Some of Greater Boston’s hardest-hit office markets are finding they have far bigger concerns than stagnant rental rates and millions of square feet of empty space.
Boston’s northern and far-western suburbs are also struggling with the lion’s share of the area’s fully-vacant buildings – buildings that are, on average, older, of poorer quality, and tougher to rent than an average office property in the market. And their dead weight is helping to drag down an already struggling market, skewing vacancy rates and impacting rents.
According to data from Richards Barry Joyce & Partners, the Boston office market now has 65 fully-vacant buildings, containing 6.3 million square feet of space. The quantity of fully-vacant buildings, and the volume of square footage attributable to them, have both jumped by 15 percent since the beginning of 2009.
“Vacancy figures don’t tell the full story, especially in certain areas and for certain products,” said Brendan Carroll, RBJ’s director of research. “Five percent of all buildings in greater Boston are fully vacant. That’s not a miniscule amount, given the size of the market.”
Not Competitive
Fully-vacant buildings account for 3.5 percent of the office square footage in Greater Boston, Carroll said, but 23 percent of vacant space.
Carroll argued that submarkets like 128 North, 495 North, and 495 West are actually tighter than their vacancy rates indicate, thanks to fully-vacant buildings that, in some cases, have been passed over time and time again by tenants. One in every five square feet in those submarkets currently sits empty. And even though 128 North, 495 North and 495 West contain just 33 percent of all the market’s office inventory, they hold 80 percent of all the market’s fully-vacant buildings.
As a result, Carroll said, vacancy rates in those submarkets are “a little over-inflated, because some of that vacant space might not be competitive.”
“There’s a percentage of the market that can’t transact, financially, because the current owner doesn’t have the capital, or can’t refi, or can’t fund the [tenant improvement] work,” said Donald Hause, founder of Keystone Strategies, a Boston firm specializing in commercial finance and tenant advisory services.
Hause said the phenomenon applies to “a good percentage of the buildings out there, not just the vacant buildings,” but said the financial pressures on vacant buildings are greater, as yawning vacancies exacerbate the massive peak-to-trough swing in values and rental rates that investors have endured.
A survey of vacant suburban office buildings identified by Banker & Tradesman illustrates the difficulties these fully-vacant buildings are up against. On average, they’re in submarkets that have been hit hard by broad-based rising vacancy rates. Rental rates in these submarkets remain far below the rates being achieved in more premier cities and towns, a fact that tends to shrink owners’ operating margins.
Lower rental rates also make ambitious tenant improvement allowances, capital improvements and asset repositioning projects more difficult to finance. Fully-vacant suburban buildings tend to have greater capital needs, though, because they tend to be older, and of lower quality. RBJ’s analysis of vacant buildings found that while 46 percent of the overall market is comprised of Class B space, 58 percent of all vacant buildings were Class B, and were, on average, 34 years old.
Empty Promises
Two former pieces of Gale International and Mack-Cali Realty’s Woodland Park holdings in Andover sit vacant. Gale and Mack-Cali bought the properties at 300 and 800 Federal St. in 2006, as part of a $53 million acquisition spree. The buildings’ vacancies were a selling point at the time, when the market was frothy and rents were shooting up. When things turned, though, ownership found itself stuck in a market full of similar buildings, but with a much higher basis, based on what they paid for the properties, and when. The properties’ lender, UBS, eventually took them back last September; UBS sold 300 Federal for $17 per-square-foot, and remains in control of 800 Federal.
At 129 Parker St. in Maynard, Chartwell Properties is trying to reposition a sprawling 400,000-square-foot campus that formerly belonged to Digital Equipment Corp., and has long been vacant. Chartwell is now offering up to four years free rent, but has yet to find a tenant. It’s currently on the hook for a $16.2 million mortgage issued in 2007 by Anglo Irish Bank, the troubled lender that is now essentially controlled by the Irish government.
Tenants have tended to shun properties that lack solid financing. As such, they’ve been steering far clear of several buildings owned by KS Partners, a local real estate investment firm with millions of square feet of office and industrial space either in foreclosure or in special servicing. KS Partners excelled in riding expanding values and generous capital markets to transactional profits – it made money by buying and refinancing properties. The buildings it owns, or once owned, have fared worse from a performance standpoint. 165 Lexington Rd. in Billerica, an 80,000-square-foot property built in 1982, currently sits vacant. It’s part of a 543,000-square-foot portfolio of properties KS acquired in 2006, and then refinanced in 2007 for $21.3 million more than the price it paid for the buildings. Another vacant property with KS ties is 261 Ballardvale St. in Wilmington. Midland Loan Services foreclosed on it late last year, after performance at the building faltered. It’s now being marketed for sale, empty, by Eastdil Secured.
“It’s unhealthy, generally, when buildings can’t transact, when there’s not a lot of velocity,” Hause added. “There’s a tremendous amount of indecision in the market anyway. Overall, it has a negative effect.”
Editor’s Note: Due to a reporting/fact-checking error, we incorrectly reported that the New Boston Fund’s office building at 2 Cabot Road in Hudson is vacant. Occupancy stands at 25 percent. This online version of the story has been modified from the original print version to reflect this correction.
