Fewer Greater Boston office landlords cut their rental rates last quarter than at any time since the late 2008 stock market crash, a sign that the region’s office market is beginning to recover after hitting bottom.
Just 17 percent of Class A buildings across the region cut their asking rents in the second quarter, according to data from Boston brokerage Richards Barry Joyce & Partners. It was the fourth consecutive quarter that rental rate cuts declined, RBJ said. The 17 percent mark was down substantially from the second quarter of 2009, when 33 percent of building owners slashed their asking rates.
“The pace of deterioration is slowing,” said Brendan Carroll, vice president of research at RBJ. “Quarter after quarter, we’ve seen a slowing of that deterioration. It’s market-wide. Eighty-three percent of landlords were at least holding steady [on rents], if they didn’t increase them.”
Carroll said current data indicates deterioration “at a slower pace, with some pockets of strength.”
Crazy Talk
“Achieved rents have completely firmed, and quotes are going up,” said Ted Oatis, a partner at The Chiofaro Co., the firm that controls International Place. Historically, Chiofaro has pushed rents on view space skyward. The firm is currently marketing 380,000 feet being vacated by law firm Ropes & Gray.
“We think we have the best space available,” Oatis said. “We were never inclined to give it away, and what we’re seeing now is making us feel pretty smart. There’s been a lot of activity and a lot of interest. We’re going to be much more effective leasing it in a rising market. We had tenants in serious talks about major expansions in 2007. They pulled out in 2008, and now they’re back in growth mode. It’s not major, but they’re back in the market.”
Oatis said downtown landlords are becoming confident that when tenants begin hiring, Class A space in Boston will quickly become scarce, because the city entered the recession with a relatively low vacancy rate, and because there’s virtually no new office space in the construction pipeline.
“We will have a shortage of space in the next twelve months,” Oatis insisted. “When you’re in a trough and talk that way, people think you’re crazy.”
The availability rate for Class A properties in Boston stood at 18 percent at the end of the second quarter, according to data from Jones Lang LaSalle. Jones Lang LaSalle defines available space as that which is being actively marketed for occupancy, but not necessarily vacant.
Swinging See-Saw
Ronald Druker, president of the Druker Co., a major downtown landowner, said landlords’ focus remains where it’s been since the end of 2008 – on retaining tenants and avoiding vacancies. Throughout much of 2009, that meant trading immediate cuts in rents for multi-year extensions. Druker said his firm hasn’t lost a tenant in two years because it’s been aggressive about securing lease extensions.
“Our attitude has been, you don’t want vacant space,” he said. But, he added, concessions are beginning to wane. “We’re making market-driven deals. Our sense is, the market is tightening, and we’ll price deals accordingly in the future.”
Jack Kerrigan, an executive vice president at Grubb & Ellis, said suburban properties in the Route 3 and I-93 corridors are still struggling, but in bellwether suburbs like Newton, Waltham and Burlington, rents have experienced a slight lift because renewals have become “less onerous on landlords.”
“People are stepping up, they’re no longer avoiding decisions and doing a one-year renewal at the eleventh hour,” Kerrigan said. He argued that suburban office occupancy statistics, which generally show availability rates running between 20 and 25 percent in various submarkets, haven’t caught up to the activity on the street. Several medium- and large-sized tenants are scouting for space but haven’t signed deals yet, Kerrigan said.
He added that he has clients that were conservative about taking new space last year, and now have to move because they’re bursting at the seams.
Still, Kerrigan cautioned, even though landlords are having to kick over fewer concessions to retain tenants, when tenant relocations hit the market, the sheer volume of available space continues to create competition among landlords.
“The see-saw is starting to come up a bit, but it’s by no means a landlord’s market,” he said.
