The $89 per-square-foot sublease at 125 High St. by Liberty Financial Group in 2000 was a high-water mark for Boston office leases involving more than 20,000 square feet of space.

In some respects, the story of last year’s record run-up in office rents may ultimately prove to be a reverse game of musical chairs, with those “winners” who persevered in locking up scarce space now perhaps wishing that landlords had found other candidates.

Office rents in Boston have plummeted dramatically during the past four months, with some estimates placing the drop at between 10 percent to 20 percent. That contrasts sharply to last summer, when rates were escalating so quickly that brokers joked of a “morning price and an afternoon price” being demanded by giddy property owners.

Before that furor subsided near the end of the third quarter, there certainly were a number of hefty rental rates achieved, although the ballyhooed $100 per-square-foot mark pursued by Equity Office Properties never came close to fruition. While some so-called “boutique deals” for a few thousand square feet may have stretched into the low $90 range, most brokers spoken with said the highest rate achieved over 20,000 square feet was the $89 per-square-foot sublease at 125 High St. by Liberty Financial Group.

“I think that generally is viewed as the high point in this market,” acknowledged a source close to the deal. Nortel Networks also supposedly had a 20,000-square-foot lease at One Boston Place price into the upper $80 range, space that is now being offered for sublease by the struggling technology company.

“They certainly don’t look very smart on that one,” one Boston broker said of Liberty Financial, maintaining that the company got locked in a bidding war with other tenants in the building. At one point, the competition among companies was so fierce that many landlords began holding space auctions, especially for desired tower locations.

Just a few months later, there appears to be two potential victims of last summer’s surge. Along with the firms left paying rents well above market averages are the landlords who, for whatever reason, held off on doing deals. According to brokers, those reasons could have simply been an inability to respond to the flash flood of rental spikes in time, while others apparently gambled incorrectly that the rise would continue indefinitely.

One block of space that some feel missed the mark is that being offered by John Hancock Financial Services at its landmark Hancock Tower in Boston’s Back Bay. The insurer has steadily been consolidating its own space in recent years and has begun leasing much of the excess supply to third-party tenants. Although company officials did not provide requested comment or figures on the issue by Banker & Tradesman’s press deadline, sources estimate that several hundred thousand square feet was being marketed, a good portion of which is supposedly still available.

One broker claimed Hancock was too aggressive in its pricing. A client of the broker “wanted to expand [in the tower], but they just couldn’t make the numbers work.” Another blamed senior management for taking too long to decide which floors should be offered to outside tenants.

One firm which appears to have had mixed success from the fluctuations is Verizon Communications, which subleased to Liberty Financial its record-setting space at 125 High St. According to sources, the recent downturn has prompted Verizon to back off from plans to sublease upwards of 350,000 square feet in the 1.4 million-square-foot complex. Although company officials have previously said they were unsure whether they would take that course, industry sources insist the firm was actively peddling the space until the market soured.

CB Richard Ellis/Whittier Partners broker David Fitzgerald, who represents Verizon, declined comment last week about the situation, except to confirm that the company does have the seventh floor of the Oliver Street tower at 125 High St. on the market. That accounts for 25,000 square feet, he said.

One broker familiar with Verizon said the company was eyeing rents in the $70 per-square-foot range, but said that rate is no longer attainable. The new approach seems to be one of quietly targeting selected tenants to gauge interest, the source said, maintaining that “there will not be the shotgun approach to the market that they were doing before.”

‘Abrupt’ Drop
Despite Verizon’s failure to sublease most of the space at 125 High St., most observers spoken with said they do not see that as a tactical error, simply because the change in rents was unprecedented.

“No one thought the demand side was going to drop off a cliff like it did,” said McCall & Almy principal David Richardson, a notion seconded by Codman Co. principal Ted Wheatley.

“It’s very hard for anyone, even the brightest forecasters, to predict demand would drop off so abruptly,” he said, adding that the situation should also be taken into perspective. Although there was space left over once the market cooled, and there has certainly been a slippage of rates, Wheatley said the average is still well above that of two years ago.

Others, such as International Place developer Ted Oatis, claim the upper end of the office market has fared even better. “We haven’t seen any change in rental rates here at International Place,” said Oatis, whose property is usually among the city’s leaders in that regard. If anything, Oatis said, “We’ve experienced a plateau.” Oatis predicts that conditions will improve by the time the twin-tower complex has any sizeable space to offer.

Nonetheless, brokers such as Richardson agree that Boston as a whole is considerably slower than a year ago in office activity. Much of the reason, he said, can be attributed to the increased space options for tenants. Whereas a year ago a company needing space in Boston’s Back Bay had no alternatives, Richardson cited eight options out there today. Because of that, he said, both sides of the pendulum are waiting to see which way it shifts next.

“Right now, there’s very little urgency for tenants,” Richardson said. “They think the longer they wait, they may get a better rent deal. I’m not sure I disagree with them.”

Spaulding & Slye Colliers broker William P. Barrack agreed that it has been a brutally slow start in 2001, but added that he believes “we could still have a very good year.” With the economy appearing to stabilize, Barrack said he believes companies will feel more comfortable in taking space. One change expected, he said, is that users needing 5,000 to 30,000 square feet will drive the activity in 2001, as opposed to the mega-deals prevalent last year.

“It’s different, but I think you will see [demand] build over the summer,” he said. “Activity is already picking up as people get more confident with their business plans, and that is encouraging.”