Some experts believe that office rents at Boston’s Rowes Wharf could reach $80 per square foot in 2007.
The crystal ball shows higher office rents, fewer vacancies, and Japanese noodles making their debut in Faneuil Hall. At least, that’s how the experts see it.
Banker & Tradesman asked four voices from the realm of commercial real estate to predict the future – or at least to give an idea of what they expect in 2007. Forecasts ranged from expectations of rents reaching $80 per square foot in Boston’s premier office towers at International Place and Rowes Wharf to the arrival of several high-end furniture retailers and at least one trendy noodle restaurant chain, Wagamama. There was also a plea to Gov. Deval Patrick to solve the housing crisis.
Last year ended with vacancy rates in the Boston and Cambridge office markets in the single digits while rents increased by an average of $4 per square foot compared to a year ago – a trend that is expected to continue.
“We are in third straight year of recovery,” said William P. Barrack, managing director at Jones Lang LaSalle, a global real estate services and money management firm with offices in Boston. “With no new offices under construction in Boston, we’re already seeing sharp increases in rents as investors continue to buy up buildings.”
In the past three years, landlords suffered as the technology bubble burst. At the same time, FleetBoston Financial Corp. was acquired by Bank of America while John Hancock Life Insurance Co. joined Manulife Financial, leaving lots of vacant office space. Today, those buildings are filling up as the office market has turned around dramatically.
“I expect 2007 to be a very good year for landlords,” said Barrack. “Tenants will face difficult decisions about where they want to locate and what they’re willing to pay for rent and they will have to do it quickly as space is gobbled up.”
Higher rents and fewer location options could force companies to devise unconventional solutions to their office leasing problems, Barrack said. For example, some firms may consider multiple locations while placing their sales force in Boston and relegate back-office support to the suburbs, he added.
David Begelfer, chief executive officer of the Massachusetts chapter of the National Association of Industrial and Office Properties (NAIOP), a trade organization that represents the industry, said the biggest worry for 2007 is whether Gov. Patrick and the Legislature will come to grips with the lack of affordable housing that has forced talented workers to leave the Bay State.
“Unlike almost any other state in the nation, we are losing the 25- to 45-year-old skilled workforce that is essential to keep our economy moving,” he said. “Greater Boston is not just unaffordable to low- and moderate-income families but for professionals too. If we can’t solve this problem over the next four years under this new administration, workers and businesses will disappear.”
Begelfer applauded the state’s efforts to encourage transit-oriented development, the trend to build housing in downtowns near MBTA and commuter rail stations. But that alone will not solve the problem, he said.
“We need urban and transit-oriented housing – which may be the place for young, single workers – but many people don’t want to live downtown above a hardware store,” Begelfer said. “Many prefer a single-family home with a backyard and a good school system.”
A study released last year by the Pioneer Institute and the Rappaport Institute for Greater Boston, a pair of Massachusetts think tanks, revealed what many housing and business experts already knew: Bay State cities and towns are driving up home prices with land-use regulations that make construction of new housing impossible.
The report was based on a survey of zoning rules in 187 cities and towns within 50 miles of Boston. It found that requirements for 2-acre lots, overly restrictive wetlands and septic rules and growth caps were the most significant barriers to housing construction.
Among the recommendations in the study, which Begelfer supports, is to withhold state money from communities that refuse to allow home construction, or create a regional panel that could overrule local officials.
“As a result of our housing crisis, businesses will leave because they don’t have the workforce to expand here,” Begelfer said. “Other states are filling the gap and competing against us head-to-head. Everything is about the talent. Massachusetts doesn’t have oil reserves, low utility costs or even nice weather. What we do have is a high-quality workforce but that’s in jeopardy. I call on our new governor to tell municipalities to ease restrictions or face the consequences.”
On the retail front, Theodore J. Chryssicas, senior vice president at Meredith & Grew, a Boston-based commercial real estate firm, predicted that the region might be saying goodbye to the handful of remaining Ground Round restaurants in 2007. The family-oriented chain, founded by Howard Johnson Corp. in the 1960s, has struggled with slumping sales.
After being acquired by several different entities in the 1980s, Ground Round fell under the corporate umbrella of American Hospitality Concepts Inc. in the late 1990s. By 2004, the company filed for Chapter 11 bankruptcy protection and about 60 Ground Round restaurants were closed. While the restaurant emerged under a new ownership structure of franchisees, its future remains uncertain.
Still, a few new national furniture stores are set to expand in Massachusetts this year, according to Chryssicas. He said West Elm, the contemporary furniture store owned by Williams-Sonoma Inc., and Arhaus Furniture, which specializes in ethnic styles and imported antiques, likely will add more Massachusetts stores.
Grubb & Ellis Co., providers of integrated real estate services, had a slightly different take on the retail market in its Global Real Estate Forecast. The outlook for the nation’s retailers is “murky,” the report said.
The housing market slowdown could have major implications for retailers because homeowners will be less able to tap into their home equity for purchases, the survey said. In addition, retail development targeting new residential neighborhoods may be delayed until home construction and sales pick up, according to the year-end survey.
But Robert Bach, senior vice president at Grubb & Ellis, was quick to add, “Never underestimate American consumers. If they can, they will find a way to keep spending.”
