In 2011, the Boston commercial real estate market showed some signs of life, with most movement attributed to small- and medium-sized companies.

Next year appears to promise much of the same, with the greatest demand coming from the 5,000- to 25,000-square-foot users who are growing. Meanwhile, larger tenants are still active in the market, but many are taking less space, effectively offsetting what smaller companies are growing into.

The largest users in the Financial District are law firms and financial services companies, and the downsizing in these industries has resulted in increased vacancies. In addition, major businesses have become more efficient users of office space (fewer administrative employees per attorney, more “hoteling,” equal-sized offices for all), and more conservative in growth projections, resulting in less space demand for companies when they do grow.

Over the last 12 to 18 months, the Back Bay area has started to run away from the Financial District as the preferred submarket in Boston. Its appeal is shared between employers and employees alike, with a “24/7” neighborhood feel, new retail shops and restaurants and easy access from the Pike for commuters. These qualities have helped the Back Bay achieve higher rents and lower vacancy rates that have dropped into the single digits. (While vacancy rates have dropped slightly in the Financial District since last year, they are still hovering around 15 percent.)

2011 also saw the Seaport District rise in popularity, a trend we expect to see continue in 2012. Similar to the Back Bay, the vitality of Liberty Wharf has created a groundswell of interest in the entire Seaport District. Deals like the Vertex Pharmaceuticals move are also serving as a catalyst in the area following the company’s decision to leave Cambridge and build 1.1 million square feet in the Seaport. This is a big transition that will likely attract more development with it. In fact, a law firm recently decided to follow Vertex and leave Cambridge for the Seaport.

Rising Rates

Current rental rates indicate where 2012 is headed. In the Back Bay, rates are trending from the $50s to mid-$70s. In the B-market, it’s closer to $30s and $40s. The better space in the Financial District is paying up to high $50s, while low-rise space in Class A properties in the Financial District are priced from the high $30s to mid-$40s. For B-market space in the Financial District, the range is from the high $20s to low $30s. The Seaport has now been dubbed the “Innovation District,” and is commanding $30 to $40 per square foot.

In the Financial District’s Class A tower market, more than 20 percent of all office space below the 10th floor is vacant. The lower and larger floors traditionally worked well for “back office” users, but these uses are now more often seen in the suburbs. The lack of light coming into these offices also contributes to functional obsolescence as large companies become increasingly focused on bright, open floors for their workers.

We have come a long way in the last two years, but similar to the global economy, we still have a long ways to go. During the recent downturn, the industry expected a flood of sublease space that never materialized. This is due to the hard lessons of the boom and bust in the early 2000s that caused many companies to remain conservative with space needs in today’s turbulent economy. Now that their cautious approach has been validated, I expect the conservative growth trend to continue in 2012. Firms that are growing aren’t going overboard, and larger firms that are not growing will give some space back. There will continue to be excess supply, and developer-driven construction projects will remain nonexistent.