Is bigger always better? When it comes to commercial real estate, the jury remains out on that debate.
As with the banking and utility industries, the impact of consolidation in commercial real estate is a largely unresolved question, but as Boston’s office market continues to be controlled by fewer and fewer players, brokers and tenants seem increasingly preoccupied by the ultimate consequences that may result from that trend.
“It’s scary,” one Boston broker said last week of the advent of such behemoths as Equity Office Properties and Boston Properties into the local office market. “A lot of people are starting to get nervous.”
The broker, who focuses on the downtown market, noted that Equity recently picked up an even larger share of the Hub’s office pie via the just-completed merger with Cornerstone Properties. Among the prime real estate scooped up in that deal were 222 Berkeley St. and 500 Boylston St. in Boston’s Back Bay, as well as 60 State St. in the Financial District and One Memorial Drive in Cambridge.
“It’s absolutely ridiculous,” said the broker, who requested anonymity. “At what point does that become an issue for the U.S. government? When is that a monopoly?”
Still, while Equity has been pushing the office rental rates to new heights, not everyone considers that akin to tying up both Boardwalk and Park Place. Many, including Cresa Partners Chairman William W. Goade, attribute the sharply rising rental rates more to supply/demand fundamentals than any closed-end conspiracy. With a Financial District portfolio of 7.8 million square feet, Equity is said to have barely 20,000 square feet currently available, for example.
“I’ve been in the business for 20 years, and I’ve never seen anything like the volatility of the rental increases and the lack of space,” said Goade, whose firm is among the nation’s leading tenant representation brokerage companies. “There’s simply no place to go, and the landlords – including the small ones along with the big ones – are just taking advantage of that.”
Indeed, Goade said he has seen a similar rate increases in other cities across the country, even in those with no dominant owners. Silicon Valley, for example, has a diverse landlord roster, but Goade pointed out that rents there are as expensive as anywhere in the country.
Goade also maintains that big players do not control as much of the local real estate supply as might appear, given that there is still a wide range of players in the suburbs and in the Class B office market. If rents get too out of balance in one portfolio, Goade said, the owner might suffer the consequences.
Equity did not return phone calls to discuss the matter by Banker & Tradesman’s press deadline. The real estate investment trust controls about 9 percent of the 138 million square feet of office space in the Greater Boston market. But with 7.8 million square feet in the Financial District, the Chicago-based real estate investment trust has more than 15 percent of that 50 million-square-foot market.
In any event, Boston Properties principal David Barrett also attributes the rental run-up to the lack of supply, as well as a subtle-yet-important change in the ownership structure. It is not so much that a few big owners run the show now, he said. Instead, Barrett notes there has been an evolution from the early 1990s when much of the supply was owned by institutions and government agencies which had foreclosed on the properties and were focused on treading water.
“What we have now is a multiplicity of owners whose objective is to run a professional business and not just cover operating costs,” Barrett said. As with Goade, Barrett also pointed to private funds such as Beacon Capital Partners, as well as insurance companies and pension funds as all sharing a portion of the Boston market.
Client Relationships
Even so, some brokers are expressing concern that the consolidation movement may lead to less business for them. Boston Properties, for example, initially handled leasing in-house at its 111 Huntington Ave. office tower, although it did hire Insignia/ESG to market the 865,000-square-foot building after securing two main tenants in Palmer & Dodge and Bain Capital. Barrett said the company makes such decisions on a case-by-case basis, but felt early on that it had enough professionals on board to do the lease-up internally.
“We deal with a lot of companies directly … but if a tenant with a broker signs with us, we [honor] that relationship,” Barrett said.
For his part, Goade said Cresa has never had any widespread problems with the large landlords, maintaining that it often can be easier dealing with such owners because the procedures are more uniform and the contact people are well known. “They’ve treated me fairly and recognized we have client relationships nationally on an exclusive basis,” Goade said. “When you have a client who supports you, the landlords are usually pretty fair.”
Thus far, even the broker who voiced concern about the advent of large owners said Equity has not squeezed brokers untowardly, even continuing to pay commissions on lease renewals. But he and others also noted that the Hub pays lower commissions than other markets, paying on a flat fee versus a percentage basis. Originally resulting from the early 1990s when rental rates were depressed and landlords used the flat fee to attract business, the escalation of rents has since served to alter those dynamics in favor of the landlord.
Goade acknowledged that brokers in Boston get paid less than elsewhere, and said he is unsure whether the consolidation is making it harder to change that situation. Nonetheless, he maintained that when it comes to the local office market, “It’s not quite a monopoly situation just yet.”
“That might happen in five years when things cool down, but right now, I think it’s just them reacting to what the market is allowing them to charge,” Goade said.
