Boston may be among the most progressive cities in America, but when it comes to corporate real estate, we are very much a “class system” at the mid-way point of 2005. We are seeing very different dynamics for tenants in search of high-image, Class A space compared to tenants in the less-desirable Class B market. And this “class distinction” becomes even more pronounced as tenants climb to the top floors of high-rises. In industry lingo, it’s called a “bifurcated market.”
In the last quarter, there has been more action in the Class A office market, with 65 percent of the activity in the towers, where 85 percent of the transactions have been for 25,000 square feet or less. In high-rise space for floors 20 and above, rents are rising (up to $46 per square foot) while the vacancy rate is down to 5 percent. This is the result of the continued “flight to quality” for tenants upgrading from Class B space as well as tenants shuffling within the towers. In the middle-rise floors, the vacancy is 12 percent, while it is 16 percent in the lower floors. Below the 20th floor, rents have remained steady or have dipped slightly.
Overall, downtown rents for Class A space continue to average about $37 to $42 per square foot, with Class B rents hovering at $25 to $28 per square foot.
Class A vacancy last quarter dropped to 18 percent, down from 20 percent in the second quarter; Class B vacancy is reported at 15 percent. This marks the first quarter in three years that the overall availability rate dropped, and it is the second consecutive quarter in which we experienced 200,000 square feet of positive absorption. Whether this will be a continuing trend or just a blip remains to be seen, as Gillette and Procter & Gamble are expected to dispose a fair amount of space within the next quarter or two.
What Lies Ahead
Looking ahead, we forecast more demand and higher rental rates for prime tower space. Elsewhere in the market, we expect less interest as the recovery continues at a more deliberate pace.
Driving the economic recovery are regional small to mid-size financial, law and professional service firms. At the same time, larger companies that have begun to evaluate the market include: Bingham McCutchen, Eaton Vance, Hill Holliday, Kirkpatrick & Lockhart, Houghton Mifflin, Wellington, Sovereign Bank and Fidelity.
As we enter the second half of 2005, we at CRESA Partners continue to see a trend developing as companies from the Financial District consider a move to the Back Bay. In addition to the Hancock Tower, there has been renewed interest at 101 Huntington, 222 Berkeley and 500 Boylston streets. Another trend that we expect to intensify is the conversion of 1 million square feet of Class B and C office space into residential units.
Overall, the majority of transactions this quarter will likely be a function of lease expiration dates, with credit-worthy tenants looking to restructure leases early to gain immediate rent relief and increased lease flexibility.
In outlying areas that are more dependent on technology growth, activity is more sporadic. For the most part, there is an uptick of interest in the Metrowest market, especially Waltham, Newton, Wellesley, Framingham and Natick. In the Route 495 area, the market is generally flat.
Why Tenants Need to Act
So, as we see ripples of change in this virtually “jobless recovery,” what is our message to corporate tenants? If you’re looking for Class A buildings, especially prime high-rise space, your window of opportunity may be closing. Already, landlords are cutting back on concession packages in this market segment, and the best pickings are becoming increasingly slim.
Accordingly, we are advising tenants to be very proactive if they want to lock into favorable deals. Indeed, timing is becoming much more critical since it typically takes six to nine months to navigate the sea of available space and negotiate a satisfactory agreement.
Whether companies are looking to renew, restructure or relocate, they are facing a greater sense of urgency. The time, then, to review options is now. Armed with the proper knowledge, tenants, regardless of their “class,” can still apply their leverage with landlords at the negotiating table.
