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Real Estate 22 2014 Economic Forecast www.wbjournal.com Worcester Business Journal 5 Things To WaTch Bigger Is Not Better, Except For Life Sciences Here are five key issues in 2014: Smaller Is Better Americans are no longer supersizing their homes and offices. The downsizing began with the crash in the housing market, which forced many homeowners into foreclosure, said Tim Warren Jr., CEO of The Warren Group. People who lost their homes or money in the housing bubble often opted to relocate into apartments, making rental properties more popular than ever, added Matthew Mayrand, vice president of Kelleher & Sadowsky in Worcester. Downsizing has come to the workplace as well, often in the form of consolidation, Mayrand said. For instance, Boston Scientific will relocate all of its Natick workers to the company's Marlborough campus by summer, while Quest Diagnostics will consolidate workers from its labs in Worcester, Cambridge and Peabody to the former Hewlett-Packard building in Marlborough by mid-2014. "The business community is not optimistic," Mayrand said. "They are not taking gambles on increas- ing the size of their space." Shrinking Inventory The declining availability of commer- cial properties has generally been seen as a positive, while the declining availabili- ty of residential properties has not. Office vacancy rates have fallen from 20.4 to 19.7 percent in Worcester over the past year and from 27.5 to 26.8 percent in MetroWest, according to global real estate broker Colliers International. Meanwhile, manu- facturing vacancies in MetroWest have fallen from 19.9 to 8.9 percent, according to commercial real estate firm Richards Barry Joyce & Partners (RBJ), and warehouse vacancies dropped from 18.6 to 16.4 percent. However, the housing market is suffering from too few people being willing to put their properties up for sale, Warren said. Homeowners have either had to wait until they were no longer underwater on their mort- gages or they opted to wait until they could unload their houses for a profit. "People have a sense of what their home was worth at the peak, and they likely want to get those prices," he said. By next year, Warren said home prices should be hit- ting their pre-recession highs. Fears Of Another Housing Bubble The commonwealth's median home price climbed more than 12 percent from $289,000 in October 2012 to $324,900 last October, according to The Warren Group. That's unhealthy in the long run, Warren said. Runaway prices will lead to speculative buying and home flipping and deter companies from staying in Massachusetts. That's because most businesses can't afford to increase wages to keep up with the rising cost- of-living level that will come with it, Warren said. The best way to curtail runaway prices would be for more sellers to put their houses on the market. Year-to- date home sales increased 7 percent from 39,239 units in 2012 to 42,077 in 2013, according to Warren Group data; however, Warren believes the market could sup- port at least a 10-percent jump in sales volume in 2014. That's because years of pent-up demand have unleashed a torrent of potential homebuyers onto the market, Warren said. Some 60,000 single-family homes in Massachusetts were sold annually in the years lead- ing up to the recession; since that point, just an average of 40,000 homes have been sold each year. "I think there's a lot of people looking to change places," he said. New Construction Remains Elusive Commercial construction remains virtually non-existent, while lengthy permit approval processes mean new homes might be years away. No office, warehouse, flex or manufacturing space has been built over the past year in MetroWest, accord- ing to RBJ, while 40,000 square feet of flex space is the only project in the pipeline for the region. That's due largely to a gap between what construc- tion costs and what can be obtained in rents for the foreseeable future. "It's very expensive to build something new today," Mayrand said. Interest is rising, though, in the building of apart- ments, condominiums and multi-family housing com- plexes, Warren said, due in good part to state tax incen- tives. But high-density housing is subject to intense scrutiny by planning officials, and it may be years before those projects get off the ground, Warren said. Life Science Firms Filling The Void Biotechnology companies are largely responsible for bringing down vacancy levels in MetroWest in recent years. HeartWare International, for one, will be upgrading this winter from 27,000 square feet of space in two Framingham buildings to a 58,000-square-foot struc- ture less than a half-mile away, while Boston Biomedical Associates will be expanding in the spring from a few suites in Northborough to a 17,500-square-foot office in Marlborough. New construction has also been part of the equa- tion, such as Genzyme's proposed $83 million mate- rial purification facility in Framingham and PerkinElmer's recently-completed 60,000-square-foot expansion in Hopkinton. The rest of Central Massachusetts is also looking to get in on the action, with a recently-launched initiative aimed at bringing production-level biomanufacturing jobs to the Worcester area. n N ext year will likely be the best the Central Massachusetts real estate industry has seen since the recession, but that doesn't mean we're out of the woods yet. Home demand is outplacing supply, creating the risk of another housing bub- ble. Meanwhile, new construction has been minimal and MetroWest and Worcester continue to struggle with higher-than-average commer- cial vacancy levels. But the obstacles ahead shouldn't obscure the progress that has been made since the worst of the economic downturn. Home sales are up, pur- chase prices are climbing and commercial vacancy rates have declined. By michael novinson Worcester Business Journal Staff Writer 2 3 4 5 1 Source: Colliers International, 3rd Quarter 2013 Data Worcester MetroWest Office, R&D Vacancy Rates Drop Vacancy rates in office and research/development space fell in Worcester and MetroWest in 2013. 2013 19.7% 26.8% 2012 20.4% 27.5% 2011 16.4% 30.2% 2010 13.7% 26.4%