Hold off popping the champagne cork if you think the economy has hit bottom. The bottom might be close, but the hangover could last a long time.
My bet is that we are – though, like a lot of this stuff, it can be messy. For example, when it comes to our battered commercial and residential real estate markets here in the Bay State, it could take another decade before we see boom times again.
And, at least when it comes to the office market, we are still a far way from hitting our low point.
Over the next year or two, the downtown Boston vacancy rate could easily shoot past 20 percent, outdoing even the grim early 1990s downturn that rocked the Hub.
And this double-barreled downturn, one that is now ravaging both the commercial and residential markets, is likely to have sweeping consequences over the next few years for both the Boston area – and the state as a whole.
No New Demand For A While
You can say goodbye to any new downtown towers and hello to skyrocketing suburban tax rates, for one.
“There is an absolute correlation between jobs and the need for real estate,” said Joe Sciolla, managing principal of CresaPartners. “Until Boston and Greater Boston [companies] start to employ the unemployed who have been laid off, there is not going to be any new demand for office space.”
A look at the recent first-quarter numbers on the local office market ought to wipe the smiles off of any Pollyannas still alive after the last harrowing six months.
Companies are frantically cutting costs – and staff – at every turn. Local firms, from financial services giants to law firms, dumped nearly 1 million square feet of sublease space on the market during the first three months alone, Meredith & Grew reports.
By year end, the amount of sublease space on the market could swell to 2 million square feet – or enough to fill a pair of Prudential towers, according to CresaPartners.
All that space is driving up vacancy rates, and driving down rents as well.
While the other sectors, from residential housing to retail sales, appear to be hitting bottom, the office downturn is just getting into gear now. The vacancy rate for top Hub office towers has already shot past 13 percent, according to Cresa Partners.
Rents are also getting hammered. Forget about $70-a-square-foot rents, let alone $100 per square feet. The new range for asking rents for top-shelf office space is now $45 to $65 a square foot. And deals are now typically getting done 10 percent or more below these already deflated asking rents, CresaPartners contends.
My bet is before the commercial market slide has stopped, say in 2010 or 2011, we will be looking at a downtown Boston vacancy rate that has exceeded the 20 percent mark, with some towers 25 percent to 30 percent empty.
That would make it worse than even the grim downturn of the early 1990s, when the nationwide office vacancy rate topped off at just under 19 percent.
But this time around, the unemployment situation is much worse, likely to rise above 10 percent. And as any developer or real estate executive will tell you, job creation – or loss – drives the office market.
Nor, even with signs that the worst may be finally over in the home sales market, is there anything to get giddy about here.
While sales appear to be finally picking up, it may take months before the runaway train of falling prices finally comes to a halt. Even then, the market may skid along at the bottom for years, with no appreciable increase in prices.
Probably the best model for what lies ahead for our troubled housing and commercial markets here in Massachusetts can be found in the aftermath of the early 1990s downturn.
Downtown Boston office development ground to a halt for nearly a decade. With high vacancy rates and relatively low rents, some developers even debated whether it made sense to tear down older and underused towers.
It took nearly a decade before the next generation of office towers began to take shape.
The residential market was, if anything, even slower to come back. The Boston area’s overheated home sales market began to cool back in 1989. It took until 2002, or more than a dozen years later, for the days of rising prices and overcrowded open houses to return.
Based on that, you can forget about any new towers opening up in downtown Boston for another decade. Boston Properties’ Russia Wharf tower and Fan Pier’s modest new office complex are likely the last major office projects we will be seeing until 2020.
Like they say, it will be a good time to plan, for not much is going to get built.
Along with a bust in the development market, we are also likely to see more tower owners lose it all in the wake of the blockbuster Hancock Tower foreclosure. Commercial defaults were up 43 percent in the first quarter, CresaPartners reports.
Spreading The Pain
Things look equally grim for the many suburbs and small cities that ring the Hub. Even if the residential market finally hits bottom, taxpayers in towns ranging from Revere to Wellesley will be dealing with the aftershocks for years to come.
The nastiest surprise will play out over the next few years, as taxes soar in many towns, even as home values plunge. For town officials, the freefall in home values has wiped out billions from their tax bases.
In the end, short of a massive infusion of new cash from casino gambling, local officials will be forced to either raise taxes or lay off more police officer and teachers.
