For four consecutive quarters, vacancy for office space in Boston has declined slightly while rates have inched upward – a trend we expect to continue at a slow and deliberate pace for the foreseeable future. Downtown vacancy now stands at 12 percent – basically a state of equilibrium for the commercial real estate market, or one in which tenants might still wield a bit more leverage. Yet major landlords seem to have a different perspective: They’re starting to push the envelope in an attempt to wrestle control away from tenants, who have enjoyed their pick of space and terms for years.

In this environment, it is important for corporate tenants to study the true dynamics of the market and challenge overzealous landlords, who may be setting prices that exceed their value, while they also attempt to slash tenant concessions.

The fact is that eight landlords now control approximately 84 percent of the market in the Financial District and the Back Bay. Equity Office (8.5 million square feet), Tishman Speyer (2.6 million square feet), Beacon Capital (4.2 million square feet), Boston Properties (2.5 million square feet), Brookfield Properties (1.9 million square feet), Chiofaro Co. (1.8 million square feet), Rose Assoc. (1.1 million) and SITQ/Immoblier (785,000 square feet) account for a combined inventory of 23.56 million square feet of Class A office space in the downtown market with a total of 28 million square feet.

With a relatively small number of landlords controlling the lion’s share of the market, we don’t exactly have a level playing field. This is a far cry from a few years ago, when there were low capitalized values, low interest rates and about 30 landlords had a much more even distribution of space. Back when the market was booming, many owners made huge investments – in many cases overpaying what buildings were worth. Then came the dot-com crash and investments went south. Today, many landlords think it is payback time.

These landlords typically work with listing brokers, from large, traditional real estate firms, who are trying to drive tenants to their buildings. They know the listing rates of competitive properties on the market and, as space continues to tighten, they are in a position to somewhat arbitrarily set inflated prices, particularly for prime real estate (especially view space) and large, contiguous blocks of space (only five options over 100,000 square feet are now available). For high-rise space, optimistic landlords will attempt to fetch $60 per square foot by year’s end. A related phenomenon is that more institutional investment companies are buying properties, and they are also controlling the tenant base.

Getting Real

But before anyone buys into the notion of runaway corporate rents and feeding frenzies, a cold, hard look at market dynamics in the fourth quarter is in order:

• Asking rents for Class A office space now average $43 per square foot, up one dollar from last quarter;

• Asking rents for Class B office space, after a slight rise for two quarters, are holding steady at $31 per square foot;

• The Financial District experienced approximately 450,000 square feet of positive net absorption in the second quarter;

• Renewals and expansions under 25,000 square feet continue to represent the majority of leasing activity; and

• There are approximately 150 active requirements in the downtown market, representing about 3.5 million square feet of tenant demand.

Indeed, there are other mitigating factors regarding the real estate bounce-back, leading to the reasonable conclusion that the market is not experiencing a dramatic shift so much as a slow-but-steady return to normalcy:

• Job growth continues at a very slow pace and this, more than anything else, impedes the speed of the real estate recovery;

• More home offices and flexible work environments keep down the headcount in offices;

• Along with a slight increase in velocity, higher rental rates are tied to higher construction costs (about a 25 percent increase this year), which landlords would like to pass along to tenants;

• More employees are leaving the state than are moving here; and

• Rising interest rates will put a lid on inflated purchases.

Tenant Tips

So where does this leave office tenants? To protect themselves, they need to conduct due diligence – studying the market and the unique conditions in their buildings so they can improve their negotiating power. In this light, it is important that landlords perceive that tenants are being proactive and are not resigned to inflated rates and terms. Even if tenants are not aggressively scouring the market for new space, they should remember that they are engaged in a chess match and they don’t want to hesitate or emit the scent of uncertainty.

Most of all, tenants need to put their interests first. That often means finding the right corporate real estate advisors and project managers who perform value engineering to determine cost-cutting measures. An objective advocate who exclusively represents tenants will avoid conflicts of interest and give tenants more options and opportunities to save money.

Looking ahead, history shows that the pendulum will slowly swing in favor of landlords. So, while tenants aren’t advised to act precipitously, they should consider where the market is headed and how long it takes to complete a transaction. In so doing, they may decide that it’s better to lock into still-favorable terms now, than to really lose control later on.