As vacancy in Boston has dropped a couple of points to 14 percent – the fourth consecutive quarter showing a tightening of office space – rents continue their slow rise, up to an average asking price of $41 per square foot for Class A and $27 per square foot for Class B, both figures a dollar higher than in Q3. But the rising rents aren’t just a function of supply and demand, according to CRESA Partners in our firm’s latest market update. As a result not only of the recent hurricanes, but also significant global market shifts – chiefly greater demand for oil in India and China – tenants can expect many new challenges in the New Year.
Based on industry reports, area construction costs are up about 30 percent. And as construction costs rise, rents follow suit. Rates for petroleum-based products, including carpet, gypsum, wallboard, steel and metal studs, will likely remain high for the foreseeable future.
Tenants this winter will also be hit with considerably higher costs to light and heat their offices. Electrical rates have almost doubled, with the cost for lights and plugs, which used to average $1.25 per square foot, now running $2.00 per square foot. Meanwhile, as transportation costs increase for oil and gas, delivery companies are hiking their surcharges for ground and air shipments by approximately 20 percent.
To deal with these price hikes, tenants need to budget accordingly, but they also should be proactive in negotiating for the most competitive rates with multiple vendors. If tenants receive the right counsel, they can reduce their exposure and save tens of thousands of dollars. Key to this process is working with project managers who perform upfront “value engineering” to determine costs and savings.
As the market becomes less tenant friendly, this proactive approach also applies to negotiating with landlords. Tenants should strive to protect all of their interests, including not only the cost of rent, but also tenant improvement allowances and numerous additional lease-negotiating points that often are not considered and can result in significant savings.
Looking at the traditional market signposts, the Boston market continues to be active. In the downtown towers, vacancy in the top floors is as low as 5 percent, with asking rents now up to $55 per square foot. But while local leasing activity continues to be strong, job growth is still modest. The office recovery is also tempered by the possibility that 250,000 to 400,000 square feet may become available in the Prudential Center as a result of Procter & Gamble’s takeover of Gillette.
Some larger tenants evaluating the market include: WilmerHale (325,000 square feet), Sovereign Bank (150,000 square feet), Hill Holliday (125,000 square feet), Putman Investments (300,000 square feet) and Eaton Vance (250,000 square feet).
The past year was a healthy one for investment sales in Boston, including ING Clarion’s acquisition of 101 Arch St., and the purchase of 31 St. James Ave. and 75 Arlington St. by Liberty Mutual.
Recent development news has also been promising. The limited availability of contiguous blocks of downtown space over 100,000 square feet is encouraging developers to consider new speculative office projects. These include Equity Office Property’s 1 million-square-foot, mixed-use project at Russia Wharf and 500,000 square feet at Fallon Co.’s Fan Pier project.
While Boston is leading the area’s commercial real estate rebound, the outlying markets are beginning to pick up the pace.
Cambridge Tightens Up
In Cambridge, vacancy for Class A and B office space dropped for the third consecutive quarter to 14 percent, and lab availability, now down to 11.9 percent, continues to fall as well. While tenants still have the upper hand in this office market, few options exist for tenants looking for 25,000-plus square feet of laboratory space. Average asking rents for Class A space is $33 per square foot, up $1 per square foot from last quarter, while laboratory (NNN) rents have reached the $50-per-square-foot level.
Suburbs Up the Ante
In our firm’s Q3 market update, we reported that Waltham was the hottest of the suburban markets for leasing activity. That continues to be the case, with Route 128 West vacancy falling a point to 18 percent and Class A office average asking rents now up to $31 per square foot. But the recovery is finally migrating north and further west, as Burlington and surrounding towns experienced their first rent increase for Class A and B office space in more than a year. Average asking rents along Route 128 North are $21.50 per square foot for Class A and $17.00 per square foot for Class B. That same trend applies to the Route 495 market as well, with Q4 office average rentals edging up ($18.00 for Class A, $14.25 for Class B).
Looking ahead, for the immediate future, tenants can still lock into favorable terms for lease renewals and relocations. But in 2006, we will reach a more balanced market, and tenants can expect to yield some of the leverage they have enjoyed for so long.
Our advice to tenants is to be resourceful and forward thinking. They should conduct due diligence before they select a new facility, and make sure they protect all their interests before and during lease negotiations. That will help make 2006 a happier and financially healthier New Year for tenants throughout Greater Boston.
