As Greater Boston’s office market bumps along a cyclical trough, quality office buildings, and submarkets, are beginning to pull away from secondary products. The flight to quality hasn’t yet mushroomed into a stampede, but it’s beginning to take root, industry veterans say.
“When we were recovering from the tech bust, Class A product outperformed other buildings downtown, and regionally, 128 West outperformed other areas,” said Brendan Carroll, vice president of research at Richards Barry Joyce & Partners. “We’re seeing a return to those types of dynamics. If you’re a tenant that is expanding or has a lease expiring and you are mobile, you may look at this as an opportunity to improve your environment in a cost-effective manner.”
The recession has been fairly brutal on office tenants in Boston’s Financial District. Over the past eight quarters, tenants have vacated 1.4 million square feet of Financial District office space, according to RBJ data.
Losses have continued over the past two quarters, with tenants shedding 321,000 square feet of Class B office space in the Financial District. However, during the same time period, Class A buildings in the Financial District saw 172,000 square feet of increased occupancy, Carroll said.
Chrysler, or BMW?
Boston Properties Chairman Mortimer Zuckerman told analysts on a recent conference call that the REIT concentrates on high-quality buildings in first-class submarkets, in part because those assets outperform in down markets.
“These kinds of buildings we feel do better in good markets, but much better, relatively, in difficult markets,” Zuckerman said. “And the reason is that in difficult markets, when rents go down … a lot of people who want to be in the best buildings take advantage of these lower rents and move into them. And that’s exactly what we have found.”
According to RBJ data, the Route 128 West submarket, which drives occupancy and rental rates along the 128 belt, has seen vacancy rates balloon from 11.4 percent to 19 percent during the recession. By RBJ’s definition, the 128 West submarket includes the towns of Waltham, Newton, Needham, Wellesley, Lexington, Weston and Wayland, and features 21.9 million square feet of commercial space.
In the first quarter, the submarket’s overall vacancy levels were trending flat, with tenants vacating a total of 67,000 square feet of office space. Again, RBJ data shows Class A properties far outperformed their Class B counterparts: Trophy-quality assets picked up 124,000 square feet in occupancy, while secondary properties lost 191,000 square feet.
“We anticipate seeing a flight to quality,” said Duncan Gratton, co-head of the asset advisory group at Boston’s FHO Partners. Gratton said moving expenses have kept most tenants renewing their leases, but he added that FHO is anticipating increased activity in its high-quality suburban assets. “If you can get a BMW for the same price, or a dollar more, than a Chrysler, why wouldn’t you?”
Spec Speculation
Tom Dusel, president and COO of Hobbs Brook Management, said his firm has seen a recent spike in interest in 175-185 Wyman St. in Waltham, a recently completed, vacant office building built on spec. Tenants are becoming more confident in their businesses, he said, and that confidence comes with a renewed desire to trade up to top-shelf office space. Hobbs Brook is close to announcing new leases at the development, he said, adding that his company had already rejected two leasing offers as being too low.
“It happens every recession,” said Jack Kerrigan, an executive vice president in Grubb & Ellis’ suburban brokerage. “There has absolutely been a spike in activity from a year ago. People recognize that we’re at the bottom, and they want to strike while the iron is hot. It’s happening as we speak.”
Grubb & Ellis recently relocated FloDesign Wind Turbine from the western Massachusetts town of Wilbraham to tech-heavy Waltham. FloDesign took 10,000 square feet in the Waltham Watch Factory. The Watch Factory offices, developed by Berkeley Investments, are technically Class B space, but they’re also brand-new, brick-and-beam space with Class A amenities.
“We have a ton of activity at the Watch,” Kerrigan said. “A lot of companies are coming in and upgrading from bland Class B and C space.”
Kerrigan is also the leasing agent at 5 Wall St., a speculative Burlington office project that The Gutierrez Co. brought online just as the financial markets were disintegrating in 2008.
The Gutierrez Co.’s President, Arthur Gutierrez Jr., said leasing activity at the 182,000-square-foot building was slow throughout much of 2009. But activity at the LEED Gold-certified building has spiked over the last month, Gutierrez said.
The tenants touring 5 Wall St. are “typically coming out of [older] A-minus or B-plus space,” Kerrigan said. “They like the value this building offers.”
