Several properties, including 33 Arch St., added to the 2004 vacancy rate in Boston’s office market, according to Richards Barry Joyce & Partners.
Dramatic comebacks have been commonplace of late in Massachusetts, and the local office market staged its own impressive version in 2004, with a strong fourth quarter providing unexpected momentum to open the new year. Although some observers warn that the future remains uncertain, others said they are encouraged by the 11th-hour surge.
“We’re very bullish,” relayed Brendan Carroll, director of research for Richards Barry Joyce & Partners. “There has been steady improvement, and we are optimistic it will continue in 2005.” Greater Boston enjoyed 1.2 million square feet of positive absorption during the fourth quarter, said Carroll, including a 193,000-square-foot gain in the Hub itself, 386,000 square feet of positive absorption in Cambridge and nearly 640,000 square feet on the plus side for the suburbs.
“In terms of what we are seeing, it’s all good,” he said, noting that all but two submarkets – Boston’s Back Bay and Route 128 South – had positive absorption during the fourth quarter. The performance put Greater Boston at an impressive 4.3 million square feet on the plus side for the year, according to RBJ&P, dropping the 2004 vacancy rate in Cambridge from 22.4 percent to 17.3 percent and the suburban vacancy from 25.1 percent to 22.7 percent.
‘Indisputable’ Recovery
Boston’s office market ended 2004 at 965,000 square feet of positive absorption, RBJ&P calculated, although the vacancy rate actually increased, from 13.1 percent to 14.3 percent. The reason, Carroll explained, was the 2.1 million square feet of space heaped onto the inventory by such new properties as 100 Cambridge St., 33 Arch St. and 601 Congress St., ManuLife’s just-completed Seaport District office tower.
Spaulding & Slye Colliers also released its year-end figures last week, highlighted by “surprising” positive absorption of 1 million square feet in Boston during the fourth quarter. Due to different reporting methods, Spaulding & Slye only counted 1.2 million square feet of supply added to the city’s office market from new construction in 2004. Even at the lower level than RBJ&P’s figures, the virgin space as counted by Spaulding & Slye put the availability rate at 17.9 percent, up from the 16.6 percent mark posted at the start of 2004.
The fourth-quarter boost did impact the outcome, however, with Spaulding & Slye putting the availability rate at 19.6 percent after the third quarter. Part of the reduction, Spaulding & Slye explained in its report, resulted from Bank of America’s announcement in the fourth quarter that it would be taking back 400,000 square feet in Boston’s Financial District previously headed for the sublease market. A 100,000-square-foot lease by Boston Medical Center at Copley Place completed in December also helped shore up the 2004 performance, the Spaulding & Slye overview added. Ironically, after holding firm for much of the year, asking rents dropped 3.3 percent in the fourth quarter, Spaulding & Slye estimated.
The 972,000 square feet of positive absorption tracked by Spaulding & Slye in the fourth quarter gave the city negative absorption of 60,000 square feet for the year, with most of the problems occurring in the 12.9 million-square-foot Back Bay submarket. Despite 215,000 square feet of positive absorption in the final three months, the Back Bay ended the year in the red by more than 485,000 square feet, Spaulding & Slye estimated. Also on the down side was Charlestown, which was hit by negative absorption of 207,000 square feet.
Spaulding & Slye documented 214,000 square feet of positive absorption in Cambridge during the final quarter, bringing the year’s absorption up to 436,000 square feet. It was the third straight year of positive absorption for Cambridge’s office market, according to Spaulding & Slye, although the office availability rate remained an unhealthy 22.8 percent and average asking rents were down another 5 percent to 10 percent from the beginning of 2004.
Suburban Boston produced similar results to the rest of the country, Spaulding & Slye said, with 1.4 million square feet of positive absorption for the year and 125,000 square feet during the final quarter. Overall suburban availability was down slightly to 26 percent for the suburbs, although the vacancy rate increased to 17.5 percent as additional sublease space reverted back to landlord control. As in Boston and Cambridge, the improved leasing activity did not prevent suburban rents from falling again in 2004, with Spaulding & Slye placing the average asking rent at $18.48 per square foot.
By most accounts, the clear winner has been the Route 128/Massachusetts Turnpike corridor. Fueled by 560,000 square feet of positive absorption in the fourth quarter, the submarket had nearly 1 million square feet of positive absorption for 2004. According to RBJ&P, the velocity has dropped the submarket’s vacancy rate from 22.7 percent in the summer of 2003 to 17.6 percent, marking an impressive turnaround for such communities as Newton, Waltham, Lexington and Wellesley hit hard by the high-tech slump which took hold in 2001.
Trammell Crow Co. also released its year-end figures last week, with the firm estimating that suburban Boston had 2.1 million square feet of positive absorption for the year. Nonetheless, Trammell Crow said that suburban vacancy rates remained unchanged for the year at 18.4 percent. Solid leasing in Cambridge did drop the office vacancy rate there from 20.4 percent at the start of 2004 to 18.1 percent, according to Trammell Crow, which estimated net absorption for the year at 692,000 square feet in that market of 9.6 million square feet.
As for Boston, Trammell Crow placed net absorption for the year at just under 10,000 square feet, and estimated that vacancy rates increased from 12.9 percent to 13.1 percent, again as a result of the new office buildings brought on line. The firm also noted a substantial difference between the Hub’s Class A and Class B office buildings, with the best product posting an 11.3 percent vacancy rate compared to 16.7 percent for Class B assets.
Given that RBJ&P has tracked five straight quarters of positive absorption for Greater Boston’s office market, Carroll said he is confident the real estate market is in the “early to middle stages” of a recovery. “That is indisputable,” said Carroll, stressing he is not sure how long or deep such a rebound might be for the industry. Worker productivity levels, offshoring employment trends and the stability of the underlying economy will determine those aspects, he said. Carroll did note that it will take years of robust leasing to get the region’s office market to the 10 percent vacancy rate considered healthy by most standards.
NAI Hunneman Commercial Co., which participated in the Boston Medical Center lease, is having one of its best years ever, principal Robert Fitzgerald told Banker & Tradesman last week. The uptick of leasing in 2004 has not lessened Fitzgerald’s dour outlook on Boston’s office market over the near term, however, with the industry veteran blaming the addition of excess space put on the market late in the year by several large tenants for disrupting a measured recovery.
“Any progress the market had made over the last four to eight quarters got wiped out by that,” said Fitzgerald, adding that “it’s like one step forward, two steps back.”
