Anyone seeking a warmer perspective to counter the season’s first blast of artic air, which swept through Boston last Wednesday, need only have stepped into the annual commercial real estate forecast held that day at the Swissotel. There, despite recent indications that the industry is heading into a deep freeze itself, most of the panelists insisted otherwise, maintaining that a sudden slowdown in demand and a nervous Wall Street will not conspire to end one of the region’s most enduring real estate boom periods.
The program, now in its fifth year, was jointly sponsored by the Society of Industrial and Office Realtors and the National Association of Industrial and Office Properties.
“2001 will bring good things to the market,” proclaimed panelist and Meredith & Grew Senior Vice President James F. McCaffrey. “We think we’re going to have better news a year from now than we do today.”
Echoing that sentiment was keynote speaker Stephen Coyle, an economist who delivered an overview of the national and local economies, with a focus on real estate. While acknowledging that the Hub is typically considered a “volatile market,” one prone to major corrections due to its cutting-edge technologies, Coyle said that very factor will also keep venture capital funding flowing into the Bay State.
“They [venture capitalists] look for growth and volatility,” said Coyle. He noted that the state received the third-largest amount of venture capital money of any area nationally last year, while McCaffrey cited estimates that another $25 billion to $30 billion will pour into the state’s so-called TechnoCorridor in the next two to three years. The TechnoCorridor, which encompasses much of Eastern Massachusetts, was identified earlier this year by Meredith & Grew as being the area where most of the state’s high-tech companies have settled.
Both Coyle and McCaffrey alluded to the difficulties experienced by dot-com companies and other new technology firms in recent weeks, with Coyle reporting that of 280 technology companies tracked by the Bloomberg Stock Index, 151 have seen at least an 80 percent decline in their market capitalization during the past year. Quipping that some of that sector should be referred to as “dot-compost,” McCaffrey estimated that 13 TechnoCorridor companies which collectively have lost $83 billion in value since the start of the year have given back about 800,000 square feet of 2 million square feet of rented commercial space.
Despite that, McCaffrey also insisted the situation is nowhere near as dire as some might believe. The Web content and service providers which have received the brunt of the negative activity make up less than 5 percent of the occupied space in the 80 million-square-foot TechnoCorridor, said McCaffrey. In addition, besides the influx of venture capital funds, McCaffrey said so-called TechnoCorridor Titans such as Nortel Networks, EMC and Lucent are aggressively making acquisitions of existing companies, a trend that should lead to greater local growth. Sun Microsystems, for example, has a requirement for 2 million square feet of space at present.
“It’s an incredible demand story,” said McCaffrey.
Equally bullish on downtown Boston was CB Richard Ellis/Whittier Partners President Andrew W. Hoar. Not only has the city had 2.2 million square feet of net absorption to date in 2000 – about twice what would be seen in a normal year – Hoar said tenants are scouring the market for another 4.2 million square feet of space. And while there has been a rise in sublease deals, with space coming available due to the technology shakeout, Hoar said most of that space is in less desirable buildings located in peripheral markets. Subleasing is also being offered in the 10,000- to 30,000-square-foot range, he said, well below the six-figure chunks which were prevalent during the previous downturn.
“I don’t think the sublease space will have the same drag on the market that it did in the early 1990s,” said Hoar. That is especially true, he said, given that 69 percent of the estimated 3.3 million square feet of new office space under construction in Boston is already committed. The city’s miniscule 0.7 percent vacancy rate puts it tops in the nation in that category, Hoar said, while the average asking rent of $53.95 per square foot is third, trailing only San Francisco and New York.
“The market is going to slow down, but we are still going to see a healthy pace” in 2001, said Hoar.
Insignia/ESG Senior Managing Director Stephen J. Murphy was somewhat more reserved than his colleagues in giving his forecast for the suburban and Cambridge markets. Although he told the audience of several hundred that “the degree of confidence and the business fundamentals in Boston have never been greater,” Murphy also said he believes the office market peaked in the third quarter.
“It is going to be hard to sustain some of the $60 and $70 [per-square-foot] rental rates we are now seeing in suburban Boston,” said Murphy, who predicted that the opening of new suburban communities to office construction will help flatten rental rate growth. Average rental rates in the seven suburban submarkets range from a low of $22.23 per square foot along Interstate 495/South to $51.50 per square foot for Route 128/West.
Back to Basics
For the coming year, Murphy said he believes demand will be slower, while skittish lenders will be increasingly reluctant to finance new suburban construction without a combination of strong equity and a 60 percent to 70 percent pre-leasing commitment. “All in all, I think we’re back to basics; a very strong and vibrant market,” he said.
On the industrial front, Cushman & Wakefield broker Kevin J. Hanna said supply remains limited locally, largely due to a lack of suitable land sites for manufacturing and distribution operations. Many R&D/flex buildings have been taken over for office functions, while other industrial properties are being eyed for telecommunications use. The current vacancy rate is 7.5 percent, while rental rates over the past year have risen by about 9 percent. Most warehouse/distribution space is renting in the $6.50 per-square-foot range, he said, although the Northern market is commanding as much as $7 per square foot.
The advent of e-tailers into the industrial market looking for distribution space has gone slower than some might have expected, but Hanna said he believes such demand is beginning to take hold. By some estimates, e-tailers currently account for about 20 percent of consumer deliveries, but Hanna said that number could be closer to 50 percent within five years. Such companies will likely need more short-term distribution and less retail space, Hanna said.
As for investment sales, Spaulding & Slye Colliers principal Catherine F. Daume said activity is beginning to slow down, but will not ebb completely. A record number of properties anticipated to come on the sales block in 2001 could result in fewer bidders, she said, especially since many pension funds are feeling over-allocated toward office buildings and therefore may be more likely to focus on multifamily, industrial and retail properties.
Spaulding & Slye Colliers likes to see between 12 and 15 bidders on any given property, Daume said. Coupled with the focus on other product types and a growing retreat to the sidelines by some investors, she said some office deals may only receive a half-dozen offers, and those bidders willing to match a sellers’ asking price could amount to just two or three.
“There is plenty of capital out there, but it is a tricky market,” Daume said. “Overall, we think the euphoria is going to come down some, but it will still be strong and we think it’s going to be more sustainable.”
Helping to mollify any fears of a prolonged downturn was Coyle, who said even in a recessionary model, Boston tends to fare better than other parts of the country. Although Massachusetts is especially vulnerable to a downturn fueled by labor shortages, Coyle said he believes the lack of excess supply and Boston’s solid educational base should bode well for the region.
“All in all, the market is in much better shape than it has been in the past 10 to 20 years,” Coyle told the crowd. “Enjoy it.”
