Gary J. Lemire (left) and Gregory H. Cahill were part of a panel that last week sought to predict conditions likely to exist in the Greater Boston commercial real estate during the coming year.
Massachusetts is still looking a little blue from the latest recession, but there is plenty of green chasing commercial real estate here anyway, according to panelists at an industry forecast delivered last week in Boston.
“Investors want to be here,” said speaker Gary J. Lemire, who estimated that Greater Boston will record $4.2 billion worth of office building transactions in 2005, some 43 percent higher than the $2.7 billion average of the past five years. The increase mimics national trends, said Lemire, citing data from Real Capital Analytics, while Massachusetts industrial properties are expected for the first time to exceed $900 million in sales velocity.
A principal and investment specialist at CBRE/New England, Lemire was among six professionals featured in the annual commercial real estate program, co-sponsored by the Society of Industrial and Office Realtors and the National Association of Industrial and Office Properties. Held last Wednesday at the Hyatt Regency in downtown Boston, speakers included economist Hans Nordby and brokers Charles S. O’Connor, Joseph P. Flaherty, Tamie R. Thompson and Gregory H. Cahill.
Partly due to inadequate alternatives to place capital, the ardor for buying real estate locally is well ahead of an actual market recovery, most of the panelists acknowledged. The national office vacancy rate of 12.5 percent for downtown areas and 15 percent for the suburbs are both healthier than the Massachusetts rates, said Lemire, yet investors have seemingly ignored such figures. In the past few weeks alone, Boston’s 101 Arch St. traded for $121 million, the nearby Ten/10 Post Office Square was put under agreement for $110 million and a New York investor committed to buying the Prospect Hill Office Park in Waltham for $63 million.
Nordby was among those cautioning about irrational exuberance going forward. Massachusetts is expected to see 1.3 percent job growth in 2005, the first gain in several years, but the Property & Portfolio Research Inc. researcher said most of the 54 markets tracked by his Boston-based company are well ahead of the Hub in that regard, adding that the state’s declining population and high living costs are ingredients of markets that are floundering, and threaten difficult times ahead here and in Cleveland; San Jose, Calif.; and Stamford, Conn., as well as other “rust-belt” communities.
“There is stuff to worry about,” said Nordby, maintaining the economic drivers of the past such as technology and defense have departed for other climes in the Southwest and Seattle. “We’re not betting on a new Internet” bringing the region back, Nordby said. The industrial market faces similar difficulties, Nordby advised, as both manufacturing and warehousing operations are being shifted elsewhere, including new distribution facilities in the mid-Atlantic states.
Program moderator Robert J. Nahigian Jr. offered similar warnings. “We are competing not just with the United States, but with other parts of the world,” he said, suggesting “China Inc.: How the Rise of the Next Superpower Challenges America and the World” as a topical book audience members might want to explore. Other trends also are problematic for the office sector, he said, including the excess space that could be left behind when baby boomers begin retiring, a phenomenon that Nahigian noted is just weeks away from beginning when the first of that generation reach 60 years of age.
Other speakers at the market overview also acceded that Massachusetts faces challenges ahead, with Cahill predicting only lukewarm improvement in the industrial and flex markets during 2006 and Flaherty indicating that the Cambridge office market has struggled of late. “Demand feels a little thin right now,” said Flaherty, so much so that the arrival of a cooking school, Le Cordon Bleu, into 73,000 square feet in East Cambridge has been the largest single “office” lease in the city this year.
Flaherty put the current Cambridge office vacancy rate at 17.8 percent. While higher than desired, the figure is down from the peak of 23.5 percent reached in 2002 and the 21.2 percent mark seen at the start of the year. An executive vice president at Meredith & Grew Oncor, Flaherty noted that asking rents are up slightly in Cambridge, from $24.96 per square foot to start 2005 to $26.46 through the third quarter.
‘A Good Place to Be’
Flaherty had even better news in Cambridge’s separate laboratory market, announcing that a surge of recent activity could result in more than 800,000 square feet of net absorption this year should several pending leases be inked in time. If they are completed, the current vacancy rate of 14.1 percent in the 7.8 million-square-foot market would plunge below 9 percent, said Flaherty, offering enough optimism that landlord Lyme Properties is even considering a speculative laboratory building that would deliver another 450,000 square feet to the market.
“They are very, very courageous,” Flaherty said of the developer’s intentions, although he agreed that the city has been aided by recent growth among major pharmaceutical companies with a presence in the market. Currently, he said, there is just one laboratory opportunity for prospective tenants in Cambridge with contiguous space exceeding 100,000 square feet, setting up the prospect of future build-to-suit development projects.
Downtown Boston has not recovered in rental or vacancy rates since the peak of 2001, said O’Connor, a principal with Trammell Crow Co. who predicted the magical 10 percent vacancy rate will not again be seen until 2009 or 2010 and put the average Class A rent at $40 per square foot, well below the peak average of $56 per square foot a few years ago. Battered by the recession, Boston’s office market has essentially weathered the storm, maintained O’Connor, who said the impact of corporate mergers has not been as harsh as expected. He noted that the estimated $20 billion worth of public investment in the city such as the Big Dig project and cleanup of Boston Harbor offers additional benefits for the city.
“I happen to think longer-term it [Boston] is a very good place to be,” O’Connor said. “The pluses certainly outweigh the minuses.” Landlords should be encouraged by the barriers to building new office space, he said, adding that the region’s educational and cultural aspects offer further attractions.
Thompson focused her remarks on suburban Boston’s office market, one which the Spaulding & Slye Colliers principal said is in a sporadic recovery. Although areas such as Central Route 128 are doing so well that it could lead to new construction, Thompson indicated that other communities continue to struggle and reported wide disparities between Class A and Class B buildings, with latter properties hit by a flight-to-quality trend among tenants. Whereas the Central Route 128 belt has an availability rate of 17.9 percent, the Interstate 495/North submarket is at an alarming 33.8 percent availability, said Thompson, and the Northwest submarket is at 27.6 percent.
“Every submarket is different,” said Thompson, so much so that “even the ones that are moving in the same direction don’t have the same drivers.” Pockets of demand range from defense and life sciences companies growing within their own markets to the arrival of new players such as Wolters Kluwer from downtown Boston to Waltham.
Thus far, the suburban office market rebound is occurring “building to building,” said Thompson, who nonetheless was upbeat about general trends. The suburbs have enjoyed more than two million square feet of net absorption in the past 24 months, she noted, while a lack of new construction and conversion of existing space to alternative uses such as housing or retail has kept supply in check.
“I’m not going to be all gloom and doom,” Thompson said. “We’re on a good track and I think it will continue.”
Cahill also offered a brave face to the market’s imperfections, opining that the industrial market has bottomed out and is on the road to recovery and predicting that some office users will migrate to the flex market for economic reasons. “We appear to be gaining traction,” said Cahill, a senior vice president at the Nordblom Co. of Burlington. The industrial market should see 1.1 million square feet of net absorption in 2005, he said, bringing the vacancy rate down from 12.4 percent to start the year to 11.9 percent. As with suburban office buildings, industrial properties vary greatly in quality and performance, said Cahill, while certain submarkets are doing better than others, with the Route 3 corridor having a difficult year that could result in more than 500,000 square feet of negative absorption this year but other markets in the south appearing on the mend. Cahill insisted that the area will overcome the problems, however. “We are survivors here in New England, and everything will be OK,” he said.
