A new study is predicting office rents in downtown Boston, Cambridge and along Route 128 North will increase in the coming months, driven by projected job growth and lack of supply in some areas.
That increase will come on the heels of a 2.9 percent drop in average rental rates across Eastern Massachusetts, to $26.59 per square foot according to the report from Lincoln Property Co., which charts the trends in rents from 2009 to 2010.
In downtown Boston, the average rental rate fell 4.8 percent to $38.28 a foot in the wake of a wave of vacancies that hit the market last year, the report found, citing one million square feet of negative net absorption in 2010.
More than 80 percent of that vacancy came from Class A space. Tower space above the 20th floor recorded a slight increase in pricing, but lower level space remained priced below $45 per square foot, according to Lincoln.
That said, if anticipated job growth occurs, tenant demand should grow with it, and Lincoln’s research group expects a slight increase in rents downtown in the next six months.
While that will be true on the top floors of high-rise towers, low-rise rents will remain flat, Benjamin Heller, a senior vice president for Jones Lang LaSalle specializing in the downtown market, told Banker & Tradesman.
“The demand from back office users is at an all-time low, the kind of users that typically occupy those lower floors,” Heller said. “The low-rise tower rents will be facing a lot of competition … with other [similar] space. In the high-rise, there’s going to be upward rents, but it’ll stay flatter a little … in the low-rise towers.”
Market By Market
In Cambridge, average rents jumped by 5 percent to $ 37.31 per square foot from 2009 to 2010 after a significant drop in the average asking rate in 2009, the report states. Mid-Cambridge, where rents grew by more than 15 percent, led the growth for the market – even though vacancy increased by more than 120,000 square feet there. East Cambridge measured only a moderate, 3 percent rent growth.
Even though Mid-Cambridge overtook East Cambridge in pricing in 2010, rent growth in East Cambridge will be far greater moving forward, thanks to the higher-paying biotechnology and high-tech tenants that typically saturate the market. MIT’s presence also helps fill vacant space faster, a trend expected to continue given favorable forecasts for technology growth in 2011, according to the report.
Along Route 128, two cities to the north ahave divided the submarkets, Lincoln concluded. In the last year, rents along Route 128 North increased 4.5 percent to $20.44 a foot, while the West dropped more than 6 percent to $23.62 a square foot. Waltham, which typically sets the high water mark for Suburban office pricing, dropped to $22.41 per square foot by the fourth quarter of 2010 as a wave of new supply beginning in 2007 helped saturate the area, the report says.
Much of that new construction has since been leased, but at a big expense to landlords who undercut one another fighting for limited tenants. For the first six months of 2011, the rental rates within Route 128 West are not expected to change much from where they are today.
Landlords Finding Leverage
Along Route 128 North in recent years, some significant technology tenants have been lured away from Route 128 West, and rents along Route 128 North are expected to rise slightly in the next six months, the report indicates.
“You’re dealing with a tale of sort of two cities with Burlington and Waltham,” said Mark Norton, senior associate at Lincoln Property Co. “You have nearly twice as much space in Waltham as you have in Burlington, and the quality of product on average is higher in Burlington than it is in Waltham. Burlington is really maturing as a location for corporate users. If you’re looking for a corporate campus feel without having a campus, you can get it in Burlington.”
Mark Vaughan, a senior partner specializing in real estate for Boston law firm Riemer & Braunstein, said in Burlington he has seen stabilization in the office rental market. There is not a tremendous amount of inventory for those looking for significant blocks of space, so landowners with some sizable chunks of square footage may be in a better position than they were a couple of years ago to lure large tenants to their buildings.
“The North market remained pretty stable compared to 128 [Mass Pike] and Northwest during the recession,” Paul Leonard, research manager for Jones Lang LaSalle, wrote in an E-mail. “It tends to be a stable market in general with very mild rent spikes and dips. I would expect this market to remain relatively unchanged with perhaps a slight uptick in rental rates over this coming year.”
