TAMIE R. THOMPSON
‘The same pressure’

Despite signs that the worst days may be over for Cambridge, mid-year figures released last week by Spaulding & Slye Colliers show continued deterioration throughout Greater Boston’s commercial real estate market, with the region’s economic woes causing particular trouble for the office sector.

“We still haven’t bottomed out on rents,” said Spaulding & Slye principal Tamie R. Thompson, who delivered an overview of the suburban market. Ongoing problems in the high-tech industry have wreaked havoc on that 75 million-square-foot market, said Thompson, with 1.1 million square feet of negative absorption in the second quarter driving up the availability rate to 25.5 percent overall. In a market with 19 million square feet available, Thompson said there is only 7.7 million square feet of demand.

“We really have to get rid of 8 million square feet to stabilize rents,” said Thompson, with many companies undercutting landlords by offering cheap, turnkey leasing opportunities. Requirements are substantially lower now, she added, estimating the average size deal at present is about 20,000 square feet, down from 38,000 square feet at the market peak in 2000.

“Across the board, everybody is feeling the same pressure,” said Thompson, who offered a glimmer of hope that lower rents will spur entrepreneurial companies to take space and potentially develop new technologies to boost the region’s economic health. “We were basically pricing them out of the market before,” she said.

Regardless, it does appear as though the suburbs have a long road ahead to recovery, with the availability rate above 20 percent in all seven suburban submarkets except for Route 495/South, an area with just over 2 million square feet of office space. The Northwest market has suffered the worst in the past three months, with negative absorption of 609,000 square feet.

As for direct space, Spaulding & Slye recorded a 13.1 percent overall suburban vacancy rate, with a low of 7.9 percent on Route 495/North and a high of 16.5 percent in the North submarket. Core Route 128 destinations such as Burlington and Waltham are struggling mightily, with Thompson noting that both communities are near 30 percent availability, challenging historic highs in that regard.

In the Red

The Boston market also has seen problems continuing, said Spaulding & Slye principal William P. Barrack, who said that the Hub has seen its longest period of contraction in the 20-year history of the Spaulding & Slye report. The subleasing equation is still driving office rents downward, although Barrack said it appears the flood of such space is finally ebbing. That is encouraging, he said, especially considering that there appears to be increased tenant demand for space.

“This is really the year of stabilization,” said Barrack, with rental rates likely to continue falling but companies increasingly willing to make lease commitments. At the same time, Barrack said firms are being conservative in their space allocations, with eight of the top 10 requirements in the market seeking less space than they currently occupy.

Absorption remained in the red during the second quarter, although the negative absorption mark of 268,000 square feet was substantially below the 468,000 square feet recorded in the first quarter. The Financial District suffered the worst with negative absorption of 409,000 square feet, although that was offset by plus 306,000 square feet in the Seaport District. Only Charlestown (7.6 percent) had an availability rate in single digits, with a high of 19.7 percent in the Seaport submarket.

Spaulding & Slye is currently tracking 174 companies seeking space in Boston. The collective 5.4 million square feet of demand is the highest since 2000. “Velocity is picking up,” said Barrack.

The same is true across the river in Cambridge, according to Spaulding & Slye principal Debra J. Gould, as witnessed by the 223,000 square feet of positive net absorption recorded in the second quarter. Building off the tiny positive absorption mark of 20,000 square feet in the first quarter, the latest figures indicate Cambridge may finally be on the mend.

“Deals are absolutely happening in the marketplace,” said Gould. “People are getting much more comfortable.”

The Cambridge supply equation has been aided somewhat by the conversion of several office buildings into laboratory space, but Gould said there also appears to be some genuine activity among office tenants. Although it was primarily a laboratory deal, the arrival of Novartis AG into Cambridge this year has been a boost for the overall market, said Gould, even though she predicted office rents will soften further before bottoming out.

Most of the second quarter activity was focused on the primary East Cambridge submarket, which now has a vacancy rate of 14.5 percent and an availability of 24.3 percent. While substantially smaller, the Alewife submarket has a higher vacancy level of 15.6 percent.

Also speaking at last week’s overview was Jeffrey B. Swartz, who delivered an outlook for the investment market, which Swartz said is “spotty at best.” The main problem, he said, has been enticing owners to place their assets on the trading block, with plenty of capital chasing deals to attract interest. Stable office buildings, grocery anchored shopping centers and multifamily remain the leading choices for investors, said Swartz.

One reason for the slower going is stricter underwriting criteria, said Swartz. Although investors are willing to adjust their returns down somewhat to secure a deal, Swartz said they remain wary of overpaying for product. “The buyers are smart and very sophisticated,” he said. “Nobody is making foolish acquisitions.”