The corporate real estate industry depends on job growth, and no significant job creation is expected in Metro Boston until late 2004 in all business sectors.

The city is driven by financial industries, while the outlying areas are driven by technology, and we anticipate further downsizing in most companies, resulting in a double-whammy jolt to real estate throughout Boston, Cambridge, and the communities along Route 128 and Interstate 495.

Boston

Rents for direct space in the city are expected to decline another 5 to 7 percent, and sublease rentals should fall 15 to 20 percent in the first half of 2003, with rates then remaining flat until the end of 2004. Average asking rents are now $45 for Class A office space (down from $50 in Q1) and $32 for Class B space (down from $38 in Q1).

According to CRESA Partners’ Fourth Quarter Tenant’s Report, Boston’s vacancy rate is now 15 percent, up a point or two from Q1, and it is expected to rise slightly through the next six months before leveling off. However, the total amount of available office space is even greater than is typically reported, since the majority of corporate tenants are holding onto 10 to 15 percent of unoccupied “shadow space” that needs to be absorbed.

In 2002, 45,000 jobs were eliminated in Massachusetts, many in the high-tech and mutual fund industries. Based on 250 square feet per person, that totals more than 11 million square feet of vacant space.

While there may be slightly more velocity in the local market, 65 percent of all of today’s lease transactions are renewals or restructures.

Cambridge Biotech

In Cambridge, overall rents, which peaked at $70 per square foot for Class A office buildings in the third quarter of 2002, now range from $25 to $36 per square foot, and about $7 less per square foot for Class B space. Rates are expected to fall another 3 to 7 percent in the next six months on a direct basis and 5 to 10 percent on a sublease basis; rents should then remain flat until the end of 2004.

The vacancy rate in Cambridge, which was among the country’s lowest at below 1 percent in 2002, is now 20 percent, down from 22 percent in the third quarter. It is expected to remain around that level for about another year.

Approximately 1.7 million square feet of direct space are available in the Cambridge office market, with an additional 570,000 square foot of sublease space.

Despite these numbers, Cambridge may be the healthiest sub-market in the area, thanks to the biotech industry. Current rents for biotech tenants range from $55 to $65 per foot for the most desirable buildings in East Cambridge, with $75 to $100 for tenant improvement allowances. Rates should remain steady or increase slightly for the next two quarters.

In the next 24 months, 1.6 million square foot of lab space will be coming on the market as a result of new construction or conversions. Of that amount, 600,000 square foot can be available immediately.

The biotech vacancy rate, now 9 percent, will likely not decline further for some time.

All factors considered, it’s becoming clear that biotech isn’t a savior. While we don’t expect a bust in the biotech industry as we witnessed with the dot-coms, funding has become more limited, and only a small percentage of biotech firms ultimately succeed.

Also, it is more expensive to fund a biotech start-up than a technology start-up.

Overall, the real estate market typically lags two quarters behind the economy, so we don’t predict an appreciable increase in activity throughout Metro Boston for at least another year.

Tenant Market

The good news for corporate tenants in the area is that landlords, many of whom are sitting on sizable space liabilities, are generally motivated to make deals. As a result, tenants can often negotiate for concessions such as free rent, greater tenant improvement allowances, reduced parking rates, after-hours HVAC, and cancellation/contraction options.

Even if companies don’t need new space or have excess space, they have the chance to negotiate agreements that can produce immediate and long-term savings. We advise tenants with excess space to work with project managers and corporate real estate service advisors to “restack” their space to create greater efficiency, reduce operating expenses, and boost morale.

On the bright side, firms that have survived the recession are in a better position to improve revenues, control costs, and hire qualified professionals who may have worked in those companies that didn’t survive.

According to our national research at CRESA Partners, the country’s largest metro markets, with the possible exception of Washington, have experienced an average rental decline of almost 20 percent over the last year. The markets hardest hit have been those relying most heavily on technology – the San Francisco/Bay Area; Austin, Texas; and Boston. Silicon Valley has suffered more than Boston, with lease rates in San Jose, Calif. expected to fall another 25 percent next year.