If the Greater Boston office market is going to continue to grow, it will have to retain the ever-expanding technology and biomedical companies that have proven to be key to the local economy, according to a new market outlook by CB Richard Ellis.
The report, which attempts to outline likely trends in the year ahead for the Greater Boston commercial real estate market, identifies Cambridge as the most active in the local scene, proof that biotech companies will be the heaviest hitters to drive the region’s economy, according to the report.
In the coming year, much of the available space that drove the negative absorption of past years will become vacant as leases expire, leaving landlords of non-core assets with high vacancy rates as tenants fly the coop for higher-quality space.
Landlords that want to compete will be forced to continue their aggressive pricing strategies, even as pricing of core space begins to rise. Just look at average asking rates: For Cambridge lab and office, Back Bay office, and 128 West office space, rents have risen over the past year, while peripheral downtown markets and other suburban markets have seen further decreases in asking rates, the study cites.
Looking forward to 2011, the report says "a new normal has emerged in Boston." Landlords, the study says, "can no longer count on the institutional financial services and insurance companies to fill the city’s vacancy. Moving forward, small to mid-size companies from the business services and technology sectors will be the drivers of growth in the city’s office market. In addition, tenants from the suburbs and Cambridge will increasingly see Boston as a viable alternative."
Ownership consolidation will also hold sway in the market as landlords like Boston Properties and Equity Office Properties now lord over a large swath of the downtown market.
"We expect that today’s disparity between the Back Bay and CBD submarkets, as well as high-rise and low-rise availabilities, will persist into 2011," according to the study. "With a substantial portion of the market pre-leased, transaction volume is expected to decline in 2011. A healthier outlook will have some landlords less willing to engage tenants far in advance of their lease expiration dates. Although positive economic news has been sporadic, there exists a general sense of optimism that recovery is here. As always, the speed and vigor of that recovery will be dependent on sustained job growth. Boston is poised for modest growth in 2011 and beyond."
In suburban markets, the report says the Metro North office market should show signs of a gradual recovery, starting with moderate tenant demand including several requirements in excess of 70,000 square feet. Rental rates and concession packages will remain relatively steady through at least the first half of the year as landlords stay aggressive to fill vacancies. Yet near the end of 2011 there should be signs of increasing rents and decreasing concessions as blocks of quality space are fewer.
The Metro West market is less certain. Given limited job growth, overall availability will remain relatively unchanged, with tenants continuing to focus on higher quality buildings with amenities, according to the report. Overall rental rates will continue to be flat, with the exception of a slight increase in specific assets within the core markets.
And the Metro South forecast shows demand for new office space will continue to be modest in 2011, and it is already trending upward. Landlords will continue to focus on occupancy, and owners of commodity space will be forced to offer additional concessions to compete for the few new tenants, and will be increasingly aggressive on lease terms to retain current occupiers, the study forecasts. Landlords of the best-located and highest-end product will start to feel the pendulum swinging back in their direction. In some specific situations, rents will start to be pushed upward as was the case in the later months of 2010. Tenants looking in certain pockets of the market may find that they have fewer options than they would like, and will either be forced to pay a slight premium or widen their geographic search criteria.
