LISA M. CAMPOLI
Sales volume eased
The working title for last Thursday’s midyear office market overview sponsored by Meredith & Grew was “Boston Bounces Back,” but keynote speaker Thomas M. Alperin did not appear quite so convinced of that conclusion.
“There is still a lot of unease in the marketplace,” the president of Newton-based National Development said during the breakfast program at Boston’s Langham Hotel. “I don’t think it’s all euphoria.”
Alperin certainly did not condemn the region carte blanche, stressing he is “very confident in the long-term vibrancy of the Boston market,” so much so that he reported his Newton-based company is mulling whether to proceed with a speculative office project at its Metro North Corporate Center in Woburn. Massachusetts has a solid educational backbone, features a diverse, resilient economy and is becoming more sophisticated in attracting new companies, Alperin said, as evidenced by last week’s announcement that Bristol Myers will be building a massive research facility at the former Fort Devens.
“If we can find a way to manage our housing costs [and other living expenses], I think we’ve got a great future,” said Alperin. Over the near term, however, sluggish job growth and the fear of rising interest rates are among the factors making it difficult to gauge just how soon the difficult days prevalent for most of the new millennium will finally disappear, he said, while consolidation among some high-tech firms is further clouding the situation.
Despite the volatile backdrop, Alperin did report signs of improvement, especially for landlords devastated by the lingering recession. As M&G principal Ronald K. Perry said in his review of the downtown Boston office market, Alperin agreed the pendulum has swung to a more balanced environment when doing lease negotiations. For the longest time, tenants held most of the clout while property owners contended with a sharp drop in demand and a glut of space made available from corporate downsizings, but Alperin said there is less pressure to offer perks to land a tenant now. The firm is also encouraged from movement within its existing properties, with Alperin estimating that upward of 40 percent of tenants in previous years were downsizing, whereas this past year only a fraction of companies with leases rolling over were taking less space, and most of them were actually in an expansion mode, he said.
National Development also has been impacted by the surge of capital chasing commercial real estate, said Alperin, explaining that the competition is leading to aggressive terms. In buying a Littleton flex asset recently, he said, there were not only dozens of competitors, National had to agree to a scant 14-day due diligence period and just 10 days for closing. “It’s challenging finding good deals,” he said, adding, “you do what it takes” to buy a property if it is deemed attractive enough.
‘A Recovery Mode’
During her overview on the investment sales climate, M&G Executive Vice President Lisa M. Campoli said sales volume of properties has actually eased from last year’s record pace, albeit not due to a lack of interest among investors. Instead, she said, owners are becoming hesitant to put buildings on the market because they hope to first capture upside from the improving market. The buyer profile also has shifted, she said, from a heavy concentration on stabilized, core assets to properties that might offer upside through a capital improvements program or leasing of vacant space.
The city of Boston has already exceeded its sales volume from last year’s $1.1 billion mark, Campoli told the audience of nearly 200 people, with $1.3 billion having changed hands to date in 2006 and another $800 million still pending. The figures are a bit skewed, however, as two mega-deals thus far have pumped up the 2006 tally, those being the $481 million paid for 10 St. James Ave. and 75 Arlington St. in the Back Bay and the just-completed $514 million sale of One Federal St. A measure of “buyer fatigue” also may be settling in, she said, but Campoli predicted capital will continue to chase commercial real estate in Massachusetts for the rest of the year, even with capitalization rates trending at record lows.
The ardor should remain strong for two basic reasons, said Campoli, one being the continued spike in construction costs, which Alperin estimated are 20 percent to 25 percent higher than just two years ago. While disheartening for developers, the situation “does nothing but help [increase] the price of existing real estate assets,” Campoli noted. Also, given that office market fundamentals are improving, capital is even more emboldened to buy product, she said.
Whatever variables may be troubling to some, Perry outlined several reasons indicating the dark days are indeed behind the area, especially for Class A space above the 20th floor. “We are clearly in a recovery mode,” said Perry, whose report focused on the 57 million-square-foot Boston office market. After beginning 2005 at 17 percent, the office vacancy rate for the city fell to 13 percent by year’s end and is now down to 12 percent. That figure should slide into single digits in early 2007, said Perry, while a lack of new construction could drop the mark into the tight 6 percent level by 2009. A vacancy rate of 8 percent to 10 percent is typically considered market equilibrium, said Perry, indicating a need for new supply is gathering on the horizon.
Stronger rents will further encourage development of new office space in the Hub, said Perry, whose firm places the current rental rate for Class A space at $35-to-$55 per square foot and at $22-to-$34 per square foot for Class B space. Although tenants have followed a “flight-to-quality” path in Boston, with the vacancy rate above the 20th floor at a scant 4.6 percent (7 percent below the 20th floor), Perry said older properties and low-rise space will become increasingly attractive to tenants seeking rate relief, a need that should help fringe markets such as North Station, South Station and Charlestown.
Another encouraging sign for Boston, Perry said, is the deal size of the typical tenant, which currently averages 18,000 square feet. That should be good news because of the potential growth prospects such firms offer, he said, adding that there are also more leasing opportunities for companies in that size range. M&G shows 45 options for tenants needing 10,000 square feet or less and 25 for those seeking 25,000 square feet or less, but just five buildings are available with 100,000 square feet or more contiguous. That could lead to a dilemma, Perry said, given that there are several companies needing 100,000 square feet or more currently in the market, including 400,000 square feet being sought by the Ropes & Gray law firm, 300,000 square feet needed by Putnam Investments and a 250,000-square-foot search under way by Eaton Vance.
“We certainly need some supply,” said Perry, adding, “we could very well see a groundbreaking by year’s end,” with Equity Office Properties and its Russia Wharf development considered a favorite to be among the first out of the gate. Exactly how it will play out is unclear, but Perry said the notion is invigorating given the dearth of projects in the past few years. “It’s exciting to be talking about those prospects again,” he said.
