Dan Cordeau had a killer deal lined up. At least, he thought so. And at any other time, in any other market, he might’ve been right.
Not in this one, though.
“It was one of the finest deals I’ve ever had,” the Jones Lang LaSalle senior vice president said. “It was seven years at amazing numbers.” The prospective tenant, he said, had $300 million to $400 million in cash on hand, and moving would have only cost them $200,000.
They decided they couldn’t part with the capital, and squashed the move.
Cordeau’s experience is emblematic of the problems wracking greater Boston’s commercial market as it limps into the first full quarter since October’s stock market crash. Statistically, the market remains relatively sturdy. Rents are sliding, averaging $35.48 in Greater Boston, and $53.21 in the city proper, according to data from Jones Lang LaSalle.
But they’re far from freefall: Vacancies have crept above 11 percent – just above market equilibrium. Sublease space has grown, but not exploded.
“Statistically, the market is in good shape,” maintained Bill Collins, a senior vice president at Jones Lang LaSalle.
Looks Can Be Deceiving
Don’t tell that to tenants in need of office space, though. The area’s statistically strong office market is being dominated by fear over the broader national economy. Fear and uncertainty has firms either shutting down their searches for new space, or demanding rents far below market rates. They’re sitting on the sidelines, hoarding cash or waiting for further market deterioration. As a result, Collins said, “Deal velocity has crept to a standstill.”
“There’s a bit of disconnect between where landlords think the market is and where tenants feel it should be,” said Ron Perry, head of brokerage at Colliers Meredith & Grew. Tenants think rents should be much lower than they are, “based on the overall economy.” So they’re resisting signing new deals, betting that joblessness and weak consumer spending will drag rents down further. “In the short run, if companies can be patient, they will be.”
“Much of what’s going on is fear of what’s going to happen,” added Dave Fitzgerald, a broker at CB Richard Ellis.
“There are no data points,” said Cushman & Wakefield broker Jim Brady. “The tenants say the market’s here, and the landlords say, ‘Show me.’ Some are so far off with the counteroffers that they’re just moving through the paces. We have a standoff between the two, and it will have to settle out between the end of the first quarter and June or July.”
Brady, like Cordeau, has seen deals fall through because tenants wouldn’t, or couldn’t, commit to spending money on moving and office buildout.
“A lot of tenants have said to me, ‘I need to figure out my business plan first.’ I’ve had a couple that were going to sign, but VCs or investors said, ‘I’m not going to let you move and expand.’”
Rents shouldn’t fall into a “freefall,” Brady insisted, “because of supply and the physical constraints of the market.” With only three new buildings – Fan Pier, Two Financial Center and Russia Wharf – coming online in the near future, lack of new supply will likely serve as a check on softening tenant demand.
Most of the deals getting done now are renewals, many of them short term. Renewals are being driven by both uncertainty and cost.
“The landlord will inevitably try to keep their tenants,” said Scott Hughes, president of Framingham-based New Dover Associates. “If you have to list the property, you’ve got to pay commissions, spend money on improvements. It’s more cost-effective to keep a tenant in the building. If it’s an existing tenant, you’re probably offering minimum improvements – shampooing the carpet and putting up a fresh coat of paint.”
The same economic considerations are driving renewals on the tenant end as well, Hughes said, because moving is an expensive event.
“Unless the economics are compelling, when two products are comparable, the tenant will stay.”
