The newest addition to our Expert Insights series is a conversation we had with Boston College Senior Lecturer, Edward Chazen. With 28 years’ experience in real estate development and investment alongside institutions like GE Capital, TCW Realty Advisors and BNY Mellon Asset Management, Chazen joined the Boston College faculty in 2015, teaching a variety of real estate courses for undergraduate and graduate students. His courses include a dozen real estate case studies that he himself authored. Prior to his current position, Chazen was also an adjunct professor at Boston University and Babson College, where he taught real estate development and finance.
Read on for Prof. Chazen’s insights on the future of the industry in a post-COVID-19 world, what sets the Boston commercial real estate market apart, as well as possible futures for several types of investment real estate, and tips for those looking to build prosperous careers while the world adjusts to the new normal.
Q: Tell us a little bit about your background and why you chose this career
After receiving my MBA degree I was interested in working in real estate, since land use, city planning and architecture was very interesting to me. I started my real estate career in 1983, as a loan officer for GE Capital, based in New York City. My job was to originate, underwrite and negotiate commercial real estate loans in the city and suburbs, and prepare the loan request memo for the credit committee. I later moved to Boston and worked for many years as a Senior VP of Acquisitions for large real estate asset management companies that invested in real estate for pension fund clients — including unleveraged acquisitions and joint ventures with local operating partners. I also co-founded a business that represented developers to arrange joint ventures with institutional equity partners. I started teaching real estate courses part-time in 1994 and began doing it full time in 2011, first at Brandeis University and, since 2015, at Boston College.
Q: Considering the COVID-19 outbreak, what are your thoughts on the CRE market in the US today in terms of trends and challenges?
Real estate will be significantly affected by Covid-19. The ways in which we use space and interact with others, the role of technology in land and building use will change, as the concern about health and wellness will be a high priority for businesses, consumers and local government. I think the biggest impact will be on retail and office spaces.
Q: What do you think differentiates the Boston commercial real estate market from other major markets in the United States?
Boston distinguishes itself through a few things:
- Significant financial support (#1 in the country) from the National Institute of Health for pioneering life science research, which creates strong demand for modern labs and research space;
- Residents are highly educated, which attracts employment growth;
- The city’s population is relatively young, largely due to the presence of more than 50 colleges in the Boston metropolitan area;
- The physical supply constraints of being a coastline city with less land for new development, plus local rule — 352 towns and cities in the state — governing local permitting of projects, which can often create long delays in project approval.
Q: How have you seen the industry evolve over the past few years?
The most significant trends I see are:
- how technology is changing the ways in which landlords and tenants interact and disrupt traditional demand/supply models — Amazon, AirBnB, co-working spaces, just to name a few examples;
- the growing diversity of sources of capital: Wall Street asset securitization, foreign sources, REITs being a separate industry classification in the S&P 500 Index, and real estate being a growing part of an institutional investor portfolio.
Q: Where do you see investment real estate going in the future?
First is real estate as an asset class for investment. I think the U.S. treasury rates will remain low for the foreseeable future, and therefore real estate offering initial yields 3-5% above treasury rates, with the optionality of increases if demand for space exceeds available supply, will be attracting more capital. If inflation remains low, the real rate of return from real estate will also be attractive. If someone figures out a way to attract large amounts of defined contribution — such as a 401K plan — money with daily liquidity, then the sources of capital will tremendously increase. That could be a floor on real estate prices and put upward pressure on asset prices.
Second, there will be a growing bifurcation between class A and class B quality buildings. I think class B office space will have chronic high vacancy, as the small lobbies and elevators and antiquated building ventilation systems will compromise employee health. Class A buildings might see rising occupancy and rents, as companies will need more space to house their employees with more space per employee to accomplish social distancing and healthier work environments. People want to work together and collaborate, and I do not think long term remote working in professional employment categories is viable.
Q: Any lessons from the past few years that you could impart as an absolute must for those looking to get into the commercial real estate industry?
A good rule of thumb is to follow the money. For the next few years, banks and other lenders will face challenges with loans that cannot meet debt service or loan repayment obligations, so getting a job in a loan asset management department could be a good track to consider. At the same time, landlords of data centers and logistics/warehouses will be busier, while owners of traditional retail malls and community retail centers will be challenged trying to re-purpose the space as more retailers close.
Q: What is your general assessment for the commercial real estate market in 2020? Have you spotted any interesting market trends, especially considering the current pandemic?
The retail sector will be very difficult. In 2019, roughly 9,500 stores closed in the U.S. Some experts predict it will be 25,000 in 2020. That puts incredible strain on the financing of these properties. The hospitality sector will be very impaired, as the lock-down shut off hotel business for 2-3 months.
Q: How do you think the evolution of online marketing has impacted the commercial real estate industry?
Online shopping accounts for about 12% of all consumer spending now, compared to about 5% in 2017. If that trend continues, or accelerates, shopping centers will either close or be dramatically re-purposed. At the same time, there will be growing demand for warehouses, logistics and business parks, and data centers.