Space at the Bay Colony Corporate Center in Waltham rented for $66 per square foot in 2000 but now is fetching about $26 per square foot.
“Seize the moment” was the recurring theme at the annual market forecast last week in Boston, sponsored by the National Association of Office and Industrial Properties and the Society of Industrial and Office Realtors. Industry panelists told the audience of more than 400 professionals that despite the pain and turbulence of the past year, the market is slowly recovering and, in the meantime, there are some interesting opportunities in real estate.
Speakers at the event, titled “Light on the Horizon: A Look Into the Future of the Greater Boston Commercial Real Estate Market,” generally acknowledged that while signs of a market recovery can be seen, the coming year will likely bring only modest improvements.
“If you’re a tenant, there’s tremendous opportunity to restructure a lease. It’s an enviable time to be a tenant,” said Jack Kerrigan, moderator and senior vice president of the Boston office of Grubb & Ellis. “For owners, it’s not all doom and gloom. A lot of you are [being] very opportunistic in your purchases … There are people who want to get a transaction done and that’s great news for all of us.”
It’s been a tough few years for Massachusetts. Layoffs at companies such as Polaroid, Fidelity and Nortel Networks have cost the state 130,000 jobs since 2000. With the loss of jobs and corporate streamlining, no one knows exactly how much shadow space – space that is technically leased but going unused – looms in the commercial real estate market, a wild card that could slow absorption and recovery. Some experts peg unused space at a level as high as 10 percent of the total office inventory.
Upheaval in the mutual fund industry and the pending merger of FleetBoston Financial and Bank of America pose big question marks as well, leaving many experts wondering if more jobs will be trimmed and whether additional vacant space will be added to the Boston-area market in the coming months.
Corporate America continues dumping excess office space, a trend likely to continue in the coming year. “They want to get it off their balance sheets and move on,” Kerrigan said.
The result, particularly in the suburbs, has meant a plethora of options for tenants. Kerrigan said that an executive searching for 15,000 square feet along Route 128 could spend 15 days in the car looking at 148 different locations where that amount of space currently is available. However, at the same time, “plug and play” spaces – sites that would require a tenant to do little before moving in – are clearly decreasing as companies continue snatching up premium opportunities, according to Kerrigan.
‘Saving Grace’
Rental rates continue to erode, even at high-profile properties that garnered top dollar at the height of the market. For example, space at the Bay Colony Corporate Center in Waltham rented for $66 per square foot in 2000 but now is fetching about $26 per square foot. Rowes Wharf in Boston, which commanded $76 per square foot in 2000, has fallen to $42 per square foot, according to statistics from Grubb & Ellis.
“That shows, in 36 months, how the mighty have fallen,” Kerrigan said. “… But we do see a stabilization; we don’t see further erosion.”
Investors still view Boston as a top choice, and although the market has experienced some foreclosures, there are a lot less than one would expect given drops in rental rates of as much as 40 percent, according to Gary J. Lemire, senior vice president/partner of CB Richard Ellis/Whittier Partners in Boston.
Industry experts pointed out that the downtown Boston vacancy rate, currently at about 16 percent, isn’t as bad as it was 11 years ago, when it reached 18 percent. Currently, one in six spaces are available. Kerrigan said that landlords are still capturing premium rents on desirable space. Tower offices garner about $50 per square foot while less desirable space can be had for around $20 per square foot.
While some experts see a light at the end of the tunnel in the suburbs, they caution that a full recovery may be years away. With an availability rate of 29.1 percent, 22 million square feet of space must be absorbed before the suburban Boston market reaches equilibrium. In 1980, the entire suburban market consisted of 22 million square feet of space – the size of the Hartford, Conn., metro market. Burlington’s availability rate remains at 40 percent and Waltham is close behind at 37 percent.
Rental rates along Route 128 have dropped to around $21 per square foot, according to Tamie R. Thompson, principal of brokerage at the Boston office of Spaulding & Slye Colliers.
“I started in 1980 in commercial real estate; this is the worst one in my career,” she said of the downturn.
The submarket won’t come back without job growth, according to Thompson.
“Tenants will take advantage of the market but it’s musical chairs, which will do little to change availability,” she said.
Availability in Cambridge is hovering at around 22 percent. In the past year, the city got a boost from leases involving Millennium, Novartis and Genzyme, all of which fueled positive net absorption. The former leader of growth in the late 1990s, Cambridge was the first to feel the effects of the high-tech crash. The office market sector remains sluggish.
But Thompson said that the makeup of Cambridge, including Harvard University, the Massachusetts Institute of Technology and several cultural attractions, bode well for its future. Another sign that Cambridge will recover is that developers are pushing forward with plans for North Point, a 5.5 million-square-foot, mixed-use development that will include a hotel, lab space, a new subway stop and acres of green space.
This year alone, the Greater Boston industrial market has seen either a commitment or groundbreaking of 4.6 million square feet of construction, according to Austin Smith, senior vice president of Lincoln Property Co., with offices in Boston. New developments include Stop & Shop in Freetown, Jordan’s Furniture in Taunton and a General Mills plant in Haverhill.
Firms don’t want second-rate facilities, so they’re building their own, he said.
“We’re seeing entrepreneurial landlords stretching to do what it takes to make the next round of deals,” Smith said. “They will set rents lower than anyone would have expected a few years ago. I don’t expect an up-tick in rent rates until 2005.”
Many of the companies looking for space need 20 percent to 25 percent office with the remainder in assembly space – they typically make large financial improvements and sign leases for 10 or more years.
“Over the last four to six weeks, we’ve seen a tremendous uptick in foot traffic of our buildings,” Smith said. “We’re seeing fewer of the rack-and-stack companies who make little financial contributions to the buildings.”
Industrial availability is at 15.7 percent with one in seven spaces available.
While the future of the commercial real estate market remains unknown, several industry experts remain optimistic about the future.
“The saving grace of Massachusetts is the tremendous influx of new technology businesses in Greater Boston,” Kerrigan said. “That will spur lots of development.”
Kerrigan emphasized the importance of practicing successful leasing strategies during and after the market slump. His tips: Show expertise, be persistent, follow up, provide deal flexibility, foster ownership involvement, make quick responses a top priority and create a user-friendly lease.
“Seize the moment,” he said.
