In the world of commercial real estate, it appears there will be no rest for the weary – or the wary – in 2005.
Coming off the busiest year ever for commercial property sales, many Massachusetts investment professionals are bracing for a frenzied start to the new campaign, with dozens of assets in the pipeline getting carried into 2005 even as owners prepare to bring fresh inventory to the trading block. But while the sales sector appears to have lost none of its momentum, the struggles dogging the leasing market and certain property types such as flex buildings also seemed to be lingering last week as 2004 struck midnight.
“Things don’t look overly bright for jobs and growth,” observed Boston real estate icon William F. McCall Jr., who is forecasting “status quo, with rents either holding steady or maybe even falling a little bit.”
Others registered similar concerns, including CRESA Partners principal Joseph Sciolla, whose tenant representation firm still considers its clientele to be in the driver’s seat when negotiating new lease terms. Landlords will likely have to remain competitive on rates and offer such concessions as lofty tenant improvement allowances or free rent, according to McCall, while CRESA said low-rise office space in Boston could see rents drop even further in the coming months.
Spaulding & Slye Colliers is slated to reveal its year-end 2004 figures this week, and most indications are that Boston will register nearly 1 million square feet of negative absorption for the year and post the highest vacancy rate for the Hub in more than a decade. Although suburban markets have fared considerably better, many communities remain burdened by excess space and lukewarm demand as 2005 arrives, particularly those in fringe areas such as Interstate 495 North that relied heavily on technology firms to fuel growth in the late 1990s and into 2001. With some 80,000 high-tech jobs having disappeared in the Bay State since the recession began, submarkets from Westford to Wakefield have shown little sign of recovery despite a few encouraging transactions completed late in the year.
The flight-to-quality trend has hastened a rebound in core markets such as Lexington and Waltham, helping the latter community drop its vacancy rate from the mid-30 percent range at the start of 2004 to about 24 percent by year’s end. Framingham even witnessed the rarest of sights when one firm opted to construct a new $10 million headquarters at 9/90 Corporate Center rather than lease space at the plethora of nearby office properties offering the estimated 55,000 square feet that the company, Amerifee, will occupy in its new address.
Life sciences firms helped prop up the Bay State’s commercial real estate sector last year, with several significant deals inked, although a glut of new laboratory space coming on line conspired to send vacancy rates upwards even in popular markets such as East Cambridge. That distressing trend has not dampened optimism for the coming year, however, with observers predicting that the arrival of such international medical giants as Novartis AG will produce greater laboratory activity in 2005 throughout Cambridge, Boston and beyond, especially suburban communities along Route 2.
One tantalizing life-science space requirement left over from 2004 is the Fresenius Medical Care search for approximately 200,000 square feet. As reported by Banker & Tradesman in November, the firm has been exploring possible locations in the Waltham/Lexington market, apparently with an eye towards staying put near its current location at 95 Hayden Ave. in Lexington. Firms such as Cummings Properties in Woburn and other landlords have pursued the biotechnology and medical device industries aggressively in the new millennium, and many have indicated they will continue that approach in 2005.
Quick Start
Regardless of the weak real estate fundamentals and dour projections for the Hub over the near term, the fervor to buy commercial properties has only increased in recent months. Normally, the first quarter is among the quietest for sales activity, but with dozens of significant assets still wending their way through the pipeline late last week, industry professionals are expecting to hit the ground running in 2005.
“It will be busy right out of the gate,” acknowledged Cushman & Wakefield of Massachusetts President Robert E. Griffin Jr., whose firm traded $2.2 billion of assets in 2004 but still has several high-profile deals in the works, including the Riverfront Office Park in Cambridge and the Bay Colony Corporate Center in Waltham. But it will not just be leftovers on the plate; according to Griffin, several prominent buildings are slated to hit the street in the first half of 2005
If that proves to be the case, there should be plenty of interest among potential buyers and more than enough funds around to finance purchases. “Capital continues to flow in an unprecedented way,” said George J. Fantini, a principal of Fantini & Gorga/iCap Advisors in Boston who reports that such money is available at reasonable terms that can fit the structure of most transactions.
“It’s an extraordinary time for borrowers,” said Fantini, with all manner of debt and equity sources available, including hundreds of mezzanine funds more than willing to participate in commercial property deals. Conduit lenders have become a major force in the industry as well, said Fantini.
“They are here to stay, and that is very good news for borrowers,” said Fantini, who maintains that conduits are doing a better job of improving workout flexibility and other issues. Even with such shortcomings, Fantini said default rates on conduit loans, as well as for traditional notes, have been encouragingly low despite the real estate market’s lingering difficulties.
Despite the general optimism, some offered mixed reviews of the coming year, including CRESA. Route 128 and technology-related markets could see improvement, said Sciolla, but his firm still anticipates that the region will be hurt by overseas job exporting and another wave of sublease space which hit the city in force in 2004. “We’re going to be stuck in the trough for at least another year,” Sciolla said in releasing his firm’s forecast. “To a limited extent, vacancy may still rise and rents may still fall.” With the weak employment outlook, Sciolla concluded that “Boston will remain near the bottom of major commercial real estate markets nationwide” in 2005.
