LISA M. CAMPOLI
‘Another great year’

From Meredith & Grew President Thomas J. Hynes Jr.’s opening remarks through the closing keynote address by former Boston Redevelopment Authority chief Stephen Coyle, negativity was in short supply at the “Trends in the Real Estate Market” seminar held last Thursday at the Hub’s Copley Marriott. It was the 27th annual industry overview sponsored by Meredith & Grew, and featured Coyle as a guest speaker for the second time after his appearance at the 1985 program.

Massachusetts “is extremely vibrant and resilient,” Hynes said in launching a program that featured capital markets guru Kevin C. Phelan, investment sales broker Lisa M. Campoli and Theodore J. Chryssicas, who delivered an assessment of the retail environment, still one of the industry’s best performers. While the region’s economy has been otherwise ravaged in the new millennium, Meredith & Grew Executive Vice Presidents Ronald K. Perry, Joseph P. Flaherty and James L. Elcock all delivered upbeat prognostications regarding office and laboratory properties in 2006 for their respective beats.

“Boston’s office market is back,” said Perry in his report on the city’s 57 million-square-foot market after an unprecedented 6 million square feet of leasing velocity in 2005, 25 percent of which represented actual expansion. “Companies both large and small stepped up this past year to lease space, and they grew,” said Perry, whose firm tracked 250 separate lease transactions in the city, 60 percent of which were relocations, a reversal from 2004 when 60 percent of the deals were renewals fueled by motivated landlords. With recovery finally on the horizon, landlords are less willing to offer aggressive terms, Perry said.

Net absorption of 2 million square feet last year was double the average and somewhat unexpected, said Perry, adding that the achievement of a $50 per square foot rent in the Back Bay was also a pleasant surprise for those hoping for rental rates to firm. Such was the case last year, said Perry, particularly for space above the 20th floor, which now has a vacancy rate of 4.25 percent and average asking rent of $39 per square foot to $55 per square foot. That compares to an 8.25 percent vacancy and price range of $33 per square foot to $38 per square foot below the 20th floor.

Given the recent resurgence, and a dearth of large blocks of space, new construction could be a possibility in the coming months, said Perry. “It looks like it’s time to build,” he said, suggesting such Boston projects as Fan Pier, Russia Wharf and the Hines Interests long-awaited South Station mixed-use development as the most likely candidates to break the current drought of new Boston construction.

Across the river in Cambridge, the office market had a solid 2005, but only the laboratory sector has a need for new space, said Flaherty, a specialist in that 18.2 million-square-foot market, 10.8 million square feet of which is office space. At 1.2 million square feet of net absorption overall in 2005, the city’s commercial real estate market began to resemble the “go-go years” of the late 1990s, said Flaherty, adding that the fourth quarter was especially robust. Technology companies continue to struggle in Cambridge, however, as evidenced by such off-beat tenants as a cooking institute and charter school being among the leading consumers of office space in the city last year. There were also several large office leases by life sciences companies, said Flaherty.

As for laboratory space, Cambridge saw the vacancy rate fall to 10.1 percent in 2005, but Flaherty explained the figure is even tighter given that most of the existing space is in smaller chunks difficult for one firm to assemble cogently. “We expect single-digit vacancies very soon,” Flaherty said of the laboratory market, with the situation so tight it could lead to new construction. Lyme Properties is already trumpeting a speculative project on Binney Street, he noted, while the Bulfinch Cos. can erect upward of 600,000 square feet in Cambridge’s Alewife district.

‘The Red Zone’
In suburban Boston, construction cranes are also a very real possibility in 2006, said Elcock, particularly in core communities such as Wayland, Newton and Waltham that have seen a promising rebound of late. “The rental rates needed to justify new construction are approaching the red zone,” said Elcock, with some analysis indicating rates could soon hit the elusive $40 per-square-foot range for prime suburban assets, especially those recently acquired as part of the investment market frenzy. New owners often try to push rental rates, said Elcock, and that appears to be happening more frequently.

Among the many encouraging signs in 2006 was the diversity of industries that grew in the suburbs last year, said Elcock, from defense and consumer firms to technology, life sciences and corporate companies, although the Class A sector continued to receive most of the tenant activity. But while Class B properties have been largely ignored, Elcock said he believes opportunistic developers will look at redevelopment of older assets as a way to garner greater returns and prepare for the anticipated economic rebound.

In reviewing the investment market, Campoli called 2005 “another great year” in a string of above-normal sales of commercial real estate. Fears that rising interest rates would curb activity in 2005 proved unfounded, said Campoli, adding that there is little talk of such an occurrence for 2006, although it appears further compression of capitalization rates is unlikely after such levels dropped to all-time lows in 2005.

Capital continued to flow into real estate last year because alternative investments remain unattractive, said Campoli, but the real change last year was the improvement in market indices such as vacancy rates and positive net absorption throughout the region. “We finally had an alignment of capital demand and leasing fundamentals,” said Campoli, predicting “more of the same” for 2006, especially if rising construction costs threaten to forestall new development.

“All that does is enhance the value of existing real estate assets,” noted Campoli, who said Boston proper had $1.1 billion of commercial property trade in 2005, while another $1.3 billion is now pending.

Retail sales were also brisk in Massachusetts, said Chryssicas, who noted that the region has the seventh-largest concentration of retail real estate in the country at 170 million square feet. Although sales were up 3 percent locally last year, Chryssicas warned that the asset class remains “survival of the fittest,” with new concepts emerging to threaten former ideas such as big-box construction. Lifestyle centers have become popular locally, he said, citing the Wayside Commons project under way in Burlington as one example. In that instance, a former office property was torn down to make way for a new shopping plaza that will feature LL Bean and the Capital Grille among its tenants when it opens later this year.

Geographic limitations are fomenting creativity, said Chryssicas, citing Loew’s building parking on top of one property to accommodate a difficult site. Smart growth and retail in mixed-use projects are also on the rise in the retail arena, added Chryssicas.

Meredith & Grew’s Financial and Capital Markets Group enjoyed a banner 2005, Phelan said, with the division exceeding $1 billion from various placements and in a number of vehicles such as acquisition, mezzanine and construction financing. That is about double the group’s normal pace, said Phelan, whose clients took the company as far afield as Texas and Washington state to complete transactions.

The office market “is very much reloaded,” said Phelan, with 45 percent of his group’s business concentrated in that area last year. Condominium lending was also popular, while the hotel market has rebounded strongly, Phelan reported. On the money side, the lines are often “beginning to blur” on what lenders will participate in, with life insurance companies increasingly writing construction loans, for example. Commercial mortgage-backed securities have become “the elephant in the room,” said Phelan, accounting for about one-third of Meredith & Grew’s production last year. Should conduit lending solve certain structural issues, such sources could become an even bigger player, Phelan also advised.

Having been chief executive officer of the AFL-CIO’s Housing Investment Trust since 1992, Coyle’s return from Washington, D.C., was spent debunking general theories that Massachusetts has seen its best years and will struggle in the new global economy, insisting that his native state has the wherewithal to reinvent itself. The city has the skilled labor, corporate presence and leadership to propel the region into the 21st century, he said, maintaining that “there are more people in this city that know how to get things done than any other city I’ve ever been involved in.”

Coyle also implored the local business community to rally around the rebuilding of New Orleans and the southern United States in the wake of last year’s Hurricane Katrina disaster. “It’s unbelievable what you see there,” said Coyle, who recently visited the area and reported destruction of untold proportions that could cost upward of $80 billion to repair.