Spaulding & Slye announced in the first quarter of this year it will be leasing 55,000 square feet at One Post Office Square in Boston’s Financial District. The office markets in both Boston and Cambridge have maintained the busy pace with which they ended 2005.
The robust activity enjoyed by the Boston and Cambridge office markets in 2005 has carried over into the new year, with a solid opening quarter offering further evidence that the region is on the mend after a protracted downturn.
“I think we’re well on track to a recovery,” Spaulding & Slye principal William P. Barrack said last week after his company showed 280,000 square feet of net absorption in Boston and 325,000 square feet in Cambridge during the first three months of 2006. The performance brought the direct vacancy rate in Boston down to 9.8 percent – the first time since 2002 it has been in single digits – and dropped the Cambridge vacancy mark to 10.5 percent.
Several notable first-quarter deals were completed in Boston, among them Spaulding & Slye’s own announcement that it will be taking 55,000 square feet at One Post Office Square in Boston’s Financial District. Also, Sovereign Bank committed to 110,000 square feet for 10 years at 75 State St., and Samuel Adams brewer Boston Beer Co. inked a 31,000-square-foot lease late in the quarter at the Boston Design Center.
Barrack said he is encouraged because many tenants are taking extra space as opposed to an extended period where the majority had been remaining at the same size or even retrenching. “People seem to have confidence in their business plans and confidence in the economy,” said Barrack. Small to mid-sized tenants have championed the rebound, but Spaulding & Slye has identified eight tenants in Boston seeking at least 100,000 square feet at a time when large space opportunities are beginning to dwindle. That could ultimately create a need for new construction, according to Barrack, following years of virtually no new supply being added to the office market inventory.
Financial Gains
A dearth of tower space is prompting rental increases, headlined by gains of 20 percent to 25 percent for Class A high-rise since last summer, Spaulding & Slye estimates, bringing rates for such options into the $50- to $60-per-square-foot range. Rents are up 10 percent overall from the midyear mark of 2005, with the first quarter enjoying a 2 percent increase. That momentum pulled the rate for all classes of space up to $35.04 per square foot from $34.43 at year-end 2005.
In the Spaulding & Slye report, Boston’s Financial District outperformed all areas of the city in the first quarter with 206,000 square feet of positive absorption, followed by 50,000 square feet in Charlestown and 42,000 square feet in the Seaport District. The only Hub submarket posting negative absorption was the Back Bay, which registered a slight drop of 39,000 square feet for the quarter. That slippage comes despite the district’s remarkable turnaround in the past year, exemplified by a direct vacancy rate of just 7.1 percent, making it the only submarket with single-digit vacancies in the city save for the tiny South Station submarket’s 4.9 percent figure. The Back Bay also now boasts the highest asking rates in the city at $38.93 per square foot, compared to $36.64 per square foot for the Financial District. The next closest is North Station, which averages $26.48 per square foot.
Despite its first-quarter drop, the Back Bay has emerged as an extremely hot destination for tenants, according to Barrack, with money managers becoming especially enamored of the area. “There is now no perceived difference in the quality of buildings between the Financial District and the Back Bay,” said Barrack, as evidenced by a slew of attorneys and other high-end users targeting that 12.9 million-square-foot submarket.
Cushman & Wakefield of Massachusetts showed somewhat less first-quarter velocity for Boston than Spaulding & Slye, estimating 126,000 square feet of net absorption in the city and 586,000 square feet for the region. Rick Cleveland, director of research at Cushman & Wakefield New England, termed the results as “decent,” adding he believes the opening salvo has set landlords up for a strong year. And while cautioning that “one quarter does not a market make,” Cleveland said the trend has been upward for an extended period, citing a drop in Boston’s vacancy rate from 14.6 percent one year ago to 12.9 percent today.
“There continues to be a slow chipping away of the vacancy rate,” said Cleveland.
The same is true across the river in Cambridge, where Cushman & Wakefield reports a drop from 20 percent to 15 percent in the vacancy rate during the past year after 201,000 square feet of net absorption in the first quarter. The bulk of the momentum has been for laboratory space, which Cushman & Wakefield tracks in conjunction with office product. “There’s a nice story going on in Cambridge,” said Cleveland, although tenants are increasingly feeling the pinch from the tightness, leading to the possibility of firms considering alternate markets such as the suburbs.
While concurring that life sciences companies have been driving the Cambridge rebound, NAI Hunneman Commercial Co. Senior Vice President Greg Larsen said he is encouraged by the performance of the office market there, with high-technology and software companies finally creating a spark last year after being in the doldrums since the start of the new millennium. Citing 2003 as the nadir for Cambridge, Larsen said the past year has seen a 10 percent drop in office vacancy rates, a plunge led by brisk leasing of Class A properties that reflects the regional “flight-to-quality” trend that has marked the recovery throughout Greater Boston.
One consequence of that movement has been a dearth of business for Cambridge’s Class B buildings, and Larsen said the Cambridgeport submarket has been especially vulnerable to that situation as several top tenants have forsaken properties in favor of more prestigious addresses, including such companies as Millennium Pharmaceuticals, Alkermes and the erstwhile TKT.
With average office rents rising for the past year at a rate of about 50 cents per quarter, coupled with a dwindling supply of Class A product, Larsen said he believes older Cambridge buildings will begin to reap the benefits of the city’s resurgence, which has been largely brought on by internal growth. “It’s good news,” Larsen said of the outlook for Cambridge. “It will still take awhile to work off the product that’s available, but we’re in a much better [position] today than we have been for a long time.”
In its first-quarter report, Meredith & Grew estimated more than 250,000 square feet of positive absorption for Cambridge, virtually all of which occurred in the core East Cambridge submarket, where there was 236,000 square feet of positive absorption. That puts the vacancy rate for the entire city at 14.8 percent, encompassing a vacancy of 15.2 percent for East Cambridge, 18.8 percent in the Alewife district and 6.4 percent in the Harvard Square submarket.
Several Cambridge leases were inked during the first quarter, among them a 20,000-square-foot expansion by the Cambridge Innovation Center at One Broadway, where the firm now occupies 91,000 square feet of office space. Meredith & Grew Executive Vice President Joseph P. Flaherty and Assistant Vice President Tucker L. Hansen negotiated that expansion on behalf of the landlord, the Massachusetts Institute of Technology, while the two also represented Prometrika LLC for an 11,000-square-foot lease at 725 Concord Ave. CBRE/New England principal Robert Fitzgerald represented the landlord, KBS Realty Advisors, in that 10-year agreement.
