GLENN VERRETTE
Meeting the market

It is a time of year when the holidays begin to meld together, and the office market forecast offered by Meredith & Grew Oncor last week appropriately reflected that interaction. Whereas the outlook might have been decidedly spooky to landlords, for example, office users received plenty of reasons to offer thanks when the opportunity presents itself later this month.

“The pendulum has clearly swung in the favor of tenants,” Meredith & Grew broker Ronald Perry acknowledged to the packed crowd gathered last Tuesday morning at Le Meridien Hotel in Boston’s Financial District. The city’s vacancy rate has skyrocketed from 2.8 percent in 2000 to 14 percent at the end of the third quarter, according to Meredith & Grew, while Class A rental rates are off from the peak average of $46.93 per square foot in mid-2000 to $39.99 per square foot at present.

“Tenants are in a position to negotiate favorable terms and conditions today,” said Perry, head of Meredith & Grew’s downtown brokerage group. For much of the year, the voluminous choices have resulted in a stalemate where tenants are either playing one building off against the other or sitting back in anticipation that rents will decline even more in the coming months. But while that hesitancy and the overall economic malaise should result in about 600,000 square feet of negative leasing absorption in Boston this year, Perry did say he is encouraged by a number of significant leases signed in recent months, indicating an inclination toward increased activity.

“Tenants are getting off the sidelines and making long-term commitments at attractive numbers,” said Perry, citing two deals at One Financial Center totaling 270,000 square feet. Cambridge Assoc. took 90,000 square feet at 100 Summer St., while similarly sized leases have also been cemented at One Boston Place and 745 Atlantic Ave. Overall, there has been 2.25 million square feet of recorded deals in Boston this year, Perry said, with another 500,000 square feet pending.

One landlord that has been particularly active this year is also the largest player, both locally and nationally, and Equity Office Properties Managing Director Glenn Verrette provided his company’s overview of the Boston market and prospects for the coming year. Although the Hub has been decimated by the recession, Verrette detailed that Equity has nonetheless completed 1.2 million square feet of leases in its 13 million-square-foot Bay State portfolio this year. Equity has successfully renewed several tenants, but Verrette said 675,000 square feet of the amount reflects new growth, either from new tenants or through expansions.

“We’re very pleased with our results and our occupancy of more than 92 percent,” said Verrette. “We think we are very well-positioned here.”

Interestingly, Equity has been criticized locally of late for its aggressive leasing approach, with some building owners charging that the real estate investment trust is undercutting them by doing below-market deals. In addressing that issue, Verrette pointed out that many claimed Equity was overheating rent levels in 2000 when it was supposedly seeking deals in the $100 per-square-foot range.

Stressing that “there is no one in the market who has more to gain than Equity Office” in having rents grow, Verrette concurred the REIT is prepared to “meet the market” on rental rates if they continue to slide downward. “Right now, we are in a competitive market and we want to compete,” Verrette said, adding, “I think our strategy has been sound.”

Verrette also offered an optimistic view about the prospects for a rebound in Boston, possibly even quicker than some have envisioned. The local office market is “bouncing along the bottom” at present, said Verrette, but he stressed there could be a return to office rental growth sometime in 2003, albeit unlikely before the midyear mark.

“Boston has the capability to tighten up quickly,” Verrette said. “We think it is still a tremendous office market and will continue to be long term.”

Perry agreed, although he also predicted that the commercial real estate market will remain flat for most of 2003, with prospects for growth not likely until 2004. The vacancy rate in Boston will probably rise to 15 percent before leveling off, said Perry, with a decline anticipated of 1 percent to 2 percent in 2004. Absorption will also even out next year, followed by positive net absorption of 500,000 to 750,000 square feet in 2004.

‘A Matter of When’

Other presentations at Tuesday’s program included an overview of what Boston will look like when ongoing infrastructure projects such as the Big Dig are completed in the next few years, with Boston Redevelopment Authority Director Mark Maloney among those on hand to offer those insights. There was also a videotaped conversation with University of Massachusetts public policy professor Alan Clayton-Matthews, who projected that job growth will not begin to appear in Boston until mid-year 2003, with unemployment rates not likely to reflect that stabilization until later in the year.

Although Boston does have some more pain to work through, Clayton-Matthews was generally bullish about the region going forward, citing such positive elements as the solid educational system, a diverse economy and Boston’s status as a 24-hour city. As soon as the business community begins to invest in technology, there should be a local revival, Clayton-Matthews said. “Massachusetts will come out of this recession,” he said. “It’s just a matter of when.”