Raymond G. Torto was keynote speaker at last week’s annual real estate forecast in Boston.

For the record crowd attending last week’s annual real estate forecast at Boston’s World Trade Center, the outlook delivered by a group of industry professionals was as chilling as anything one might find in the Old Farmer’s Almanac.

There is a ton of adversity right now, said Trammell Crow principal John J. Boyle III, who produced alarming figures such as a 30 percent vacancy rate for office space in Waltham and a 29 percent gap in Burlington, both in the core of the suburban market.

Others were similarly dour, including Raymond G. Torto, keynote speaker for the event, which was co-sponsored by the National Association of Industrial and Office Properties and the Society of Industrial and Office Realtors. While predicting that conditions will not reach the depths seen during the last downturn a decade ago, Torto said a plethora of new office buildings and millions of square feet of sublease space ensures supply will outstrip demand at least through mid year of 2002.

We keep saying we won’t do it again … but we do have more square footage coming into this marketplace as well as the national marketplace at just the wrong time, said Torto, a principal with Boston-based Torto Wheaton Research.

Things don’t look terribly good, said Torto, estimating that the national vacancy rate rose from 8.1 percent at the end of the third quarter in 2000 to 12.3 percent nine months into 2001. The change has been even more dramatic locally, with vacancies leaping from 3.7 percent to 12.1 percent in that time frame.

The industry’s recent woes were a prime reason last week’s event drew more than 550 people, said Robert B. Cleary Jr., president of SIOR’s New England chapter. Given the uncertain times, people are looking for answers, he said, and were drawn by the lineup of experts, which included brokers from Meredith & Grew, Spaulding & Slye Colliers, Cushman & Wakefield and Insignia/ESG.

In this marketplace, people want to understand what is happening, and if they can get some direction on a trend or some advice about where we are going … that can be a very valuable asset, said Cleary, who also maintained that the discussion carried an air of optimism about the long-range health of the market.

Torto did say the national vacancy rate would bottom out in the 14 percent range, considerably lower than the 19.5 percent seen during the 1990-1991 recession. Although rents will continue to drop throughout 2002, Torto estimated there would be positive absorption by in the third or fourth quarter.

Torto stressed there are some other positives. About half of the excess supply is pre-leased, meaning that landlords continue to get paid for a significant portion of the empty quarters. Fifty percent of the problem belongs to the tenants, Torto said, which should cause fewer foreclosures than seen in the previous real estate crash.

Rents have eroded by 25 percent in San Jose, Calif., since peaking during the third quarter of 2000, while the numbers are down 14 percent in San Francisco, 10 percent in New York City and 6 percent in Boston. But Torto noted that most of the historic upside is still in place. Between 1994 and the peak, San Jose saw rents grow by 125 percent, for example, while San Francisco levels were up by 94 percent and Boston improved by 89 percent.

High-tech sectors have been devastated by the crash, said Torto, with 76.6 percent of the negative absorption this year occurring in just 10 markets, all of which rode the high-tech boom into the ground. Members of that ignominious group are Boston; San Francisco; Chicago; Denver; Seattle; San Jose; Northern New Jersey; Washington, D.C.; Dallas; and Austin, Texas. Of the 32.5 million square feet of negative absorption in the 10 areas, Boston had the highest concentration, with 6.63 million square feet, or 15.6 percent of the national pie. But Austin is in a bigger freefall, and Torto said vacancy rates there will soon reach 21 percent.

No matter how bad you think it is in Boston … just be glad you aren’t in Austin, he said.

‘After the Storm’

Still, things are not particularly rosy in the Bay State, with Cambridge among the biggest casualties anywhere. In his presentation, broker Gregory Lucas said the vacancy rate in the 14 million-square-foot market is now at 17 percent, remarkable considering it was essentially zero just a year earlier. Prior to the recent struggles, the highest vacancy rate seen in Cambridge during the past 10 years had been a 6 percent reading in 1998.

What a difference a year makes, acknowledged Lucas, a senior managing director at Insignia/ESG. Cambridge will register 750,000 square feet of negative absorption this year, he said, while average office rents have eroded from $61.28 a year ago to $40 today, returning to the level of rates seen back in late 1998 or early 1999.

Even with the troubles, Lucas said there are some pluses. Strict barriers to entry imposed by the city have kept new supply in check, he said, while Cambridge has been buttressed by a solid biotech market, so much so that some office space is being converted into laboratory space. Although that will have limited impact and there may be additional corrections in office rents, Lucas said the addition of new sublease space has slowed to a trickle and vacancies have also stabilized.

The bad news is mostly over, said Lucas. On the biotech front, Insignia/ESG is tracking 1.5 million square feet of demand, with numerous companies prowling for space. Vacancy rates are at 7 percent in Cambridge, with the city expected to see 250,000 square feet of net absorption this year.

Few positives can be found in the suburbs, however, according to Boyle, who said the 25.6 million-square-foot submarket along central Route 128 has a 23.5 percent vacancy rate. After registering a record 8.5 million square feet of net absorption in 2000, the suburbs have had 8.9 million square feet of negative absorption in 2001.

All of the growth from 2000 has been taken away this year, Boyle said, although newer developments continue to hold their own. Bay Colony Office Park in Waltham is 99 percent leased, for example, while Waltham Woods and Wellesley Office Park are each at 97 percent occupancy.

As with the national picture, Boyle said suburban Boston rents have fallen sharply in the past 12 months, with an average drop in the 25 percent range. Boyle warned that high-tech firms with major sublease offerings may become increasingly aggressive in pricing. Nortel Networks is peddling more than 800,000 square feet of space, while Exodus and Nortel Networks each have more than 400,000 square feet on the block. It’s going to be very competitive, said Boyle.

The same is true in Boston, reported Meredith & Grew Senior Vice President J. Michael Flynn, estimating that the overall vacancy rate for the 51 million-square-foot market is now 10.4 percent, with nearly half of that sublease space. We’ve gone from euphoria to disaster, he said.

As with his fellow panelists, Flynn marveled at how quickly conditions changed, calling 2000 the real estate industry’s perfect storm. High demand clashing with low vacancies led to bidding wars, fomenting asking rents in the triple figures and achieved deals above $80 per square foot. Tenants engaged in brutal bidding wars, while others gobbled up more space than they needed, leading to 1.7 million square feet of positive absorption for the year.

In contrast, Flynn said 2001 has become the quiet after the storm, with rents plummeting between 20 and 40 percent for direct space and as much as 50 percent off the face rate for sublease space. Flynn said companies likely would give more space back, leading to additional supply and further rent drops.

Boston will have a difficult first half of 2002, but could solidify by the third quarter, Flynn said. Meredith & Grew anticipates 15 million square feet of leases will roll over during the next three years, with 3 million square feet of tenant requirements currently in the market. Tenants with longer-term needs may come out early to take advantage of the downturn, Flynn said.

One potential trouble spot could be found in the ongoing trend toward consolidation and downsizing, warned Flynn, noting that struggling energy giant Enron saw its stock soar upon announcing thousands of job cuts last week. Given that, a rebound in the stock market may not benefit the real estate industry, Flynn said, while companies that do sign leases may take less space than they currently occupy.

Does velocity mean absorption? Not necessarily, he said.

Transaction ‘Triage’

The investment market is also headed into uncharted waters, said panelist Robert E. Griffin Jr., president of the New England chapter of Cushman & Wakefield. Griffin said there has been a marked change between the first half of 2001 and the final two quarters, with most of the velocity early in the year. Of the top 25 deals, Griffin said 88 percent occurred between January and June.

It has been quiet since then, said Griffin. The slowdown has come from both sides, he said, with pension funds unable to spend money because real estate allocations have increased due to the stock market woes. Meanwhile, many sellers have pulled assets off the market in hopes of improved conditions down the road.

Suburban office is especially out of favor, said Griffin, with multifamily, industrial and grocery anchored retail assets garnering the strongest attention. Those interested in office buildings prefer single-tenant properties with strong credit tenants and lengthy leases. In that vein, Cushman & Wakefield has received strong interest in the Boston’s Lafayette Corporate Center, a 335,000-square-foot building that has State Street Bank and Massachusetts Financial Services as its two lone tenants.

Given the strength of the tenants and leases that run to 2014, Lafayette Corporate Center should receive a better response this time around, Griffin said. The property was pulled earlier this year due to tepid interest, but Griffin said the asset is the sort that institutional buyers will embrace.

Sales will take longer to complete, Griffin said, with brokers having to nurse their offerings to the finish line. Buyers are scrutinizing each asset, he said, with many trying to change their bids midstream. We’ve had our largest retrades ever, Griffin said. Every deal is triage.

The main bright spot last week came from Spaulding & Slye principal William Bailey, who said the industrial sector remains strong. The industrial vacancy rate is down to 9 percent after reaching 19 percent in 1996, he said, while average rents are at $7.30 per square foot, more than twice the $3.30 per-square-foot average seen a decade ago.

I’m really bullish on the market, said Bailey. He outlined several major deals for the year, including Weyerhauser’s 827,000-square-foot lease in Freetown, a United Liquors warehouse lease for 484,000 square feet in Braintree and Trader Joe’s 380,000-square-foot pact in Taunton.

Boston’s 100-million-square-foot industrial market is migrating into the southwest corner of the state, Bailey explained, with cheaper – and more available – land driving that trend. The Campanelli Cos. has benefited at its park in Freetown, he said, while Taunton, Franklin and Mansfield are also popular.

Bailey said there is 3.5 million square feet of industrial demand in the market, led by such firms as Home Depot, Target and Ikea. With the vacant space mostly in outmoded facilities, Bailey anticipates an increased focus on build-to-suit deals, with companies requiring ceiling heights up to 50 feet and state-of-the-art loading docks.