science space and specifically in Cambridge due to tenants’ desire and demand to be part of the “brain” cluster.

 

Enjoying campus life near Cambridge.

Case study two: Federal Realty and AvalonBay benefit from new metro at Assembly Row, Somerville

One of Federal Realty’s largest centres and growing, Assembly Row remains a successful project for the company. It demonstrates its core competency to control land and work with local municipalities to improve the densification of the project.

In this case, Federal was able to control a piece of land 15 minutes from the urban core of Boston and work with the city to expand the city’s metro system to include a stop at their project.

As a result, FRT was able to attract a number of retailers to what has become an entertainment hub and developed a class A office component leased to Partners Healthcare. That will drive a whole new source of daytime traffic.

The site remains rich in development opportunities for the company to harvest over time.  

Lots more value-creating work to be done at Assembly Row for FRT

AvalonBay also developed an asset in this project: a 174-unit residential building which is already stabilised with average rents of around $3.75 per square foot.

With the completion of the metro stop, rents in the submarket have increased significantly over the past year, outpacing the 3% rent growth across Boston which is held back by new supply in the urban core.

AvalonBay is relatively well-positioned to withstand this wave of new competition. Its Boston portfolio is diversified but with a skew toward more suburban, garden style and class-A assets. Specifically, 66% of the assets are suburban and 25% are urban. Of its suburban properties, most are situated on or in very close proximity to a train or metro centre.

Given a more suburban focus around Boston, AVB should be somewhat protected from the negative externalities of new supply in Boston’s urban core, specifically the Seaport district.

 

 

Sign up to Global Cities now to get the latest news and views, including future updates to the Index

Important Information:

The views and opinions displayed on this website are those of Tom Walker and Hugo Machin, Co-Heads of Global Property Securities. They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

The article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information in the article when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The regions, sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  

Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.