Daniel O’Connell, the state’s secretary of housing and economic development, speaks to commercial brokers last week at Meredith & Grew’s Mid-Year Market Overview for Boston.
Downtown Boston’s office asking rents continued to rise in the second quarter while vacancies diminished, according to a preliminary report by real estate brokerage firm Meredith & Grew.
The city’s Financial District, Back Bay, Charlestown, Fenway/Kenmore, North Station, Seaport and South Station saw vacancies fall to 9.5 percent from April to June, down from 12.1 percent for the same period one year ago. At the same time, asking rents for some Class A office space has reached as high as $75 per square foot.
“It’s a landlord’s market,” said Ronald K. Perry, executive vice president at Meredith & Grew. “Building sales have been occurring at a record clip, putting upward pressure on rents.”
Perry’s comments came last week as details of the second-quarter data were released in the company’s Mid-Year Market Overview for Boston at the Boston Harbor Hotel. The snapshot included an analysis of 57 million square feet of space in the city’s downtown office market.
Commercial real estate executives are convinced that growing economy has fueled demand for space. At the same time, Boston has not had any new office space built in the last three years. In addition, no new space is expected to be competed until 2010. Those factors have put pressure on rents and reduced availability.
One of the major reasons for asking rents rising from between 10 percent and 30 percent is the sale of Boston office buildings. In February, the Blackstone Group’s $39 billion purchase of Equity Office Properties, the nation’s biggest private real estate sale of all time. While Blackstone has sold off much of the portfolio since then, the firm is keeping many of its Boston properties including Center Plaza in Boston’s Government Center, Rowes Wharf, Russia Wharf and 60 State St.
“They’re holding onto Boston feeling that the dynamic here offers further growth along with the West Coast and some properties in New York City,” Perry said. “We are on track this year to absorb nearly 1.5 million square feet of space, which is above the average of the last 25 years of 1 million square feet. Companies are expanding and they are taking space and it’s happening in a very diversified way.”
In addition, Blackstone is planning improvements to some of the properties, such as 225 Franklin St., 150 Federal St. and Center Plaza. The renovations are intended to maximize the value of their office space, Perry said.
In terms of Class A office space, Meredith & Grew’s study examined 40 of the city’s premiere towers and found that the vacancy rate on floors 20 and higher had a vacancy rate of 3.79 percent with asking rents from $55-$75. One the lower floors, rents ranged from $45-$55 with a 6.21 percent vacancy rate – one year ago, the range on rents for the upper floors was $43-$55 and for the lower floors it was $35-$42.
‘A Real Appetite’
Lisa Campoli, Meredith & Grew’s executive vice president, said all bets are off when it comes to pricing office towers.
“The benchmarks in terms of what something’s worth on a per-square-foot basis has been tossed out the window,” she said. “The sale of 45 Milk St. has not closed, but the price is nearing $500 per square foot. That’s a real testament to the dynamic in today’s market.”
In addition, Boston is seeing new buyers, Campoli said.
“Many of these new investors have an Irish brogue,” she said. “There’s a tremendous amount of capital flowing out of Ireland looking for opportunities in downtown Boston. It’s a function of currency, their lower cost of capital and all the wealth that has been created over there. We see a real appetite for real estate and that trend is expected to continue.”
Campoli said two factors could derail what appears to be a market that increasingly favors landlords. “If there were some unforeseen global capital crisis or a major economic condition, that could change things, but continued growth assumes the economy continues to grow.”
Daniel O’Connell, the state’s secretary of housing and economic development and a former Meredith & Grew employee, came to the early morning session to explain his role in Gov. Deval Patrick’s administration. He got laughs when he said, “It’s great to see my old colleagues. I miss them, and my family misses the paycheck.”
Meredith & Grew’s report comes on the heels of the latest Commercial Real Estate Outlook of the National Association of Realtors. The NAR study found the nationwide office market is booming and they expect fundamentals to remain sound for the commercial sectors.
Outside of the hospitality sector, a record $157 billion was invested in commercial real estate in the first four months of 2007, up from $97.0 billion in same period in 2006; that total does not include transactions valued at less than $5 million, NAR’s report said.
“So far this year, 60 percent of all commercial real estate purchases have been in the office sector,” said Cynthia Chandler, chairwoman of the Realtors Commercial Alliance, in a prepared statement. “We expect the flow of capital into commercial sectors to remain strong throughout the year, driven by large portfolio transactions and [real estate investment trust] privatizations, as investors continue to value diversification. This could make 2007 another record year for commercial investment.”
