One Federal St. was among the Boston buildings that scored major lease agreements in 2005.
Talk about demanding. Even in the wake of Boston’s second-best leasing year on record, broker William P. Barrack is not entirely impressed by the local office market entering 2006.
“I wouldn’t call it a full-fledged recovery,” the Spaulding & Slye managing director opined last week at his firm’s annual industry wrap-up and forecast of the commercial real estate sector. With the region posting an astounding 5.4 million square feet in net absorption of office space during 2005, the Hub alone accounted for 2 million square feet, or twice the normal level, according to Barrack.
Rents rose 6 percent in Boston in 2005 to an average of $34.43 per square foot but the rate remains below that needed to support new construction, said Barrack, a yardstick he placed in the mid-$50 per-square-foot range. A combination of forward-thinking developers and tenants sporting six-figure requirements late in the decade could yield new construction sooner rather than later, Barrack said, given that large blocks of space are becoming scarce. Russia Wharf and Fan Pier are the best prospects for a launch in the next 18 months, he suggested, albeit only if a creditworthy anchor can be found
“There are a lot of tenants out with 2009 and 2010 [expirations] who right now have no options,” said Barrack in explaining the possible motivation. “It’s either renew or get a new building built for them.”
The 1980s-rendition of Fan Pier was used by such tenants as the Ropes & Gray law firm to leverage downtown landlords, and the new owner’s ambitious plans for that waterfront site could again be employed as a bargaining chip. Meanwhile, city of Boston officials last week cajoled the McCourt Co. into moving development along for its extensive acreage in the Seaport District, a swath adjacent to the Fan Pier. There was a complete dearth of new buildings delivered or breaking ground in Boston in 2005; in fact, nearly 2 million square feet has been removed from the inventory since the downturn began, Spaulding & Slye estimates, some for conversion to residential and other space gobbled up through building acquisitions by users such as Liberty Mutual Insurance Co., which stunned the real estate community in 2005 when it agreed to buy Boston’s 10 St. James Ave. from Millennium Partners.
‘Positive Signs’
Barrack was among several industry experts on hand at Spaulding & Slye headquarters for last Monday’s market overview, likely the last under that moniker following the blockbuster $150 million purchase of the venerable real estate services firm by Jones Lang LaSalle late in 2005. Among those offering insights were Spaulding & Slye principals and leasing specialists Deborah Gould, Daniel Cordeau, William Bailey and Tamie Thompson. Benjamin Breslau, the firm’s research director, delivered the figures for the 2005 campaign, while principal Michael G. Smith provided insight on the investment sales climate.
Among the salient data unveiled at the program, Spaulding & Slye placed office vacancy rates in Boston at a 14.4 percent availability rate, and had a 10.7 percent direct vacancy level, tantalizingly close to the 10 percent rate traditionally seen as the sign of a stabilized environment.
Owing to the continued flight-to-quality trend and major lease agreements scored in such prime buildings as One Federal St., the John Hancock Tower and 222 Berkeley St., Boston’s Financial District and Back Bay had the strongest year, each exceeding 700,000 square feet in net absorption to account for 75 percent of that total citywide. The Back Bay’s direct vacancy has shrunk to 6.6 percent to lead all submarkets, including the Financial District’s 11.7 percent rate. The only office submarket that had negative absorption in 2005 was Charlestown at minus-35,000 square feet, a distinction achieved even after Partners Healthcare committed to nearly 200,000 square feet at the Schrafft’s Center, a block of space subleased from ManuLife as a casualty of that firm’s merger with John Hancock Financial Services.
Although as much as 450,000 square feet could be made available in the Back Bay following the merger between Gillette Corp. and Procter & Gamble, conditions have been so healthy in the Back Bay that the average asking rate for space of $38.13 per square foot leads the six city submarkets, including the Financial District, where the average stood at $36.49 per square foot. Class A rents were even higher at $41.36 per square foot citywide, reflecting a direct vacancy rate of just 8.9 percent.
In assessing the Cambridge submarket, Gould said requirements for both office and laboratory space are down in the first quarter of 2006, particularly compared to the robust activity enjoyed in 2005, including 275,000 square feet of net absorption in the fourth quarter. East Cambridge, which has 11.6 million square feet of office and laboratory space, recorded 818,000 square feet of the 1.01 million square feet of net absorption in the three-tiered market in 2005, Spaulding & Slye reported, putting that district at 16.4 percent availability and just 13.1 percent in direct vacancy.
“We’re continuing to see positive signs,” said Gould, listing growth by such companies as Aspen Technology and Akamai as indicators of better times ahead in Cambridge, which has seen dramatic swings in performance since the city’s peak in 2000 and 2001. Asking rents for office space in Cambridge have increased to $27.93 per square foot, said Cordeau, who warned that suburban alternatives will require Cambridge landlords to keep pricing in check going forward. The Cambridge address continues to have global appeal, Cordeau stressed, but he also indicated that cost-conscious investors are no longer willing to write blank checks for that cache alone. Lexington and Waltham are gaining enough critical mass and have a location central enough to lure even life sciences companies, said Cordeau, especially those needing 20,000 square feet or more of space.
Smith predicted another hectic year on the investment front, advising buyers to “get your boxing gloves on” if intent on pursuing deals. “I do think you are going to see the parade of capital continue,” Smith said, anticipating a growing stream of investors ready to accept lower yields and aggressive terms. Even foreign investors are now eyeing fringe properties after strictly favoring core-plus assets, said Smith, citing one overseas buyer who recently bid on an office building in the Interstate 495 region, a deal which the suitor was ultimately unable to secure.
Along with foreign capital from Europe and Australia, domestic pension money, real estate investment trusts and private funds should all again vie for Massachusetts real estate in 2006, Smith predicted. The improving market conditions and need to place funds is leading to interest in so-called value-added opportunities as well, he said, giving hope to buildings passed by when stability was considered sacrosanct to most investors.
