Investors Bank & Trust leased 355,000 square feet of office space at the John Hancock Tower in Boston (above), as well as another 150,000 square feet at nearby Copley Place, in 2005. The Hub’s office market has finally started to right itself after several difficult years.
For office space in Boston, 2005 could be regarded not so much as a year, but more as a 12-step program, with the market finally righting itself after several unsteady attempts to begin the new millennium.
“We think this really is a recovery and not just fluke numbers, and that’s definitely good news,” Lincoln Property Co. Research Director Emily Schwartz said last week in releasing preliminary figures for 2005 that included a slight bump-up in asking rents following years of backsliding on rates.
Bolstered by a solid showing in the Hub’s Back Bay district, the city recorded 1 million square feet of net absorption by Lincoln’s count and even more in other surveys, such as an estimate of 1.6 million square feet in CBRE/New England’s year-end overview. The vagaries reflect differences in market sampling and other data gathering methods. Whatever the actual numbers, the reports issued did appear to be tracking improvement, even in fringe submarkets that have struggled in recent years such as the Seaport District, Charlestown and North Station.
According to CBRE/New England, the vacancy rate for Boston’s 66-million-square-foot office market dropped from 13.2 percent to begin 2005 to 11.7 percent at present, while CBRE/New England principal David Fitzgerald also opined that the rebound is likely here to stay, calling 2005 “a turning point for commercial real estate” and describing it as the strongest showing for the city since 2000.
“We credit this positive market shift to the growth of both new and existing companies, which increases tenant demand, and to a continued ‘flight-to-quality’ trend,” Fitzgerald offered in a release unveiling the CBRE/New England study. Small- and mid-sized firms continue to lead the recovery, Fitzgerald and other brokers explained, although the region certainly had its share of blockbuster leases during the year.
Tenant Drivers
Major agreements in 2005 included Bingham McCutcheon taking 320,000 square feet at One Federal St., Wellington Management leasing 210,000 square feet at 100 Federal St. and the massive, two-building pact by Investors Bank & Trust for more than 500,000 square feet in the Back Bay, deals brokered by Meredith & Grew, McCall & Almy and CBRE/New England. IBT secured 355,000 square feet at 200 Clarendon St., aka the John Hancock Tower, and another 150,000 square feet at nearby Copley Place. A lease renewal by Houghton Mifflin at 222 Berkeley St. extending into the abutting 500 Boylston St. also graced the Back Bay this year. Estimated at just under 250,000 square feet, the deal compounded a dearth of space options available to accommodate large tenants in the Back Bay.
Currently, there are just 11 opportunities in the Back Bay for tenants needing 25,000 square feet or more of Class A space, and just five options for firms seeking more than 50,000 square feet, said Schwartz, who puts the Back Bay’s office vacancy rate at a tight 6 percent, down from 7.8 percent to begin the year. The Back Bay had 448,000 square feet of net absorption in 2005, Lincoln’s preliminary figures indicate, compared to 200,000 square feet of net absorption in the Financial District. Schwartz also said that the average asking rate for office space in Boston is now $31.47 per square foot, up 26 cents from the beginning of 2005.
CBRE/New England put the rate increase a bit higher, estimating the rate has risen from $33.02 per square foot to $34.38, although most of the gains were enjoyed at the upper end of the market, both in space quality and in location, with upper floors continuing to get the greatest activity. Class B demand is less strident, but the disappearing Class A space and a move to convert older properties into alternative uses did bolster the fundamentals for that market segment. Attorneys, financial services and technology companies were all leading tenant drivers in 2005, while Boston also managed to attract a few companies to move from Cambridge across the Charles River, most notably the arrival of Babson Capital Management to 470 Atlantic Ave. during the summer.
CBRE/New England estimated more than 2.5 million square feet of gross leasing activity in Boston in 2005, with more than 200 transactions. The average transaction size was 16,000 square feet, and Fitzgerald said he believes the city will continue to see small- and mid-sized firms lead the pack in 2006.
Schwartz said the Hub was further aided last year by the absorption of several hundred thousand square feet of sublease space, including some stemming from such major corporate mergers as the FleetBoston Financial/Bank of America union, the Manulife Financial and John Hancock Financial Services marriage and the acquisition of Gillette Corp. by Procter & Gamble.
A leading concern going into 2005, some sublease space was never put on the market as originally feared, noted Schwartz, and that which did appear found willing takers. Manulife subleased 190,000 square feet at the Schraffts Center in Charlestown to Massachusetts General Hospital, Kirkpatrick & Lockhart committed to 150,000 square feet offered up by State Street Corp. at One Lincoln St. and a portion of the space leased at the John Hancock Tower also was subleased from the merger of Manulife and John Hancock.
“Those clouds didn’t last very long,” Schwartz said of the subleasing factor, leading to a better year than some had anticipated. The momentum was slowed a bit when Manulife placed another 300,000 square feet of sublease space on the market this quarter at 200 Clarendon St., but Fitzgerald said it is less onerous than some such offerings because of a 2015 expiration date and an asking price of $62 per square foot. In the past, some firms have impacted direct rental rates by offering sublease space at dramatically reduced levels, but Fitzgerald said it does not appear that will be an issue in the latest instance.
As for Boston submarkets, the Seaport District and Fort Point Channel within that sector had perhaps the most interesting year. The United Way leased the majority of 51 Sleeper St. from the Mayo Group and Elkus Manfredi Architects relocated from Russia Wharf to 300 A St., which was subsequently acquired by Goldman Sachs as part of its purchase of the final piece of the Boston Wharf Cos. holdings in Fort Point Channel. That deal this summer for $90 million ended Boston Wharf’s legacy of more than 150 years in the area, during which time the London-based company amassed millions of square feet of space before opting to sell it off piecemeal beginning in 2000.
The series of sales also has brought new life into the district, with Boston Wharf having left many of the properties undeveloped. Goldman Sachs is said to be moving aggressively to begin producing income from its new acquisitions, as is Berkeley Investments, a Boston firm that acquired another swath of Boston Wharf Co. properties in Fort Point Channel in late 2004.
