The office market in Greater Boston stayed on track during the first six months of 2006, as evidenced by Iron Mountain’s signing an 82,000-square-foot agreement for all of 120 Turnpike Road in Southborough.
Leasing eased a bit in the second quarter, but midyear reports show the recovery of Greater Boston’s office market remains on track, with demand healthy enough that the strongest sectors are bracing for a wave of new construction, especially in the suburban centerpiece of Waltham.
“Overall, I’m very encouraged after the first six months of the year,” said R.W. Holmes President Garry Holmes, who relayed that “a lot of singles and doubles” drove the leasing pace. “There seems to be good velocity,” concurred RBJ Research Director Brendan Carroll, whose eight-page overview did offer concerns about macro-economic trends but nonetheless voiced general optimism about the future for most of the region.
The Hub was not hit as hard by merger activity among law firms as some had feared, Carroll noted, and Boston ranks second nationally in the number of job postings advertising six-figure salaries on Monster.com. Also, an RBJ review showed that 29 percent of all Class A Boston office buildings increased occupancy in the second quarter compared to 18 percent that experienced declines.
RBJ estimated 641,000 square feet of net absorption for the second quarter, bringing the total for the year above 2 million square feet. Meredith & Grew registered 2.16 million square feet of positive absorption at midyear, while Lincoln Property Co. had the figure on the plus side by 2.09 million square feet.
Due to incongruous standards for when leases and vacancies are calculated, the various market reports differed in certain respects. RBJ, for example, showed 52,000 square feet of negative absorption in Boston’s Financial District in the second quarter, compared to Meredith & Grew’s estimate indicating 453,000 square feet of positive absorption and Spaulding & Slye’s mark on the plus side of 146,000 square feet. Lincoln did not break the numbers out by quarter, but Research Director Emily Schwartz recorded 290,000 square feet of positive absorption in the Financial District since the beginning of the year.
Collectively, however, the research offerings suggested steady improvement, with RBJ showing 749,000 square feet of positive absorption in the Financial District in the past 12 months and a gain of 1.03 million square feet for the entire city during that time, 273,000 square feet of which occurred in the second quarter. That dropped Boston’s vacancy rate slightly to 12.6 percent, RBJ reported, whereas Meredith & Grew put it at 11.6 percent, ranging from a low of 6.3 percent in the tiny Fenway/Kenmore office district to a high of 15.2 percent in the Charlestown district. Lincoln set a vacancy of 8.3 percent for direct space in Boston and 13.5 percent when sublease opportunities are included.
The office market “is improving at an impressive pace,” Cushman & Wakefield Executive Managing Director Tom Collins said in a release that put the overall Boston vacancy rate at 10.4 percent at midyear, down from 13.3 percent a year ago, while Class A vacancies in the Financial District slipped below 10 percent for the first time in 16 quarters, falling from 12.4 percent halfway through 2005 to 9.6 percent today.
“Market fundamentals continue to strengthen and office tenants are absorbing higher quality space at a fairly brisk pace,” said Collins, whose firm estimated 321,000 square feet of positive absorption in Boston during the year’s first six months.
‘It’s Fantastic’
Significant leases inked in Boston proper during the first half of the year included Bergmeyer Assoc. taking 28,000 square feet at 51 Sleeper St., Aspen Specialty Insurance committing to 29,000 square feet at 600 Atlantic Ave. and Ixis Asset Management’s renewal for 94,000 square feet at 399 Boylston St. in the Back Bay. The Bergmeyer departure from nearby Russia Wharf is a precursor to a planned overhaul of that three-building complex by Equity Office Properties, a proposal seen by many as the quickest opportunity to add new office space for an increasingly tight inventory.
In his report, Carroll indicated a measure of pre-leasing might be required to kick off the Russia Wharf renovation and expansion, especially given EOP’s traditional reticence to develop spec space. Another area ripe for new construction is in Waltham, Carroll added, and a number of well-heeled developers are preparing to add new supply or upgrade older buildings, as EOP appears to be doing with a former Hewlett-Packard facility on Wyman Street. Davis Marcus Partners and Boston Properties are also moving ahead with speculative construction, as is Duffy Assoc. and its 143,000-square-foot speculative building already under construction on Waverly Street.
Some 1.6 million square feet of new office space could be heaped upon the Waltham inventory during the next two years, according to Carroll, but he predicted it would be well-received – and may prove badly needed. “We’re getting to the point, if we aren’t already there, that the absorption [in Waltham] will slow because there won’t be the product to accommodate the demand,” he said. Rental rates are undeniably moving in the right direction, he said, reporting a 31 percent increase in Class A asking rates during the past two years to an average of $30.83 per square foot at present. Deals at premier addresses such as Bay Colony are running into the mid- and upper-$30 per-square-foot range, he said.
“It’s fantastic to be able to talk about speculative development again,” said Holmes, whose Natick-based real estate firm has endured despite several down years for the suburban office market. A roster of life sciences and consumer-focused companies has kept the Framingham/Natick submarket healthy, but Holmes said the central strip of Route 128 saw rental rates drop substantially before mounting the recovery. The rebound has yet to benefit fringe markets such as Interstate 495, but Holmes said he believes price-conscious tenants will begin to explore outer options as rents firm closer to Boston
Although small and mid-sized tenants drove the leasing activity in many suburban communities, several larger-sized office deals have been completed to date this year, including a 67,000-square-foot commitment by Sungard Availability Services at 260 Locke Drive in Marlborough, a lease negotiated for the landlord, 250 Locke Drive Corp., by broker Bill Sullivan of R.W. Holmes.
Another top lease featured RenaMed Biologics signing a 15-year, 113,000-square-foot deal at 20 Walkup Drive in Westborough, in which the life sciences firm will relocate its headquarters from Rhode Island. RBJ and NAI Hunneman negotiated that lease between the tenant and landlord, the Campanelli Cos. of Braintree. Also, Mitchell Jacoby and Denise Geroir of CRESA Partners brokered a 40,000-square-foot lease at 257 Cedar Hill St. in Marlborough to Evergreen Solar, and Iron Mountain signed an 82,000-square-foot agreement for all of 120 Turnpike Road in Southborough, with RBJ brokers John Lashar, Brian McKenzie and Paul Leone representing the landlord, Realty Associates Fund VI LP while Alexander Dauria of Spaulding & Slye served as agent for the tenant.
In Lincoln’s report, only one of the 10 suburban submarkets it covers – I-495 Northeast – was negative in absorption during the first half of the year. I-495 Northeast was in the red by 65,000 square feet, while I-495 South was only slightly positive at 4,000 square feet. The strongest submarkets included central Route 128 at 528,000 square feet positive, I-495/Route 2 West at 307,000 square feet positive and Route 3 North, which was up by 40,000 square feet. The suburban total absorption was positive by 1.24 million square feet, Lincoln reported.
