The first speculative construction to get out of the ground since 2009 is currently under construction in Burlington, an aggressive move by a developer with pockets deep enough to at least finish the $18 to $24 million job.
Filling the building with tenants, however, could be more of a challenge if the building starts its life empty, without any tenant signed on when the doors open. But of all the communities in the route 128 North submarket, Burlington may be hot enough that Duffy Properties’ gamble just might pay off.
Burlington’s office vacancy rate fell to 13.4 percent in the second quarter, from 17.5 percent at the same time last year, according to information provided by Richards Barry Joyce & Partners. Class A asking rates average $25.39 per-square-foot, compared to a year ago when it was $24.75. Rents at some properties have even managed to climb into the low-$30s per foot.
Some might ask themselves how Duffy was able to secure financing to build 120,000-square-foot, Class A building speculatively at 78 Blanchard Road in Burlington. The answer is, because they didn’t have to – Duffy is paying all cash for the project.
“We consider ourselves a more conservative company, so we do all our development on cash flow, no financing,” said Robert Duffy, principal with the firm. “With interest rates so low, a lot of people might think that’s very odd. But no matter how low interest rates are, you still have to pay it back.”
Aggressive Speculation
This will be Duffy’s third redevelopment project at the three-building Blanchard Woods campus. At 76 Blanchard Road, Arbor Networks pre-leased the entire 40,000-square-foot property in May. That building is being renovated now. A month earlier, 80 Blanchard Road experienced significant leasing activity and was brought to 80 percent occupancy.
“It’s obviously an aggressive speculative move, but fundamentals in Burlington are better than they have been in quite a while, and there are not many blocks of large space, especially for new construction,” said Duncan Gratton, senior managing director at Cassidy Turley FHO in Boston. “Blanchard Road has always been considered the wrong side of the highway with [Burlington Mall and the Lahey Clinic] located on the other side of the highway. But [Duffy has] done what they had to do make Blanchard Road” an attractive place for tenants by redeveloping the properties.
And unless a huge block of space drops onto the market before next summer – when the building is slated for completion – Duffy’s 78 Blanchard Road will be the only game in town for a tenant seeking more than 70,000 square feet of contiguous space. The only other alternative is at 10 Corporate Drive, where about 69,000 square feet of contiguous space is available, out of 107,000 square feet of total space. Other properties do have 60,000 square feet available, but nothing contiguous.
Steve Murphy, a principal with CB Richard Ellis, said the amount of available space alone is at top of the list of the property’s selling points. Others include the signage opportunities, as well as the location directly on Route 128.
Testing The Wind
But if Duffy’s experience with speculative development is anything like that of Seattle-based Kennedy Assoc., it might take a while to fill the property. Ten Corporate Drive, a project owned by Multi-Employer Property Trust and Kennedy Assoc., was the last speculative project begun along Route 128. The building was finished and its doors opened in mid-2010. The company just signed its first tenant, Endurance International Group, at the 107,000-square-foot property – more than two years after opening.
Still, observers said they expected Duffy to have an easier go of it, thanks to improved market conditions.
“The reason [Ten Corporate Drive] hasn’t leased until now is that it opened in 2010 and the market had not recovered enough yet by then,” Gratton said. “But now space is starting to get absorbed and Burlington vacancy is going down.”
Duffy would likely need to charge rents in the mid-$30s per-square-foot to justify the new construction, but for the high quality that will result, Tamie Thompson, managing director for Jones Lang LaSalle, said Duffy would likely achieve that. However, she said there are not currently any tenants in the 50,000- to 100,000-sqaure-foot range looking for space for summer 2013. But Murphy did confirm to Banker & Tradesman that a consulting firm is seeking 100,000 square feet in the Greater Boston market and is looking in the Burlington area. She did specify who that tenant might be.
“This is one developer putting their finger in the wind and testing the wind,” for successful speculative development, Gratton opined. “If [the building] is still empty in a year, then [other won’t follow suit]. But if it leases up quickly, maybe they will. But Burlington is a place people are thinking about it.”
That’s especially true as more and more commercial activity picks up in the area. Keurig has agreed to lease more than 420,000 square feet of space on South Avenue. And a new Wegman’s supermarket will be opening in Burlington next year.
