Robert B. Cleary Jr. – ‘Emotional year’
As it was with much of the economy, 2001 proved to be a mean season for commercial real estate.
Beginning the year with tepid optimism, industry professionals watched as the bedrock foundation established in the late 1990s and a remarkable 2000 turned to quicksand virtually overnight. When a silent spring gave way to a listless summer, real estate brokers and landlords clung to hopes that activity would rebound after Labor Day. If there was such a surge on the horizon, however, it disappeared in the smoke and flames of Sept. 11.
The terrorist attacks certainly hurt the office market, but conditions were already abysmal prior to that catastrophic event. High-tech companies that led the record run-up in leasing volume and rents during 2000 were suddenly abandoned by the fickle capital markets, and when unneeded space began hitting the streets in massive chunks, all gains seen during the previous year quickly eroded.
We were blindsided as an industry, said William F. McCall, founder of McCall & Almy. People were truly stunned by the magnitude of the downturn.
McCall, who has been in the commercial real estate business for 40 years, said he has never seen the market fundamentals collapse so quickly, noting that the region went from enjoying its best year ever in 2000 to suffering its worst campaign within a 12-month span.
Robert B. Cleary Jr. of Meredith & Grew called 2001 a remarkable, emotional year, especially in the wake of the record-setting 2000. It’s tough to be on such a high and get your legs cut out from underneath you, said Cleary, the outgoing New England chapter president of the Society of Industrial and Office Realtors.
According to figures released last week by Spaulding & Slye Colliers, office space in Greater Boston saw negative absorption of 8.02 million square feet in 2001, bloating the overall vacancy rate to 8.7 percent and the availability rate to an alarming 17.7 percent. Comparatively, the market enjoyed 10.4 million square feet of net absorption in 2000, ending the year with a 2.6 percent vacancy rate and an availability mark of 5.4 percent.
Bolstered by the opening of a fully leased 111 Huntington Ave. office tower in the fall, Boston’s Back Bay posted net absorption of 579,000 square feet in 2001. That ray of statistical sunshine was not enough to overcome sluggish demand elsewhere in the city, with Boston’s office market suffering negative absorption of 1.94 million square feet.
Conditions were even worse elsewhere. Long one of the country’s hottest office markets, Cambridge was slammed by a one-two punch of new construction and flagging demand from the high-tech industry, of which Cambridge had been a leading beneficiary in the boom period. The 13.1 million-square-foot market had negative absorption of 870,000 square feet in 2001, bringing Cambridge’s availability rate to 20.5 percent.
The bulk of the high-tech struggles have been felt in the suburbs, where 5.2 million square feet of negative absorption has raised the overall vacancy rate to 11.1 percent. Save for a 15.5 percent rate in the tiny Interstate 495/South office market, availability levels are at or above 20 percent in every suburban submarket, including a high of 24.2 percent in both the North and Route 128/Massachusetts Turnpike submarkets. Ironically, Route 128/Mass. Pike has long been considered the epicenter of the suburban market.
On the investment sales front, most of the commercial deals occurred in the first half of 2001. Reflecting continued overseas interest in the Hub, German syndicator Jamestown acquired Boston’s 1 Federal St. in March, with Clarion Partners selling the 1.1 million-square-foot asset for a record $375 million. That was followed by the $45 million purchase of 1 Liberty Square by Lend Lease Real Estate Investments and a joint venture acquisition of 99 High St. by Walton Street Capital and Westbrook Partners. The 99 High St. buyers paid Boston Capital Institutional Advisors $213 million for the 32-story office tower barely two years after that firm had purchased the property for $168 million.
As 2001 wore on, the economic uncertainty led buyers to pause, a tendency exacerbated by the demise of the stock market. In what is being coined the denominator effect, pension funds which allocate a certain percentage of their investments to real estate saw the numbers skewed when the value of their stock plummeted, putting many such players on the sidelines.
Still, there were a number of suburban office building sales completed in 2001, with private opportunity funds picking up some of the slack left by institutional capital. Berkeley Investments recently closed on One Research Drive in Westborough, for example, acquiring the building from the Government of Singapore for $53 million. The New Boston Fund paid $18.4 million for 5 Burlington Woods in Burlington, while Paradigm Properties purchased 959 Concord St. in Framingham for $12.1 million.
Interestingly, investment sales specialists maintain there would have been more deals completed this year had the opportunities been expanded, but many sellers who tested the waters ultimately pulled back when asking prices were not warmly received. The Intercontinental Cos., for example, pulled Boston’s 343 Congress St. off the market when it received a lukewarm reception for the 100,000-square-foot office rehab. The owners of Lafayette Corporate Center took a similar approach when that downtown Boston office/retail building did not achieve its asking price.
Cushman & Wakefield is already preparing to bring Lafayette Corporate Center back on the market, according to sources, but industry brokers say it appears some assets will not be offered again to investors, at least not in the near term. Intercontinental is supposedly refinancing 343 Congress St., while Lend Lease is not expected to revive its efforts to sell Boston’s Lincoln Plaza, a multitenanted office building that had been on the block this summer.
Trading Places
The upheaval on the property side was not the only commercial real estate change in 2001, with a number of significant personnel moves rocking the local scene as well. Trammell Crow Co. was particularly impacted, losing top brokers John Barry, Robert Richards, Michael Frisoli and Steve Purpura in June when they decided to form their own real estate services firm, Richards Barry Joyce & Partners. Michael Joyce of CB Richard Ellis/Whittier Partners also left to join the new entity, as did John Wilson of Insignia/ESG.
The other shoe in that trend dropped on Trammell Crow in October when the entire Investment Services Group defected to Cushman & Wakefield. To replace the highly valued sales team, which included industry stars Robert E. Griffin Jr., Marci B. Griffith and Edward C. Maher Jr., Trammell Crow responded by hiring James F. McCaffrey away from Meredith & Grew. Peter Joseph of Cushman & Wakefield also joined Trammell Crow as the firm rebuilds its investment capabilities.
Other changes involved mergers and acquisitions between real estate firms. Cambridge-based ADD Inc joined forces with two overseas firms, Evata of Europe and the Adrianse Group, which covers the Pacific Rim. Two local real estate services companies also joined forces, with the Stevens Group and GVA Thompson Doyle Hennessey & Everest coming together in August.
Despite the sluggish economy, industrial real estate remained relatively healthy in 2001, although it did experience a difficult fourth quarter with negative absorption of 1.43 million square feet. The fourth-quarter demise brought the industrial market’s overall availability rate to 14.3 percent, with Interstate 495/South the highest in that regard at 20.9 percent.
Even with the fourth-quarter slump, industrial rental rates held steady and several impressive leases and sales were completed. The RREEF Funds, for example, paid $28 million to acquire the I-290 Industrial Park, a six-building, 577,000-square-foot complex in Northborough. Invesco Real Estate Advisors paid $9.8 million for 1-5 Sassacus Road in Westborough, while GFI Acquisitions purchased the 53 Ayer Road Industrial Complex in Littleton for $8 million.
Among the top industrial leases for 2001 was an 800,000-square-foot commitment by Weyerhauser Corp. for the Campanelli Business Park in Freetown. Trader Joe’s took all 350,000 square feet at 800 John Quincy Adams Road in Taunton’s Myles Standish Industrial Park, while NAI/Hunneman broker Cathy Minnerly completed a 450,000-square-foot warehouse lease in Braintree on behalf of her client, United Liquors.
One real estate sector that had little to cheer about in 2001 was the telecommunications industry. Data centers, also known as telecom switch hotels, were so hot in 2000 that landlords everywhere were clamoring to adapt their properties for telecom, while others rushed to buy properties they believed could be converted into such a use. When financing for the industry cratered, many landlords were left holding the bag.
The most glaring example of the telecom troubles can be found along the Massachusetts Turnpike in Allston, where Cabot Cabot & Forbes stopped construction midstream of what was to be a 450,000-square-foot switch hotel on behalf of Globix Corp. When Globix was unable to complete the build-out, CC&F stopped construction and is now trying to find a biotech tenant or some other use for the property.
