Vacancies in the Boston and Cambridge office markets inched up slightly in the second quarter as asking rents soared, defying the laws of supply and demand. But brokers say the ambitious prices fail to reflect giveaways to lure tenants.
“Asking rents haven’t changed much when you consider that landlords are giving more concession packages including free rent and tenant improvement dollars,” said William P. Barrack, managing director at Jones Lang LaSalle, a global real estate services firm with offices in Boston. “The mood in the market is that tenants are seeking the most cost-effective solutions to meet their operational needs.”
The vacancy rate in the downtown’s white-hot office market barely increased to 7.7 percent in the period that ended June 30, up from 7.5 percent one year ago, according to Jones Lang LaSalle’s data. But the average asking rent increased by 26.9 percent in Boston during the second quarter to $58.71, compared to $46.25 one year ago.
Every downtown submarket except North Station experienced rent increases. The Back Bay continues to command the highest asking rents at $65 per square foot, up from $55.23 one year ago, a 18 percent hike. South Boston’s Waterfront had the biggest boost in average asking rents at $50.52, up from $29.22 last year, a 73 percent rise. South Station rents swelled to $42.30, a 37 percent increase from $30.77 one year ago. The Financial District saw rents reach $63.45 from $49.89, a 27 percent surge.
Still, there are signs of trouble. Boston’s net absorption rate, the amount of space occupied at the end of the quarter minus the amount used at the start, was a modest 166,740 square feet in the second quarter, down from nearly 700,000 square feet for the same period last year. In addition, the amount of vacant space in Boston increased to 4.5 million square feet, up from 4.38 million in the second quarter of 2007.
Stuck in Neutral
David L. Richardson III, executive vice president at McCall & Almy, a Boston-based firm that exclusively represents tenants, said his clients are in neutral.
“No one is making a decision that they don’t have to make on taking space because tenants are uncertain about what will happen,” he said.
While Richardson acknowledged that rents have not fallen, indicators suggest that they are headed down.
“At some point, some landlords will show a chink in the armor and lower rents,” he said. “Landlords paid lots of money for these buildings, and they have debt to pay. But at some point they’ll say, ‘Ouch! My mortgage is more than what’s coming in, and I need to do something.'”
Landlords, like single-family home sellers, are reluctant to lower prices in the hope they can still command top dollar, Richardson said.
But that’s changing given the economic turmoil, he added.
“Blackstone Group bought Equity Office in 2006 and raised rents immediately in those buildings by 20 percent, and other landlords followed,” he said. “Now, if an owner has a 300,000-square-foot vacancy in a 1 million square foot tower where the asking rent was $85 per foot, they’re more likely to do a deal at $65,” he said.
Richardson said Equity Office, the landlord for 150 Federal St., the 28-story building in the Financial District that features 530,000 square feet of office space, has lowered asking rents from $80 per square foot nearly two years ago to $60.
“When Bingham Dana moved out of its 300,000 square foot space, it left more than half of the building empty,” he said.
Still, Richardson said price depends on three factors: location, location, location.
“A tenant seeking office space at Copley Place could make a deal at $45 per square foot, but if they want the 60th floor of the Hancock Tower, they’d have to pay $75.”
The Cambridge office market’s vacancies were 8.3 percent in the second quarter, almost unchanged from last year when the rate was 8.1 percent. Average asking rents in-creased 16 percent to $47.06, up from $40.55 one year ago, according to the Jones Lang LaSalle data.
In the suburbs, average asking rents increased to $24.57, up from $21.99, a nearly 12 percent jump. The overall vacancy rate in the 83 million-square-foot office market was 14.3 percent, flat from a year ago when the vacancy rate was 14.9 percent. All of the sub markets including 128/Mass Pike, 495/Mass Pike, North, Northwest and South continue to have double-digit vacancy rates.
Kevin Hanna, a broker at Cushman & Wakefield whose specialty is MetroWest, said deals have slowed.
“We’re seeing a few tenants seeking space in the 5,000 to 10,000 square foot range,” he said. “But lots of the larger companies are taking a wait and see attitude.”
