Time certainly does seem to accelerate when an individual is immersed in fun, but that would hardly account for the swift procession of Greater Boston’s commercial real estate market, which has soared past the halfway point of 2004 with scant reason for industry professionals to be enjoying the experience. Office fundamentals remain anemic, industrial product has suffered mightily and tepid demand has even quieted the long-vibrant apartment sector, leading to increasing financial troubles for the weakest links in the property chain.
Turning to a more relevant adage, in darkness there is light, and many observers insist there are numerous reasons to be optimistic about commercial real estate going forward. Rents remain flat or are even still declining in some areas, but better economic news and a willingness among companies to commit to leases after months of contemplation bode well for the remainder of 2004 and into 2005, according to veteran broker Mark A. Stevens.
“The activity we are seeing is real,” said the GVA Thompson Doyle Hennessey & Stevens principal. “People are out trying to get a deal done and not just sticking their toe in the water anymore.”
In releasing its mid-year numbers, GVA reported a third straight quarter of positive absorption for the 101 million-square-foot suburban office market, as a busy three months in the Route 128 West corridor helped absorption register at 467,000 square feet. That followed nearly 1 million square feet of positive absorption in the first quarter, and has brought the suburban vacancy rate down to 15.7 percent. The suburban office availability rate, which includes direct and sublease space, is now 22.2 percent, according to GVA/TDHS, down from 23.3 percent after the first quarter.
“We need to see a lot more to make a real dent in the vacancies, but at least things are going in the right direction,” said Stevens. “It is starting to show a little bit of life.”
Suburban R.E. Boosted by Biotech
With the technology arena still creeping along, defense, health care and biotechnology companies have offered the greatest hope to suburban landlords in 2004, with Straumann Co. taking 163,000 square feet of office and manufacturing space in Andover after heavy courting by state economic officials to have the European medical devices firm establish a Bay State beachhead. Boston Scientific paid $43 million for a corporate campus in Marlborough that was previously home to Lucent Technologies, while health care giant Medtronic cemented a 130,000-square-foot lease at Cherry Hill Park in Danvers in May.
CRESA Partners principal Joseph Sciolla, who represented Medtronic, said in his mid-year overview that major corporate expansions or relocations are unlikely in the immediate future, with any velocity in leasing likely restricted to small- and medium-sized deals. A firm focused on tenant representation, CRESA predicts that sluggish job growth and overseas outsourcing will keep landlords from gaining the upper hand in the office market. Rents will not begin to rise until vacancies dip to between 10 percent to 12 percent, said Sciolla, who predicted that is not going to happen until well into 2005.
Although a recovery remains in the distance, according to CRESA, Sciolla said his firm is advising tenants to consider renewing or restructuring their deals today, allowing them to lock into favorable rates. “Rents have almost been cut in half during the last five years, so companies have an opportunity to leverage the soft market conditions and save an average of $5 to $10 per square foot,” said Sciolla, whose firm estimates that Class A office space is now averaging $39 per square foot, while Class B deals are running in the $23 range, both down an average of $1 per square foot from the first quarter.
Maintaining that the office market has essentially bottomed out, with any futher rent drops likely to be offset by stingier concessions on tenant fitout and free rent, Stevens agreed that tenants should seriously pursue lease deals. “If they are going to make a move, they’ve got to do it now and do it quickly,” he said, particularly as so-called plug-and-play and sublease opportunities dry up. And although mid-sized firms have plenty of choices, Stevens also warned that large contiguous blocks of space are also disappearing quickly. In the Waltham market, for example, GVA/TDHE said there are just three properties featuring 100,000 square feet or more of contiguous space available.
Industrial Landlords Facing Fierce Future
On the industrial front, signs of improvement are considerably harder to come by, with what had been one of the industry’s strongest performers suddenly running into difficulty during the past two years. According to Cushman & Wakefield, Bay State industrial properties saw 1.13 million square feet of negative absorption in the first half of 2004, while Spaulding & Slye Colliers reported similar numbers, posting 1.27 million square feet of negative absorption for the 59.1 million square feet of inventory in its survey.
“It just seemed to lose traction at the start of the year and hasn’t recovered,” said Stevens, who had anticipated that the improving economy would have boosted industrial leasing. Spaulding & Slye placed the industrial vacancy rate at 17 percent and the availability rate at 21.9 percent. The Northwest submarket was hit hardest in the first half of 2004, suffering negative absorption of 586,000 square feet, while the largest industrial submarket, the 21.8 million-square-foot South sector, had negative absorption of 203,000 square feet, bringing the vacancy rate there to an alarming 19.9 percent.
Among the few bright spots for industrial landlords in the first half was a 200,000-square-foot lease renewal at 35 Optical Drive in Southbridge by Aearo Co., a leading manufacturer of personal protective equipment and energy absorbing products. NAI Hunneman Commercial Co. CEO Michael DiGiano noted that the deal will keep some 400 manufacturing positions in central Massachusetts.
“We’re delighted that we were able to put this lease together quickly,” said DiGiano, who represented the tenant along with NAI Hunneman Executive Vice President Wayne Spiegel. James Umphrey of Kelleher & Sadawsky negotiated for the landlord, Franklin Real Estate Advisors, which was cited by DiGiano for working cooperatively to restructure the lease.
Closing out the first half of 2004, McKesson Corp. agreed to lease all of 55 Lyman St. in Northborogh from the Gutierrez Cos. of Burlington, which developed the 130,000-square-foot structure on a speculative basis. The tenant, a health care services company, was represented by Paul Leone of Trammell Crow Co., while John Wilson of Richards Barry Joyce & Partners was the broker for Gutierrez.
