Layoffs and a sputtering economy are once again threatening to throw the Route 495 commercial markets for a loop.
The 495 markets are, historically, the first to feel the brunt of an economic downturn, and the last to recover. That’s exacerbated by the fact that, as this current downturn hit, the 495 belt was still struggling to shed its dot-com hangover.
At their peak, before the dot-com bust, vacancies in some parts of the belt stood in the low single digits. The bust sent those vacancies soaring – to 40 percent in the north, and near 35 percent in the western boroughs. Occupancy has come down into the 20s, but has never fully recovered. And, worse for landlords, neither have rents.
Up north, recent growth had been driven by flight from Waltham and Burlington. The market forces that drove tenants to the outer suburbs no longer exist. With rents coming down and sublease space opening up in those two towns, and a significant amount of aggressively priced new construction in Woburn, the traditional $10 rent differential between Routes 128 and 495 has narrowed considerably.
“Previously, companies facing renewal rents sometimes more than 50 percent higher than their current rents found themselves asking if they needed to be located in Burlington, Lexington and Waltham,” said Joe Doyle, a tenant broker with CresaPartners. “The answer in 2007 and early 2008 was no, which lead to many tenants migrating to towns like Billerica, Chelmsford and Lowell where rents were significantly lower. That scenario changes when rents depreciate along 128.”
Landlords in the outer suburbs don’t have much room to cut rents in response. Doyle expects rents, currently running between the high teens and mid-20s, to fall off another 10 percent to 15 percent, but said, “In the Route 3/495 markets, there is less room for rent depreciation than in Waltham, where landlords can achieve rents in the $30s and $40s. Unlike other markets, there isn’t room for rents to drop 30 [percent] or 40 percent on a gross basis. The deals were pretty thin to begin with.”
Some landlords were only netting $2 or $3 a square foot. If they cut rents too much further, they’ll be doing negative deals.
Up north, rents are sliding after hitting a five-year high in the first quarter of 2008, according to data from Jones Lang LaSalle. Rents are down more than $7 from their historical high, in 2000. Meanwhile, Class B offices are sitting empty as tenants snatch up cheap Class A space. Out west, Class A rents down more than $10 from an historical high in 2000. Class B rents are down more than $6. And there’s virtual parity between Class A and Class B asking rents, according to Jones Lang LaSalle. The brokerage firm is relatively bullish on 495 South, noting that thee buildings account for more than half the submarket’s available space. Still, rents largely remained static since 2001. Landlords’ costs have not.
“In every real estate cycle, [495] is always the tail of the dog which is 128,” said Joe Sciolla, a managing principal at CresaPartners. “There’s a lot of inventory out there. Rents haven’t moved in six to seven years. They’ll bottom out – they can’t go down much further, based on the prices guys paid for the buildings.”
Layoffs loom large on the horizon, but suburban sublease space has yet to explode. Sublease availability across the suburban markets stood at 3.4 million square feet at year’s end, up from 2.9 million the year before. That’s nowhere close to the 11.8 million square feet on the sublease market at the end of 2002.
“By historical standards, 3.4 million is within a norm,” said Mary Sullivan Kelly, research director at Colliers Meredith & Grew.
Still, real estate executives are fearful and uncertain about the submarkets’ ability to weather the economic downturn, given the interconnected nature of the region’s high-tech and industrial sectors.
Nortel, which has a significant presence in Billerica, filed for bankruptcy protection two weeks ago. Observers believe the company is headed for liquidation. That could be disastrous for a number of smaller, local tech firms. One is Airvana, a mobile broadband firm that gets nearly all its business through Nortel. Brokers believe Airvana’s 60,000-odd square foot space in Chelmsford could become one of the bankruptcy’s victims.
Brokers are also warily eyeing Teradyne, the large North Reading semiconductor firm that just posted a $55-million, fourth-quarter loss and announced a 14 percent global workforce reduction, and Wyeth, the pharmaceutical giant with spaces in Andover and Wilmington. Wyeth is being taken over by Pfizer in a $68 billion deal that will ultimately cost the two firms 20,000 jobs, though the employment outlook for Massachusetts was not immediately clear.
