Now more than ever, how one views the Greater Boston office market depends largely on where they are coming from. For landlords, the dearth of supply amidst hyperactive demand lends itself to superlatives. Tenants, however, are more inclined to issue expletives.
“It’s a terrible time to be a tenant,” acknowledged Boston broker John Hennessey. “There are just no options out there.”
According to his firm, Thompson Doyle Hennessey & Everest, Boston’s overall vacancy rate is now 1.7 percent at the mid-way mark of 2000, while average asking rents have increased during the last six months by an astounding 31 percent, from $37.60 per square foot at the start of the year to a current level of $49.38.
“The last six months have been really crazy,” Hennessey said. “We tell our clients that whatever we quote you today will likely be more expensive by the time we get over to see the space.”
A combination of unique factors is driving the activity. James J. Adams of Insignia/ESG noted that while Boston’s economy has expanded at a rapid and consistent pace since 1991, the city saw no new office towers break ground until two years ago. And while none of those properties have yet to open, 75 percent of the 1.9 million square feet to be delivered to the city through 2002 is already spoken for.
“It’s putting pressure on the market,” agreed Ronald K. Perry of Meredith & Grew. “It’s a big concern that enough space be delivered over the next couple of years to satisfy the demand.”
During M&G’s mid-year overview last week at Boston’s Le Meridien Hotel, Perry said there are just 14 options for tenants needing 5,000 square feet in the Hub today, nine for anyone requiring 25,000 square feet and only seven possibilities for tenants seeking 100,000 square feet or more. With landlords in the driver’s seat, Perry and others predicted that Boston will see more escalation in rental rates, with Adams estimating that the city is on pace for 40 percent growth in rents by year’s end.
Landmark Deals
While such escalations have previously been unheard of locally, it appears rental rates for prime space is growing even faster. Along with a $77 per-square-foot rate for space at Rowe’s Wharf, a 10,000-square-foot block at International Place is being quoted at $85 per square foot, according to downtown brokers, with a $95 rate being asked for the second half of a 10-year deal at the property.
Spaulding & Slye places net absorption for the last six months at 420,000 square feet in Boston, dropping the vacancy rate from 2.8 percent to 1.5 percent. One distinction during that stretch has been the commitment by tenants to several large blocks of space, including deals exceeding 100,000 square feet at One Federal St. and 100 Summer St. The Nutter McLennan & Fish law firm and Foley Hoag & Eliot opted to take more than 100,000 square feet each at the Seaport Center project in the Seaport District, while Citizens Bank grabbed 115,000 square feet of highly desirable space at Exchange Place in the Financial District.
As is often the case, the strong market has begun driving tenants outward, both to the suburbs and close-in districts such as Allston-Brighton and the Fenway. The latter district has really only emerged with development of the former Sears warehouse into 625,000 square feet of office space, but M&G broker Robert B. Cleary Jr. said the area has seemed anything but untested. His firm has leased 110,000 square feet in the first half of the year there, headlined by a 70,000-square-foot deal with Agency.com. After strong leasing there last year, Landmark Center is almost completely full, according to Cleary.
Whereas Boston’s fringe markets were almost all in double-digit vacancy rates just a few years ago, that situation has shifted dramatically. According to Spaulding & Slye, the highest submarket vacancy at present is the 3.4 percent rate seen in North Station, which still has only 79,000 square feet empty in a market of 2.3 million square feet. Charlestown is next at 1.8 percent, followed by the 1.2 percent in the Back Bay and 0.7 percent in the South Boston/Waterfront district.
“The velocity has been staggering,” said Cleary, who estimated that Boston had 4.3 million square feet of leases inked during the first six months.
Across the river in Cambridge, leasing was about as slow as it gets, an ironic situation given that it is among the hottest markets in the country at present. The problem, according to Hennessey, is the basic lack of supply there, with vacancies below 1 percent and a building moratorium conspiring to keep the supply of space in check for the near term. Although Cambridge Research Park and the University Park mixed-use complexes are poised for more development, most observers predicted that Cambridge tenants will have to continue their migration to other markets in order to find adequate quarters. Agency.com was one example, given that the firm is relocating from Cambridge.
M&G’s overview, entitled “New Developments and the New Economy,” focused on the effect of e-commerce and dot-com companies in the market. In addition to a presentation by high-tech venture capitalist Michael J. Hirshland of Polaris Venture Partners, Boston Properties Senior Vice President Bryan J. Koop outlined his company’s efforts to monitor the firms it leases space to in its national office portfolio of 35 million square feet. So-called “new technology companies” must provide a minimum one-year security deposit, Koop said, adding that the firm is also exploring other potential guarantees.
“We can’t forget that we are unsecured creditors,” Koop said. At the same time his firm has not reached the level of concern seen by one competitor, with Koop saying the landlord had told him his firm is rejecting all technology companies as tenants.
“In our opinion, it’s really not fair to throw these companies into one dot-com bucket,” Koop said. “All companies are different, and that’s what we are looking at.”
The struggles experienced by new technology companies are creating a bit of a slowdown in suburban demand, according to CB Richard Ellis/Whittier Partners broker Christopher P. Tosti, but given the crush of activity in 2000, he said that, “it’s almost welcome because we need the space.”
With a reported four million square feet of net absorption in the suburbs thus far this year, Tosti described the stretch as “the best six months in the history of the Boston suburbs.” Demand has been so strong, he said, that Waltham is now quoting per-square-foot rents in the $60 range, compared to a $35 high-water mark last year. Although he said there have been no real “mega-deals” hit for home runs so far, Tosti said the barrage of leases from 20,000 to 100,000 square feet have resulted in “a lot of doubles and triples.”
“There are a lot more deals that haven’t gotten done because we just don’t have the space,” he added.