JAMES J. ADAMS
‘Good activity’

It was a light summer by any standard for Boston’s office market, but there are signs emerging that the turning of the leaves may also usher in an upswing in leasing, according to industry observers.

“We’re seeing good activity,” Insignia/ESG Senior Managing Director James J. Adams reported last week, with demand finally returning after a thin stretch for much of 2002. While cautioning that the recovery “will not be overnight,” with rents likely to continue falling through the end of the year, Adams said he believes Boston has been through the worst stretch and could record positive growth in 2003.

According to research compiled by Insignia/ESG that tracked gross leasing activity, or GLA, on a month-by-month basis since September 2001, the Hub’s worst stretch by far was last October, when a torpid 28,000-square-foot GLA mark was posted. That figure gradually improved until this February, when Boston had 500,000 square feet of GLA. It then reversed itself downward until bottoming out again in August at 70,000 square feet GLA.

Adams cited nervousness over subleasing on both sides of the aisle for keeping activity down in late 2001, but said companies eventually became comfortable that they could take temporary space without fear of being hit by hefty rent increases down the road. That led to a surge of sublease deals at the start of the year, Adams said, especially once landlords began to acquiesce and accept such opportunities as well.

“That [short-term thinking] went away for tenants first and then for landlords, too,” Adams said. The slide back down from February through August, he said, resulted from economic uncertainty that froze decision makers.

On the plus side, Insignia/ESG is tracking a return of tenants looking for space. After peaking in December at 3.7 million square feet, gross leasing demand fell to just 1.7 million square feet in June, but has since returned to an encouraging 3.8 million square feet at present. Typically, the demand affects deal volume two months out, so Adams predicted the Hub will end the year with a flourish, albeit not enough to rescue the city from its second straight year of negative absorption, which will be a record for Boston.

Spaulding & Slye Colliers is noticing similar trends, with principal William P. Barrack acknowledging that the negatives are finally slowing down. In fact, according to preliminary third-quarter figures from Spaulding & Slye, negative absorption for the third quarter will run at about 50,000 square feet, substantially improved from the 737,000 square feet registered at midyear.

“That’s good news,” said Barrack, although he added that most of the activity through the end of 2002 will be driven by companies forced to make a leasing decision rather than reflecting positive expansion among companies. “We need job growth,” Barrack said, adding the most upbeat scenario would be stabilization in early 2003.

“We’re not going to see a large volume of leases signed in Boston in the next 60 to 90 days, but I do think we are getting near the bottom,” Barrack said. “If we can start 2003 with a clean slate, and hopefully eke out a few positives, I think we will start to turn the corner.”

One encouraging sign that Barrack sees is a large number of tenants out in the market, with 14 companies carrying requirements at present for 100,000 square feet of space or more. Normally, he said, that figure would range between five and eight companies with such space needs. Part of the reason is that companies with lease expirations out in the 2005 and 2006 timeframe are also now entering the fray, ironically because they may be spooked by the lack of new downtown office construction following next year’s scheduled delivery of 33 Arch St.

Other industry professionals agreed that firms are thinking long range. Among the companies with extended leases said to be out looking include Digitas, which reportedly is already seeking more than 200,000 square feet despite an expiration in 2005, as well as the First Union division at 200 Clarendon St., aka the former Keystone Financial, which needs as much as 200,000 square feet. Sources said its lease does not expire until 2006. PricewaterhouseCoopers, out looking for about 270,000 square feet, reportedly needs to plug an 85,000-square-foot requirement over the near term, but the bulk of its lease needs are longer term, as well.

In any event, it appears conditions should be improving as the market moves into 2003, with the expiration-driven activity expected to carry the day over the short run. The finalization of the AIG Lexington Insurance lease at 100 Summer St. for more than 150,000 square feet is expected to provide one boost, while other firms busy chasing agreements include the Goulston & Storrs law firm, as well as Choate Hall & Stewart.

One issue of note is determining which sectors are driving the activity, and Insignia/ESG has just compiled an in-depth overview of that trend. Between last September and this September, architects and engineers leased 24 percent of the space in the Hub, even though they occupy just 5 percent of the city’s 50 million-square-foot market. HNTB moving to 40 Court St., Parsons Main shifting to 100 Summer St. and Process Facilities settling at 150 Federal St. were all examples of that velocity. Adams said it was driven by a combination of leases coming due and the companies taking advantage of lower rents that allowed them to remain in Boston.

According to Adams, many of the architectural/engineering firms were weighing moves to the suburbs before the market cratered and allowed for them to strike economically feasible deals in Boston.

Law firms also were busy, accounting for 36 percent of the leasing activity while occupying just 25 percent of the space. Interestingly, even high-tech companies held their own, with deals by Apple at 111 Huntington Ave. for 13,000 square feet and Oracle taking 11,000 square feet at One Beacon St. helping that the technology industry lease 10 percent of the GLA while occupying about 6 percent of the total pie.

“For the most part, the [technology] companies that are leasing have been established for three or four years and they are actually making money,” said Adams, offering some long-term hope for that sector.

As far as underperformers, banks leased 6 percent of the space even though they control 17 percent overall, while insurers were also tepid, accounting for only 8 percent of the leasing activity even though they occupy 24 percent of the city’s space. Adams said it appears those industries are shuttling employees to the suburbs whenever possible.