RAYMOND G. TORTO
Recovery will take time
Boston’s commercial real estate market will see success, but it will not be overnight, more than 450 people attending a midyear industry overview at Boston’s Seaport Hotel were advised last week. The program was cosponsored by the National Association of Industrial and Office Properties and the Society of Industrial and Office Realtors.
Keynote speaker and real estate economist Raymond G. Torto concurred with other panelists that the worst is behind the tattered industry, with an improving business climate and rising employment suggesting that office, hotel and industrial properties will see demand begin to rebound in the second half of 2004. Even so, Torto warned, any meaningful revival will require a strong dose of patience among landlords, brokers and other real estate professionals.
“Your prayers … will be answered,” Torto told the crowd. “It’s just going to take a little time.” Save those from Dallas, a market which he said “will not recover in [his] lifetime,” out-of-towners may have been a little more soothed by Torto’s presentation, with the principal of Boston-based Torto Wheaton Research citing vibrant real estate conditions in such areas as southern California, Las Vegas and Florida.
“They are going gangbusters,” Torto said of those regions. The Bay State suffers from the outsourcing trend seen in recent years, not only overseas, but also from defections to other parts of the United States, said Torto, with the Massachusetts cost of living and cost of doing business far above the national rate. And while Massachusetts did report 10,000 new jobs last month, Torto noted that hundreds of thousands of positions were lost in the state following the high-tech crash that began in 2001. Whereas the rest of the country should recover to the peak number of office-based jobs lost prior to the recession by next year, Torto said it could take until 2008 before Massachusetts accomplishes that feat.
“That said, Boston is not going to sink into the ocean,” Torto stressed, acknowledging a flood of overseas capital chasing real estate deals in the region, with many still comforted by the knowledge-based economy and a proven ability to recover from adversity. Torto and others cited the depression of the Central Artery as offering an additional boost to the city, improving both property values and the prospects of a more vibrant downtown as Boston moves into the 21st century.
Tuesday’s program was moderated by CB Richard Ellis/Whittier Partners President Andrew W. Hoar, who provided a detailed analysis of the various real estate markets and product types and their performance to date in 2004. Boston, Cambridge and the suburbs all produced positive net absorption of office space in the second quarter, said Hoar, helping blunt a difficult start to 2004 for the industrial sector.
Turning the Corner
According to CBRE/Whittier midyear figures, Boston enjoyed 555,000 square feet of net absorption of office space, marking two consecutive quarters of positive activity after 12 straight quarters in the red. The city’s 63.3 million-square-foot inventory of space is at 14.8 percent vacancy, with an average asking rent of $33.03 per square foot.
Major Boston leases inked in the first half of 2004 included a 230,000-square-foot renewal by Mintz Levin at One Financial Center, Choate Hall & Stewart’s 150,000-square-foot pact at International Place and another six-figure deal at 501 Boylston St. that will see Pearson Education come into the city from Needham. Boston’s newest office tower, 33 Arch St., also finally broke through from the sluggish beginning of its leasing program, with Digitas becoming the anchor tenant via its 200,000-square-foot deal and separate agreements with the Securities and Exchange Commission and the U.S. Department of Education that will allow the property to open at a minimum of 58 percent leased.
“Activity is terrific,” reported Hoar, whose firm is overseeing the leasing campaign at 33 Arch St. Hoar and other panelists, including Spaulding & Slye Colliers principal William Barrack, also detailed a deep division between Class A and B buildings in Boston, with the flight-to-quality trend seen in past downturns taking hold in force. CBRE/Whittier estimates that high-rise space in Boston has a 7.2 percent vacancy rate, compared to 16 percent for space renting on the 19th floor and below.
Coupled with hundreds of thousands of square feet of lower-level space that could return to the Boston market as a result of the Bank of America takeover of Fleet Bank and other large consolidations pending in the area, landlords shopping lower-grade space “will be in a dogfight” during the next 18 months, Hoar predicted. The area had done a solid job to date eliminating sublease space, said Hoar, with Boston currently sporting about 1.3 million square feet compared to 3.5 million square feet in 2002, but the glut of new merger space could temper that progress.
Cambridge had positive absorption of 209,000 square feet in the first half of 2004, said CBRE/Whittier, while pending leases with the Broad Institute (220,000 square feet) and the Smithsonian Center (125,000 square feet) indicate the 19 million-square-foot market is poised for improvement. “It certainly feels like we’ve turned the corner,” said Barrack, noting that rental rates have fallen enough that many firms who defected from Cambridge in past years are now mulling a return.
Even so, suburban Boston also has been robust in recent months, with CBRE/Whittier posting 2.5 million square feet of positive absorption to date in 2004 for a market of 97.9 million square feet. The availability rate is at 25 percent, with the average asking rent now at $17.96 per square foot. Cushman & Wakefield principal Mark Roth, whose lease on behalf of New York Life in Westwood was one of the largest this year, told audience members that activity has increased through many suburban markets, with other top deals including Cytyk’s 215,000-square-foot agreement with Berwind Property Group in Marlborough and the acquisition of a nearly empty office campus in that same community by user Boston Scientific for $43 million.
Despite that progress, Roth said he anticipates suburban rents will remain flat for the rest of 2004, with little improvement seen before next spring. Industrial space suffered nearly 1 million square feet of negative absorption in the first half of 2004 in Massachusetts, although Hoar did announce a 130,000-square-foot industrial lease at 55 Lyman St. in Northborough to McKesson Corp. that helped bolster that sector as the midyear mark approaches this week.
McKesson will lease all of the spec industrial building from the Gutierrez Corp. of Burlington, which is now proceeding ahead with another 130,000 square feet alongside the just-completed building. Richards Barry Joyce & Partners principal John Wilson brokered the lease on behalf of the tenant, while Paul Leone of Trammell Crow Co. was broker for McKesson, a San Francisco-based firm specializing in health care services.
Speakers at the NAIOP/SIOR program also reported that Taurus Investments has placed 160 Federal St. in Boston up for sale, and said two Class A office buildings in Waltham are also being offered to investors. Those properties include Prospect Hill and Prospect Place.
Trammell Crow Co. principal James McCaffrey provided insight on the investment sales market, which Hoar noted is “the hottest segment” of the industry at present. Evidenced by the $81 million sale of two Raytheon Inc.-leased buildings in Woburn, McCaffrey said capital is aggressively pursuing commercial real estate, particularly deals featuring long-term leases to top credit tenants. That fervor should continue through the rest of the year, he said, although the threat of rising interest rates could dampen that movement.
