It remains to be seen whether the recent technology tremors on Wall Street turn into an economic earthquake, but the difficulties already appear to be shaking the Greater Boston commercial real estate market.

I’ve never seen so many deals fall apart, CB Richard Ellis/
Whittier Partners principal Chris-
topher P. Tosti acknowledged last week. A lot of them just can’t seem to get over the goal line.

According to industry observers, the palpitations are coming from both sides, with landlords nervous about the number of technology related firms in their portfolio, and tenants increasingly skittish about committing precious capital to real estate, especially with rents rising to record levels.

There’s no question that landlords are concerned about the creditworthiness of those [technology] companies, said Boston broker William F. McCall Jr. They want to make sure the whole strength of the building isn’t based on dot-coms.

As a result, building owners are said to be mandating pre-paid rent and increased security deposits for most companies falling into a category that is being termed new-age technology, including Web-based firms, software companies and networking operations. Although officials did not return phone calls, Boston Properties is reportedly requiring a two-year security deposit for any new-age technology companies interested in leasing space in its vast portfolio. Boston Properties owns 25.5 million square feet nationally, with 6.2 million square feet of that in Greater Boston.

That’s a huge bite, one broker said of the requirement, estimating that it could mean millions of dollars in upfront costs for even a mid-sized lease.

Insignia/ESG broker James J. Adams said last week that he believes landlords are not painting the technology industry with a broad brush, but they are scrutinizing non-established companies much closer. Depending on how skeptical they may be, he said, landlords are requiring upwards of two years pre-paid rent for even a five-year deal.

That’s absolutely the case, said Adams, adding he believes it is simply prudent due diligence on the part of the property owner. It’s basically a very hard look at their balance sheet, especially if it’s a company that has yet to turn a profit, to try and figure out how long they would be able to pay their rent.

Another downtown Boston broker, Robert B. Cleary Jr., seconded that outlook, and said he believes the recent stock market upheaval has had a psychological effect on the office market.

The impact NASDAQ has on everybody’s personal pocketbook is creating more caution in really pursuing these [technology] people, said Cleary, a principal with Meredith & Grew. The upfront money’s great, but if they aren’t around in two years on a five- to 10-year lease, it’s just not something [landlords] want to get involved in.

Tenants Balk
On the flip side, reports are beginning to circulate about tenants quashing lease deals themselves. A high-tech Cambridge firm known as InCert, for example, recently backed out of a 25,000-square-foot Brighton lease. While company officials did not return phone calls to discuss the matter, one source said InCert’s board of directors killed the lease due to the stock market scare. Others, such as Boston-based Verbind, have opted for less expensive quarters in the suburbs. That company had been planning to move to another Boston property before recently opting to relocate to Hayden Avenue in Lexington.

The chill on available capital is one reason seen for leases being held up, with one recent report showing that 67 percent of the companies that have gone public in 2000 are currently priced below their original offering price, while 90 percent are down from their first-day closing price. The aggressive tactics being applied by landlords is another likely reason for some leases falling apart, according to Tosti. Particularly in the cases where numerous companies are chasing one opportunity, Tosti said the winner often reaches the decision point only to begin questioning the rent levels and other requirements.

Everybody pushes because they are afraid they are going to lose a piece of space, and then when they get to the [end], they just can’t pull the trigger, he said. At the same time, the competitive market continues to churn out new candidates, Tosti said, adding that, we’re showing space literally twice a day.

In some respects, however, the anticipated shakeout of the technology industry should ultimately lead to greater real estate opportunities for the surviving firms, said Joseph Sciolla, whose Cresa Partners exclusively represents tenants. Sciolla, who said he has also heard many landlords express concerns about being top heavy with technology companies in their buildings, suggests that any companies that can should delay their lease agreements to see what does happen down the road.

I do envision new supply coming out over the next 18 months from companies giving up space because they are no longer in business, Sciolla said. It’s just a natural evolution that’s happening out there right now.

Landlords Tempering Dot-Com Love Affair

by Banker & Tradesman time to read: 3 min