New England weather has long been noted for its fickle nature, possessing the ability to turn sun-dappled skies into blustery storm clouds at a moment’s notice. In some respects, however, even the most schizophrenic atmosphere would have a hard time matching the upheaval experienced of late in the local suburban office market.
“I don’t know any of us who have seen things change as quickly as they did this past winter,” Jones Lang LaSalle broker Kenneth Shaffer acknowledged last week. “We really hit the wall.”
The sudden shift of activity was perhaps even more dramatic given that it immediately followed a record spate of leasing that occurred last summer. Spurred by the boom in high technology, rental rates in nearly all suburban office markets attained new highs, including a reported $72 per-square-foot lease at Bay Colony Corporate Center in Waltham, tops for the suburbs. The amount leased was also unprecedented, with net absorption of 8.1 million square feet in 2000 smashing the previous mark of 5.4 million square feet, according to Spaulding & Slye Colliers.
The euphoria of last summer seemed inextricably imbedded in the region’s booming economy, but almost as quickly as the good times arrived, they disappeared. A retreat of capital from the high-tech industry was the biggest blow, as investors stampeded like lemmings once several top players reported slumping profits and sluggish performance projections. Suddenly, funds to expand were non-existent, while rolling layoffs have curbed the need for additional space. Indeed, millions of square feet of sublease space have subsequently returned to the market since the start of the year, with more anticipated.
“No one has panicked, but we’re not headed in the right direction,” said suburban leasing broker Lenny C. Owens. “It’s going to be pretty slow here for awhile.”
After troubles initially appeared late in 2000, the market appeared to be stabilizing in January and February, Owens said, only to be thrown into the deep freeze again in March and April. “Deals were just put on hold,” he said. “They haven’t come back, and I don’t think they are going to come back again until next year.”
A principal of Boston-based McCall & Almy with a specialty in tenant representation, Owens blamed the current stalemate on dour corporate earnings. CEOs and other executives he deals with are doubtful their finances will recover over the near term, said Owens, while Shaffer added that the need for office space will not appear until several months after such firms stabilize.
The arrival of the sublease stock could turn out to be the most significant event of 2001. Shaffer said he receives a dozen e-mails a day with new sublease offerings, adding that 38 percent of the western Route 128 market is now comprised of such opportunities, compared to just 13 percent last year.
Exacerbating the additional supply is the reduced demand for sublease. Whereas many startups last year preferred to take a short-term deal while they assessed future growth needs, Shaffer said the companies seeking quarters now are not interested in that approach. Much of the space is only available for a few months, he said, while firms are also concerned that the company they would sublet from might not survive to the end of the lease term.
“Today, [subleased space] is not a very marketable commodity,” said Shaffer.
Regardless, large blocks of subleasing continue to hit the suburbs, including a whopping 235,000 square feet being peddled at 1200 Crown Colony Drive in Quincy. State Street Bank, which had taken down the entire building last year, initially planned to sublease 100,000 square feet, but reportedly has now bumped that up to include the entire building. Nokia is said to be seeking takers for most of the new office building it has underway in Burlington. Meanwhile, EMC Corp. is supposedly subletting some or all of the 190,000 square feet in its new building at the Westborough Office Park in Westborough. As with Nokia’s, the EMC building is still under construction.
Still, for all of the handwringing which has taken place in 2001, most industry observers insist the suburban office market remains relatively healthy, with existing and projected supply considered a manageable amount. Although there is currently 4.7 million square feet of new suburban office space under construction, according to Spaulding & Slye, the pipeline for additional product has likely been shut down due to the dour economic climate.
“It is very difficult to justify the start of a purely speculative office building today,” said Shaffer.
Scott R. Hughes, president of Hughes Properties Inc., added that he believes demand will rebound early next year, making it wise for any tenants who are seeking space to do so during the next nine months. With the reduced activity, Hughes said landlords are more competitive today than they have been for some time, with many now willing to cut rents, increase buildout allowances and even offer some measure of free rent.
“For the first time in years, tenants have some leverage, but the window of opportunity is between now and the first quarter of 2002,” said Hughes.
And while it may not come close to resembling last year, especially for six figure requirements, brokers said there has been a certain level of leasing taking place, dominated by leases of 10,000 square feet and less. One of the more notable pacts is said to be in the works at the Waltham Weston Corporate Center in Waltham, where Boston Properties is forging ahead with a 304,000-square-foot building that represents one of the market’s few speculative undertakings. According to sources, Microsoft has agreed to take 50,000 square feet in the top floor of the six-story structure, which was topped off earlier this month.
Meanwhile, the Maggiore Cos. has fared well in leasing its speculative office building at 225 Cedar Hill St. in Marlborough. Hughes, who is representing developer Paul Maggiore, said the building has scored three tenants recently, while a fourth deal close to completion could put the building above 50 percent leased. Tenants include StarGen (26,000 square feet); Senko (11,000 square feet); and Vitesse Semiconductor (9,000 square feet).
Others who believe the recent downturn is temporary include CB Richard Ellis/Whittier Partners principal John Power, who has been active in the Lowell market since that area first began its recovery from the regional recession of the early 1990s. Due to the lack of oversupply, Power said the market’s fundamentals remain solid, with any increase in vacancy rates or drops in rental rates expected to be minimal.
“It’s not a bloodbath,” he said. “It’s just a cooling off.”
As with his colleagues, Power said he believes the slowdown seems worse due to last year’s record performance. “Last September was a fun time to be in the real estate business, but it wasn’t healthy, and we all know it,” he said. The rental rate spike had begun to make the region less competitive, he said, with landlords holding all of the cards.
Because it is in a more fringe area of the state, the Route 495 corridor also did not see as big a jump in new supply, Power said, making it likely that any excess space will be eaten up fairly soon.
To the south, Cushman & Wakefield broker Thomas M. Powers said he has seen the same slowdown among companies scoping that area, a situation he attributed partly due to robust activity in 2000. Many large requirements have already committed to new quarters, he said, acknowledging that, “today, there are just very few tenants looking for space.”
One potential concern could be the State Street sublease at Crown Colony, as well as the recent launch of two speculative office buildings in Canton. But while those two properties will together add another 360,000 square feet to the south market, Powers said he is hopeful that demand will pick up over the near term.
“I think it is going to be slow through the summer, but I anticipate the third and fourth quarter will be more active,” said Powers, adding that the region will likely see vacancies increase from the 7 percent range to the low double digits at the mid-year point.
