Greater Boston’s office market is expected to remain quiet for the foreseeable future, in part because of the Sept. 11 terrorist attacks on America.
The sound of silence continued to deafen Greater Boston’s office market in the third quarter, with the unspeakable horrors of Sept. 11 helping to ensure that the already dormant industry will remain muted for the foreseeable future.
“It’s very quiet,” acknowledged Jones Lang LaSalle Vice President Kenneth Shaffer. “Traffic is way down.”
According to figures released last week by Spaulding & Slye Colliers, the region suffered negative absorption of 1.6 million square feet during the past three months, putting negative absorption for the year at just under 7 million square feet. All submarkets in Boston were in the red in the third quarter, while Cambridge saw its availability rate soar to 21.2 percent.
Given the dour climate, the small amount of momentum which was generated at times was gladly welcomed by real estate professionals. Following up on an impressive 290,000-square-foot lease by Applied Materials in Danvers, Simpson Gumpertz & Heger last week inked a 50,000-square-foot deal at iPark in Waltham. The former Raytheon facility is in the midst of a conversion to mixed-use space by Saracen Highgate Holdings.
More leases are in the works, said Insignia/ESG Senior Managing Director Stephen J. Murphy, including one for 30,000 square feet that could be cemented as early as this week. Murphy, who represents the landlord, said he is encouraged by the reception, attributing it to a location in the heart of the suburban office market, but at per-square-foot rental rates in the teens.
“It’s a pricing point that is reasonable,” said Murphy. “And the building appeals to a lot of uses.” Currently headquartered in Arlington, the Simpson, Gumpertz & Heger engineering firm will relocate into Building Four at iPark West, which encompasses 275,000 square feet of newly renovated space.
Despite the velocity at iPark, Murphy agreed that the third quarter displayed little indication that relief is on the way anytime soon for the beleaguered office market. While many had hoped the end of summer would reenergize the business community, the terrorist attacks have ensured that will not happen for some time to come, with most firms taking a staunch defensive position.
“Overall, people are being very conservative,” said Murphy. “I think everyone is taking stock of their company and rethinking their business plans … There aren’t a lot of big commitments being made.”
The brunt of the difficulty is not coming from speculative construction, as was the case in the early 1990s, but by the lack of demand among the tenant community, said Shaffer. In fact, the negative absorption shows a massive retreat in facility needs, reflecting both the gorging on space last year and the ongoing cascade of employee layoffs. Although it is difficult to quantify just how much of the space available is sublease, most agree that it easily amounts to millions of square feet.
‘Really Shocking’
According to Shaffer, however, only about half of the sublease opportunities in circulation today can compete with those being marketed by landlords. Subleases with terms under two years will find few takers, he said, adding it would be wise to shy away from sublessors who may go out of business because the space typically reverts back to the landlord.
“Not all subleases are created equal, and they do not all have the same downward pricing pressure on direct space,” said Shaffer, adding that many subleases are also either too small or too customized for the previous tenant to attract interest.
Murphy agreed with Shaffer’s analysis, predicting that about 50 percent of the subleases will eventually “bleed off.” He added that the security deposits and other financial protections demanded by landlords last year puts them in better shape to weather the economic storm clouds.
Even with the ability of landlords to reject uneconomic terms, Shaffer said rental rates have clearly eroded in recent months. The main reason, he said, are the choices available to tenants, with one recent Jones Lang LaSalle search on behalf of a 10,000-square-foot client indicating there were 70 options in the heart of the Route 128 market.
By any measure, the office market was brutalized in the third quarter, especially when compared to the upbeat conditions enjoyed in virtually all sectors just 12 months before. At the end of the third quarter in 2000, for example, Greater Boston had seen 8.8 million square feet of positive absorption, with 4.1 million square feet of that occurring in the third quarter alone. The overall vacancy rate for the region stood at 3 percent, with the Hub at an amazing 1.5 percent and Cambridge at just 0.4 percent. The suburban sector had a 4.7 percent vacancy rate, reflecting 2.3 million square feet of activity from July to the end of September.
Fast forward to this year, and the picture has completely reversed itself. All of Boston’s submarkets experienced negative absorption in the just-completed quarter, with the Financial District, Back Bay and Seaport District all suffering six-digit losses in square footage. Boston’s vacancy rate is now 4.9 percent, which would be considered impressive in most situations were it not for the suddenness of the downturn.
“To happen so quickly is what was really shocking to people,” said Shaffer.
Certainly the upheaval in Cambridge occurred at lightning speed, with the market’s availability rate having shot up exponentially from the 3.2 percent seen at the end of the third quarter in 2000. But after losing more than 840,000 square feet at the mid-year point of 2001, the city did slow that trend in the past three months, posting negative absorption of just 6,898 square feet. The vacancy rate now stands at 9 percent, with the 8.4 million-square-foot East Cambridge market reaching 9.9 percent.
