Call it the auction option. As demand for office space reaches unprecedented levels in Eastern Massachusetts, building owners have found a new tool to ensure that their leases reflect what the market will bear. While there is no gavel or fast-talking emcee involved, the auction process is beginning to take hold in commercial real estate, pitching prospective tenants in a do-or-die financial battle to secure precious quarters.
“With no supply and so much demand, landlords are telling tenants, ‘You let us know what you’ll pay,” acknowledged Spaulding & Slye Colliers broker Tamie Thompson. “More and more landlords are starting to think that way.”
The owners of One Financial Center in Boston, for example, recently auctioned off a floor in that downtown tower, while the same phenomenon occurred at International Place, according to developer Donald Chiofaro. Across the river in Cambridge, Equity Properties offered up 75,000 square feet at 245 First St. to the highest bidder, a rare block of sizeable space opened up by the departure of the Learning Co.
Calls to One Financial and to Equity were not returned by Banker & Tradesman’s press deadline, but Chiofaro said the tight conditions at International Place – with “not a foot available” in the 1.7 million square foot complex – have led to auctions there when vacancies do crop up.
“For the couple of floors that might come due, we’ve got several people chasing it … and we’re going to let them set the [rental rate],” said Chiofaro, adding that, “It’s a very, very unusual time.”
The traditional barometer in leasing office space has been the “average asking rent” set by the property owners. According to Spaulding & Slye Colliers, for example, the average asking rent for Boston office space was $46.21 per square foot at the end of the first quarter, up from $44.26 per square foot at the beginning of the year. The average asking price of Class A space remained unchanged during that time at $49.21 per square foot, but brokers note that auctioned space would not be reflected in those numbers. International Place, for example, is said to be fetching rents in the $70 per square foot range.
‘Oversubscribed’
Cushman & Wakefield Managing Director Mark Winters said it is often not so much that the landlord decides to hold an auction than a situation where several tenants compete for a given piece of space, suitors who then become entangled in a bidding war to obtain it. Conditions are especially ripe for such activity in Cambridge, Winters said, where there is a perceived worth in the location.
“It’s so important for a lot of these companies to be in the right building and the right environment that they are willing to pay for it, no matter what,” Winters said. “That’s really what’s driving it.”
Trammell Crow principal Brian Hines concurred with that notion, adding that in nearly every case he has seen of late, “whether it be for 5,000 square feet or 200,000 square feet,” there are multiple tenants vying for the space. Indeed, the latest buzzword for office buildings, Hines said, is “oversubscribed,” where landlords offer a piece of space and it receives so much interest that additional offers are shut off, and the firms which do make the cut are put against each other.
In some cases, Hines said, it amounts to an auction where the highest bidder is the winner. Increasingly, however, landlords do not simply use price as a determining factor. Hines said the credit quality and overall strength of a firm may be also taken into account in what he calls a “country club selection process.”
“You’ve got the auctions, and you’ve also got this stringent selection process,” Hines said. “That’s really what’s going on out there right now.”
Joseph Sciolla, a principal with the Cresa Partners tenant representation firm in Boston, said he is familiar with the auction activity, but added that he has never participated in such an exercise with his clients. As with Winters, Sciolla said he believes overzealous – or panicky – tenants are the biggest influence on such dealings, and said he would advise firms to avoid getting wrapped up in such a freewheeling atmosphere.
“It’s going on in a limited fashion, but I’m not sure that it will continue to proliferate, especially in the suburbs,” Sciolla said. “It’s not a trend that I think will be the norm over time.”
Another tenant rep specialist, William F. McCall Jr. of McCall & Almy, also questioned whether there is a future for auctions in leasing office space. Although there are such deals ongoing, especially on the West Coast, McCall said he believes it will only occur in the hottest markets, such as Cambridge, and only then as long as the supply/demand equation remains wildly out of whack.
“There are certainly some instances of auctions at our end of the business, but I’d say it’s not the general rule at the present time,” McCall said. “For the most part, it’s usually three or four guys fighting for a piece of space that they all want.”
