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Boston’s office rents are up and vacancies continue to fall, but at least one broker says the landlord party is about to end.
The vacancy rate in the downtown’s white-hot office market dropped to a modest 7 percent in the first quarter, down from 8 percent one year ago, while average asking rents increased 44 percent to $58.63, up from $40.66 in the first quarter last year, according to Jones Lang LaSalle.
Every section of the city saw inflated prices. The biggest rent hike was on the South Boston Waterfront, where asking prices soared by 71 percent to $47.71, up from $27.92 last year. Back Bay saw rents climb by 67 percent to $65.38. At the same time, vacancy rates plummeted in nearly every Boston submarket. And in a dramatic sign of irrational exuberance, South Station’s vacancy rate increased to 14.5 percent, up from 2.9 percent one year ago, while rents climbed by 50 percent to $42.35.
But as property owners are celebrating, Ted Wheatley, senior vice president at Staubach Co., a commercial real estate firm that only represents tenants, said a possible recession and layoffs could spell the end of spiraling rents.
“The data show that the fundamentals of Boston’s office market are strong, but common sense says demand is not as strong as landlords would have you believe,” he said. “Recession and layoffs are a reality and we’re seeing landlords exhibit a greater sense of urgency about getting their space leased, even if it means a discount.”
Wheatley is working on a couple downtown deals where a “10 percent discount off asking rents is under discussion,” but he would not provide details.
Still, Wheatley said there are plenty of landlords that won’t compromise on price.
“Some landlords believe that just because they have one of the few large blocks of high-end space available, tenants will be forced to line up and pay up,” he said. “The economic indicators are changing daily and we’re starting to see more-conservative thinking prevail. Landlords know instinctively that it’s far better to lease their space at a slight discount today, than to carry empty space indefinitely.”
‘A Modest Amount’
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William Motley, a Jones Lang LaSalle managing director, acknowledged that tenants seeking between 50,000 and 100,000 square feet of space have more options. “These larger tenants have more leverage because a landlord will use a tenant like that to plug a gap,” he noted.
Motley added, however, that tenants seeking less than 30,000 square feet have few choices in the downtown and may be forced to pay high rent for space with lots of light and great city or harbor views.
“If you’re a private equity group seeking 4,000 square feet of space, your options are limited in terms of where you can go in a high-rise,” he said. “To lots of these smaller firms, $80 [per square foot] vs. $100 per square foot is meaningless because it’s a modest amount of space and not a heck of a lot of money when you consider what these hedge funds earn. Some of these tenants want the best views because it defines their image and how they are perceived.”
That said, Motley admitted he is unsure where rents will go.
“For the first time, I have no idea whether rents will be higher or lower in a year,” he said. “There’s no supply, no new product and you’ve got 3.4 million square feet of demand consisting of 167 tenants.” But for rents to drop, Motley said, Boston would have to experience a perfect storm of layoffs, falling corporate earnings and sublease space coming on the market.
The highest rents, he said, continue to be on the upper floors of One & Two International Place, One Post Office Square and Rowes Wharf. At those locations, per-square-foot rents range from the high $60s on the lower floors to $103 on the upper floors, he added.
One thing brokers seem to agree on is that New York-based Blackstone Group, one of the largest landlords in Boston, continue to drive rents. In 2006, Equity Office Properties Trust of Chicago, the giant publicly owned landlord that owns many of Boston’s best-known addresses – including Center Plaza, Rowes Wharf, 60 State St., and 100 and 125 Summer St. – was acquired by Blackstone Group for $36 billion.
“Blackstone has a strong opinion of the Boston market and they’re setting rents that will continue to rise,” said one broker who declined to be identified. “They’re saying ‘This is the rent; take it or leave it.’ They have that flexibility because they have lots of cash and they can hold out.”
The Cambridge office market’s vacancy rate remained unchanged at about 9 percent in the first quarter, while the average asking rent increased 34 percent to $46.34, up from $34.50 last spring, according to the Jones Lang LaSalle report.
In the suburbs, average asking rents increased slightly to $24.52, up from $21.23, a 15.4 percent increase. While the overall vacancy rate was flat at 14 percent, the Interstate 495/South submarket saw its vacancy rate increase to 23 percent, up from 15.9 percent one year ago.
