Leases totaling more than 2.5 million square feet have been inked so far this year in Boston, including Investors Bank & Trust’s pact to occupy 350,000 square feet of space at the John Hancock Tower and another 150,000 square feet at the adjacent Copley Place (above).
It is smart to be educated, and the Bay State’s knowledge-based economy offers the greatest hope for a recovery in the commercial real estate market, panelists said last week at a midyear overview at Boston’s Hyatt Regency. The event was co-sponsored by the Society of Industrial and Office Realtors and the National Association of Industrial and Office Properties.
“We have to compete on quality,” stressed moderator Douglas M. Poutasse, while speaker Robert B. Richards Jr. maintained that the region is better prepared to attract and retain life science research jobs than manufacturing positions. “That’s [manufacturing] not ever going to be a driver of our economy,” said Richards, whose presentation concentrated on the Cambridge office and laboratory market.
Poutasse, chief investment strategist at AEW Capital Management, proclaimed himself a pessimist but strained to offer positive elements of the market. Higher defense spending should bolster Massachusetts going forward, he said, and the hotel sector appears to be in the second stage of recovery, with revenues and average daily room rates on the upswing. And although the high-technology bust was difficult on the area, particularly along Interstate 495, the woes have been even more acute in California, noted Poutasse, explaining that San Jose has lost more jobs than Detroit did during the auto industry meltdown of the early 1980s.
In his assessment of the Boston office scene, Codman Co. principal Robert B. Cleary Jr. reported 120,000 square feet of net absorption in the first half of 2005. Some 250,000 square feet of negative absorption in the Financial District was offset by a robust stretch in the Back Bay, a 14.3 million-square-foot submarket that enjoyed 430,000 square feet of net absorption. The overall office space inventory of 65.4 million square feet is at 15.1 percent vacancy, according to Codman, with the Back Bay 11.9 percent vacant but the Financial District up to 16 percent.
Given the loss of tens of thousands of jobs since 2001, Boston’s office market has seen its share of trouble in recent years, but Cleary insisted that the climate is finally improving, especially for high-rise space. By his firm’s estimates, supporting other industry surveys, office space on the 20th floor and above in Boston office towers is presently under 6 percent. There has even been rent appreciation in select buildings, said Cleary, including one lease just completed at International Place exceeding $50 per square foot.
“That’s a good sign for the marketplace and for owners in the city,” said Cleary, who predicted that “the tenant window is going to close pretty quickly.” More than 2.5 million square feet of leases have been inked to date this year, headlined by the Investors Bank & Trust commitment to 350,000 square feet at the John Hancock Tower and another 150,000 square feet at the adjacent Copley Place. Going by Codman’s research, there are 212 tenants seeking space in Boston at present, accounting for 5.3 million square feet of potential requirements. The average need is about 25,000 square feet, suggesting that “the entrepreneurial companies are driving a considerable amount of demand,” said Cleary.
Laboratory leasing in Cambridge has been slower than the office market there, said Richards, who added that the latter sector has now posted positive absorption in five of the past six quarters, dropping the midyear vacancy rate in East Cambridge to 18.2 percent. The smaller mid-Cambridge submarket vacancy rate is at 7.8 percent, and West Cambridge is down to 20.8 percent following completion of a 27,000-square-foot agreement at 10 Fawcett St. by Cambridge Trust Co. In one of Cambridge’s larger leases of the first half of 2005, cooking school Le Corden Bleu took 73,000 square feet at 215 First St.
Despite those deals, Cambridge has several substantial blocks of space available for both office and laboratory users. The 215 First St. property still has 150,000 square feet of office space to lease, while Four Cambridge Center has another 73,000 square feet and CambridgePark Drive is peddling 56,000 square feet. The laboratory arena has had 78,000 square feet of net absorption this year, but large blocks remain available in those properties as well, including 640 Memorial Drive, 675 West Kendall St. and 500 Technology Square. One lure for Cambridge may be a flattening of the lease differential between the city and the suburbs, a gap that Richards said has never been shorter.
“At this point, there may be better value in East Cambridge than there is out [in Boston’s western suburbs],” said Richards, although much of Cambridge’s office leasing velocity this year has been internal relocations. The opportunities in the central research area have likely contributed to the office market’s problems along I-495, panelists also said, with that market traditionally relying on Cambridge spillover.
Safe Harbor
Focusing on the suburban office market, R.W. Holmes President Garry Holmes cited disparities throughout the region, with the Central Route 128 region improving dramatically while others such as I-495 face a long road ahead to recovery. According to the Holmes report, the suburban office availability rate is 23.9 percent overall, but just 21.7 percent in the Central Route 128 stretch. “That really is ground zero,” said Holmes, maintaining activity there portends improvement elsewhere. “Once we see progress in that submarket, it really mushrooms out,” he said.
Route 128 North registered an availability rate of 26.9 percent, compared to 23.5 percent for Route 128 South. The cream of the crop on performance continues to be Framingham/Natick, however, with Holmes putting the availability rate there at just 5.7 percent. “That market is on fire,” he said, particularly compared to 50 percent availability levels seen there in the last commercial real estate downturn in the early 1990s. Diversification of its business base has greatly helped the submarket, Holmes explained, with the area today sporting such firms as Genzyme Corp., TJX Cos. and Staples.
As Framingham and Natick proved, communities can reinvent themselves, said Holmes, adding that there has been some improvement in the suburbs at the outset of 2005. Still, Holmes cautioned that the 10 million square feet of supply needed to reach 10 percent vacancy could take as much as five years to accomplish.
On the industrial front, panelist Catherine Minnerly of Cushman & Wakefield said a slow beginning to the year has given way to a brisk spate of deals. “It’s very active and busy out there right now,” said Minnerly, although a vacancy rate of 18 percent overall remains higher than normal for the industrial sector. Auto parts, consumer goods and service firms such as O’Charley’s Restaurant chain have kept the industrial sector moving along, she said, with several deals “being penciled out” at present.
On the investment sales side, the acquisition of nine buildings at Shawmut Park in Canton by Leggat McCall Properties for $29 million was among the top industrial transactions of 2005, with the new owners expected to convert a portion of the park into industrial condominiums. Responding to a follow-up question, Minnerly said the industrial condo is arriving swiftly in Massachusetts after success in other parts of the country, adding that such communities as West Bridgewater, Avon and Mansfield are all currently entertaining such uses.
Trammell Crow Co. principal James F. McCaffrey provided an overview of the real estate investment business, one which continues on a blistering pace for nearly every product type. An eye toward converting to residential space has brought new life to nearly 2 million square feet of older office and warehouse buildings, said McCaffrey, while the search for a safe harbor for investment capital is drawing interest for even lower rated assets. Indeed, the definition of a core real estate deal has eased significantly in recent months, said McCaffrey. Once demanding good tenant credit, solid building quality, extensive lease terms and a price below replacement cost, core deals are now being defined by “one or one-and-a-half” of those criteria, said McCaffrey.
Regardless of the increased risk or need to select off-center opportunities, capital flow remains intense, said McCaffrey, estimating another $300 million of property will change hands in Greater Boston during the next 45 days alone. The appetite is bringing capitalization rates down below 6 percent for many deals, said McCaffrey, with investors increasingly willing to accept lower yields.
