According to Arthur Margon of Rosen Consulting Group, keynote speaker at the recent NAIOP/SIOR 2005 real estate outlook event, economic prospects for Massachusetts are good and will help buoy the commercial real estate market.

No one needed shades, but after a series of dark – and painfully accurate – forecasts, the prospect of a sunnier commercial real estate market cast a faint glow during last week’s 2005 outlook conference sponsored by the National Association of Industrial and Office Properties and Society of Industrial and Office Realtors. Thursday morning’s event at Boston’s World Trade Center was hardly a harbinger of happiness, particularly for the near term, but keynote speaker Arthur Margon and a panel of local real estate experts insisted that Massachusetts will not remain stagnant indefinitely.

“We see light at the end of the tunnel for the Boston economy, and are not at all bearish about it,” said Margon, a principal with New York-based Rosen Consulting Group. While concurring that the region has not been hitting on any of its multiple business cylinders to begin the new millennium, Margon maintained that the Bay State has the educational, scientific and financial backbone to remain competitive in an emerging global environment.

“The problems facing Boston are not going to be here forever,” said Margon. “It’s not Michigan Â… or Ohio or Pennsylvania.” Margon cited the Hub’s demonstrated ability to pick itself up from past fiscal disasters, including the meltdown of the office market in the early 1990s, and predicted the region will see benefits from increased defense spending, as well as an eventual recovery in the technology and telecommunications industries so heavily vested in the region. “I don’t believe for a minute that technology and telecom are dead as job generators Â… and [Boston] will benefit from that,” Margon said.

Margon outlined other bright spots as well, including a consumer confidence index that stood at 92.8 in October. While lower than the 96.7 registered in September, the index would have to fall substantially below 90 to spark a consumer-led recession, said Margon, who also noted favorable spending trends on capital equipment, a sign of greater business activity.

Although Margon said he believes the prognosis is positive going forward, delivering a 75 percent chance that the economy will continue to improve, he stressed that “we’re not going to see a boom” with job growth continuing to struggle at about 140,000 new positions being added nationally each month.

Unlike past years, increases in the gross domestic product indices have not yielded the same amount of jobs as they typically had since World War II, said Margon, who blamed offshoring of jobs and improved technology that increases worker productivity as main reasons for the shift. Massachusetts is doing even worse on that front, he said, making it unlikely that the job-dependent office market will see significant absorption of space in the coming year.

Another concern, said Margon, is that ballooning federal trade and budget deficits will overwhelm the economy, sending interest rates dramatically higher to pay off the imbalance. Although other factors may prevent that, Margon indicated he believes that rates are headed upward, advising the packed NAIOP/SIOR audience to “borrow the money now, find the property later,” and to switch adjustable-rate loans to fixed instruments. “It’s going to happen,” Margon said of the interest rate increase.

Record-low interest rates have been a leading driver of the commercial real estate investment market, seconded program moderator Robert E. Griffin Jr. and several of the panel members. Introduced by SIOR New England President Garry Holmes as “one of the country’s superstar brokers,” Griffin said the region is likely to set a record in investment sales for 2004, with some $3.3 billion worth of commercial properties expected to change hands. Despite “fundamentals that are as sideways as they have ever been,” with office vacancy rates skyrocketing and rents backsliding, Griffin said capital continues to rush towards commercial real estate at unprecedented levels.

“It’s a strange situation,” said Griffin, president of Cushman & Wakefield of Massachusetts. The firm’s investment sales group is currently marketing the Bay Colony Corporate Center in Waltham and has received an “incredible” number of bids for the Class A office asset, said Griffin, considering the four-building park’s $250 million price tag.

“The capacity of the marketplace to take down a deal like this Â… is absolutely amazing,” said Griffin, noting that only a handful of suitors were available a decade ago when he and several colleagues brokered the sale of Bay Colony to its current owner, the Shorenstein Co.

Panelist and fellow Cushman & Wakefield principal Edward C. Maher Jr. said that “deal flow has been incredible” for commercial sales in 2004. “The prices being paid have even us shaking our heads,” said Maher, adding that properties of all types are enjoying the fiscal feeding frenzy. Maher did note, however, a deep divide between stabilized properties and those sporting weak tenant rosters or substantial vacancies. “Every asset class is hot right now, but within each one, it can be feast or famine,” he said. “You can’t paint it all with the same brush.”

Soft at the Edges

Other panelists offered a mix of good and bad news as well, including Richards Barry Joyce & Partners principal Michael J. Joyce, who said landlords are experiencing a range of conditions depending on what type of building they are leasing and the size of the prospects seeking space. Larger requirements have only limited options, Joyce said, but it remains enough of a tenant’s market that many firms with leases expiring through 2010 are already out exploring the landscape.

Low-rise and mid-rise space remains plentiful, said Joyce, but coveted Class A office towers above the 21st floor have a vacancy rate of just 5 percent. “We expect a little more firming up in the high-rise marketplace,” added Joyce, who said he also is encouraged by the pace of activity in Boston’s Back Bay district. Hard hit by the economy and mergers such as that between ManuLife and John Hancock Financial Services, the Back Bay could rebound sooner than the Financial District, said Joyce, even with vacancies at such marquee properties as Copley Place exceeding 30 percent.

Cambridge also has been on a rollercoaster, according to Spaulding & Slye Colliers principal Debra Gould, who said in her panel presentation that the city on the other side of the Charles River has struggled of late with both its office and lab space inventories. Still considered the Mecca for life sciences companies, a glut of space brought on by downsizings and construction of new supply has pushed the availability rate for lab space to 25.8 percent, compared to 24.7 percent for the office inventory. It is the first time, Gould said, that lab space has seen higher availability rates than office space in Cambridge, leading to a decrease in average asking rents for laboratory space from $45 to $40 per square foot, triple net, during the past year.

“That’s a pretty significant drop,” said Gould. Office rents are also down by $2 from last year to an average asking rate of $25 per square foot. As in other markets, Gould said there are positive happenings in Cambridge, including the continued arrival of national and international life sciences companies into the city. Still, with absorption for the year expected to be in the red by 200,000 square feet, Gould said she doubts that Cambridge will see any rental growth for another 12 to 18 months.

As for suburban Boston, panelist James J. Elcock of Meredith & Grew said there has been a continued flight to quality among companies, keeping activity brisk at Class A properties and those located in strong markets such as Route 128 West, which has enjoyed a solid 2004. Many deals have been struck this year by tenants and landlords rewriting existing deals at lower rates but for a longer period of time, said Elcock, while life sciences companies have provided additional velocity to the marketplace.

The vacancy rate has trended downward in certain markets, said Elcock, although fringe communities have not fared as well. “There is still a lot of softness, and tenants are going to remain in the driver’s seat,” said Elcock, who estimated that a real rebound will not be seen in the suburbs for another 24 to 36 months.

On the industrial front, panelist James Nicoletti said low interest rates have helped tenants focused on the home-improvement market, and said he is “very encouraged” about the sector going forward. A principal with CB Richard Ellis/Whittier Partners, Nicoletti did warn that a surge of space being dumped back on the industrial inventory will bring negative absorption in the fourth quarter to an alarming 700,000 square feet, but predicted that it is only a short-term phenomenon.

“It just feels good out there,” said Nicoletti, citing strong interest at a Mansfield industrial property that has traditionally struggled to find tenants. The scarcity of land should keep the industrial supply in check, he said, with retail developers currently snapping up parcels that might otherwise be used for industrial buildings.

Nicoletti said a surge of companies are looking for approximately 40,000 square feet of space, with as much as 70 percent of the 150 prospective tenants his firm is tracking at present seeking space in that range. Looking forward, Nicoletti said he believes rent growth will begin to appear for industrial landlords within 15 to 18 months.

Joe Clements may be reached at jclements@thewarrengroup.com.