Investors Bank & Trust signed a 200,000-square-foot lease renewal and expansion at Copley Place in Boston’s Back Bay area during the first half of this year, helping to lower the area’s vacancy rate.
After about three years of double-digit vacancy rates, Boston is attracting companies from the suburbs and the market is starting to favor landlords rather than tenants.
The cachet of being in Boston has pushed the vacancy rates to single-digit levels that have not been seen since 2002, and areas like the Back Bay and the Seaport District are booming, according to commercial real estate experts. A decline in vacancy rates was evident after the first half of the year, and they are continuing to fall, pushing up rental rates.
“There has been significant movement in rental rates,” said Andy Hoar, president and co-managing partner at CB Richard Ellis-New England.
The general expectation, most of the way through the third quarter of 2006, is that the pace of rising rental rates will pick up, he said. According to CB Richard Ellis, the vacancy rate in Boston was 9.4 percent after the second quarter of this year, down from almost 11 percent in the first half of the year. A total of almost 300,000 square feet of space was absorbed in the second quarter.
“Much of the declining vacancy can be attributed to a combination of suburban tenants relocating to the city, in conjunction with significant growth for midsize companies,” according to a quarterly report from CB Richard Ellis. “Indications are that this market will continue to tighten, as landlords are seeking higher rents on premium Class A space with Class B rents following suit.”
Research from Cushman & Wakefield shows a slightly higher vacancy rate for Boston. According to the firm’s statistics, the vacancy rate in the central business district was 12.1 percent at the end of the second quarter, down from 14 percent at the end of the second quarter of 2005.
The Seaport District and the Back Bay stood out in the first half of the year, according to Hoar. In the Back Bay, Investors Bank & Trust signed a 200,000-square-foot lease renewal and expansion at Copley Place, and IXIS Asset Management Group renewed 94,000 square feet at 399 Boylston St.
“That’s a significant sign of health in the Back Bay,” Hoar said.
The vacancy rate for the submarket was 8.3 percent at the end of the second quarter, according to CB Richard Ellis. There is a continued renaissance in the neighborhood, he said.
‘So Much Activity’
The Seaport District also is outperforming many other submarkets in Boston, Hoar said. The vacancy rate at the end of the second quarter was 11.5 percent, but development continues at a fast pace.
“There’s so much development activity going on down there because of projects like Fan Pier,” Hoar said. In the early 1990s, the Seaport District was a submarket that was struggling, but with the infrastructure and support that has since been added, it has become a much more interesting neighborhood, he said. There were some impressive leases signed during the first half of the year on Summer and Congress streets, Hoar said, adding that he has seen more of the same in the third quarter.
Fidelity Investments absorbed 110,329 square feet in the World Trade Center West building during the second quarter, according to a report from Jones Lang LaSalle, and several midsize transactions increased year-to-date net absorption to 107,631 square feet.
Both the vacancy and availability rate in the South Boston Waterfront area declined to noteworthy lows during the second quarter of 2006, reaching 12.4 percent and 12.5 percent, respectively. The availability rate shows a 6 percentage point drop over the last year, a significant decline, and is at its lowest level in six years, according to Jones Lang LaSalle.
“Average asking rents actually fell slightly during the quarter but remain in line with improving market fundamentals and mirror the $25.50 per square foot gross rate achieved in the second quarter of 2005,” according to the company’s report. “The Fidelity transaction successfully removed the last block of Class A space from the market, bringing the availability rate to zero, the primary reason for the slight decline in average asking rent. Meanwhile, the Class B market saw its availability rate increase to 15.7 percent from 14.2 percent in the previous quarter, predominately due to the reemergence of 451 D St. [as an office building]. Average asking rents for Class B space shifted upward to $25.87 per square foot gross, a 9 percent jump from one year ago.”
Experts at Jones Lang LaSalle say they expect the South Boston Waterfront to continue to make headlines, since several new developments have been proposed there. There has been no slowdown in investment and development activity.
The Boston Redevelopment Authority recently approved a master plan for the Fort Point Channel area, which entails nearly 6 million square feet of new development at a 100-acre site along the South Boston Waterfront.
“The BRA’s decision could potentially result in $2 billion worth of development projects and the transformation of the former warehouse district into a new neighborhood of offices, retail stores and housing,” according to the report. “Also making news recently is tower builder John Hynes’ plans to acquire a 20-acre site near Pier 4 that was sold earlier this year to News Corp. for approximately $145 million. These projects will expand the existing office supply, significantly enhance the area and attract tenants.”
The overall outlook for Boston is favorable, although the job market could present some problems.
“Realistically, you would have to say that job growth is streaky,” Hoar said. Still, he added that he expects about 1 million square feet of absorption in 2006.
Class A space is doing particularly well, as premier space is demanding rents of more than $60 per square foot, according to CB Richard Ellis.
“Rising rents, coupled with scarce large blocks of available space and no immediate office development on the horizon, leaves large Boston tenants with limited options until new projects are delivered in the 2009 to 2010 time frame,” according to the firm. “Demand for space in the Boston office market remains decidedly active, with 220 companies seeking 4.2 million square feet of space. A breakdown of the overall demand from a historical perspective shows similar demand from the second quarter of
2005. Growth among Boston’s small and midsize financial services companies and law firms accounts for roughly 56 percent of the overall office demand in the downtown office market.”
