Execs: Boston Office Rents Have Room To Grow

Greater Boston’s emergence as a global tech hub has propelled its commercial real estate market to new heights in recent years, but there’s still room to grow, industry insiders predict.

Tech companies are more willing than ever to pay top dollar to lease office space in metros such as Boston and San Francisco that have educated workforces including skilled immigrants with H-1B visas, said Stuart Shiff, CEO of DivcoWest.

“They’re one algorithm away from being disrupted and losing their business. They need to get the best brains out there,” Shiff said at a forum hosted by NAIOP-Massachusetts. “They will pay incredible prices when the market’s doing well to attract that talent.”

San Francisco-based DivcoWest acquired Cambridge’s 1 Kendall Square tech campus in January for $395 million.

But panelists acknowledged red flags that could take momentum out of the market, including traffic congestion in the Seaport District, corporate users’ shrinking space requirements and potential interest rate hikes.

Rob Griffin, president of the New England area for Cushman & Wakefield’s capital markets group, said the downtown Boston office market would have even higher rents and valuations if not for the building boom in the Seaport District.

“We have much more healthy companies taking space (than in past real estate cycles). The revenues for a lot of these start-up companies are more highly scrutinized and we are ready to take off,” Griffin said.

Average rents for class A office space in the Seaport District were $52.94 per square foot at the end of the first quarter, according to a report by Cassidy Turley, compared with $48.39 in the Financial District.

Jacob Werner, a principal in private equity firm Blackstone’s real estate group, said downtown Boston real estate could be an unintended beneficiary of the Dodd-Frank Act, which limits riskier practices by Wall Street. The 2010 law has prompted big banks to spin off some investment activities to subsidiaries located outside Manhattan.

“What that means for Boston is you’re going to see a similar trend here. You’re going to see financial service demand come, and that really sets the market up well for a rent move,” Werner said.

Robert Plumb, a managing director in acquisitions at AEW Capital Management, said multifamily properties could be vulnerable investments in Greater Boston. AEW and Corcoran Management this month sold the 220-unit Andover Place apartments in Andover for $37.7 million to Mack-Cali Realty Corp. of Edison, N.J.

“When I look at Boston right now, probably one of the biggest concerns I have is are we going to be creating the jobs that can afford the rents?” Plumb said. “Boston’s (development) cost structure is really tough.”

The forum at the Hyatt Regency was sponsored by Nutter McClennen & Fish LLP, Santander, along with media partner Banker & Tradesman and public relations partner Solomon McCown.