
Because of the slowing economy, Cisco Systems has opted to shut down development of three buildings under construction at its Boxboro campus.
Now that the industry is suddenly rife with holes, the musty smell of mothballing is returning to Boston’s office market.
Facing vapid demand and imposing carrying costs, companies are hunkering down when it comes to excess real estate. Normal strategies include subleasing unneeded quarters, or perhaps selling properties if a firm has an ownership position. Increasingly, however, companies are embracing the idea of simply shutting down such space in hopes that the situation will stabilize over the near term.
In what may be the most striking example, Cisco Systems has opted to close off three buildings underway at its sprawling Boxboro campus, spokeswoman Mojan Khalili acknowledged last week. Work began last December, she said, with just under 400,000 square feet slated to be delivered in the initial phase. Once the high-tech market began its alarming free-fall, Cisco decided to proceed with caution, she said.
“There definitely has been a speed bump in the economy, and we have to build our facilities based on our hiring needs,” said Khalili. Rather than cease abruptly, Cisco has opted to complete the properties to a “cold shell condition,” she said, basically enclosing the structures but performing no interior build-out. Cisco’s original concept called for seven buildings and 900,000 square feet at the 350-acre campus, enough mass to house 3,000 employees.
The long-range outlook is not even being considered at this point, said Khalili, explaining that the firm’s goal now is to wait until the first phase is complete and then determine how to proceed based on market conditions. Such matters are reviewed on a quarterly basis, said Khalili, adding she is unsure whether Cisco would consider selling the development outright, as some competitors have done with their real estate.
While Cisco may be the most striking example of a mothball strategy, brokers say the struggling high-tech giant is not alone. EMC Corp. reportedly is considering that approach at 900 West Park Drive in Westborough, a 200,000-square-foot property being developed by the Archon Group. “Rumor has it that they are going to mothball it,” said one source, noting that EMC has yet to occupy another 100,000 square feet it took last year at One Research Drive in Westborough. EMC officials did not return phone calls to discuss the matter.
In any event, there are firms employing similar defensive approaches, said Walter Henry, director of project management for Cresa Partners of Boston.
“We are seeing people mothball [space],” said Henry. “They get part of the way through a project, and then decide they don’t need it.”
Henry would not cite names, but said his real estate advisory firm is working on behalf of several clients who are evaluating how to cope with empty properties. Many companies initially took additional space with plans to sublease it, while others incorrectly assessed their own growth projections over the short term, Henry said.
“Most of the projects are being completed, but there are cases where people are saying, ‘We’ve changed our mind,'” he said. “It’s our job to advise them what is the best thing to do.”
Typically, the process is not as simple as turning off the lights and shutting the door, said Henry, whose firm exclusively represents tenants. There is a myriad of issues that must be looked at, such as buying out the contractor, determining where to store unused materials and securing the space for security and from the weather. Cresa will also evaluate whether the property will be more attractive to users as is or built out, said Henry, explaining that unfinished space at times is more adaptable for alternative uses.
“There is much more to it than just saying, ‘Let’s stop,'” Henry said. “You’ve got to give it some thought about what makes the most sense.”
That goes for the big picture as well, according to Henry, maintaining that one silver lining amidst the economic storm clouds is that companies can now better refine their long-range growth programs. Given the breakneck speed the business world was operating at last year, firms had been gobbling up space too quickly to determine whether it was necessary.
“The growth will start again, but until it does, this is a good time for people in corporate facilities to evaluate how they do things,” said Henry. “We’re at the rest stop on the trail here, and before we start scrambling up the hill again, we’re saying, ‘Let’s stop and look at where we are heading.'”
Getting Out
Matthew Dwyer Jr., head of corporate facilities at Spaulding & Slye Colliers, agreed that companies are seeking out real estate professionals for advice on the future. But the company is also working actively on disposition assignments, he said, with about 500,000 square feet of space either being marketed as sublease or being prepped for sale on behalf of Spaulding & Slye clients. Dwyer said he has not seen a significant movement toward mothballing to date.
“Our corporate clients will tell us to either get them out of the space or try to sell it,” said Dwyer. “You don’t just mothball space if you have no anticipated need for it.”
Others insist it is a viable strategy, especially given the size of the sublease market at present, with upwards of 15 million square feet said to be in play in metropolitan Boston. For those owning buildings, the rush to sell property to boost company earnings is considered unwise by some because it might require a deep discount to attract buyers.
Whatever the approach, most acknowledge that real estate is a key capital issue at present, with the high-tech sector facing a mountain of rent payments and dwindling revenues to meet those obligations. Subleasing is not the panacea it used to be, said Gregory Cahill of Nordic Properties, whose firm represents Cisco Systems.
Cahill would not discuss the Cisco dilemma due to client confidentiality, except to note that the firm’s ownership of the Boxboro campus puts it in a better position than it would have been had it been a rental situation. Overall, however, the 18-year industry veteran said he is concerned about current market conditions and what might happen for the remainder of the year.
“Right now, technology is a complete wipeout and the non-tech field isn’t doing anything either,” said Cahill. “Nobody is expanding, and anybody who has a real estate decision to make is delaying it as long as possible.”