PricewaterhouseCoopers recently leased nearly 300,000 square feet at 125 High St. in Boston, but the city still ended the first quarter of 2003 with an office vacancy rate of 10.6 percent, up from 9.2 percent at the end of 2002, according to Spaulding & Slye.
It’s still chill.
Mimicking the frigid, drippy spring foisting itself upon the Bay State this year, Greater Boston’s office sector saw little indication of a warm-up in the first quarter of 2003, with industry observers reporting that the few deals of note were chilled by continued corporate downsizing and eroding market fundamentals.
“We haven’t had a tremendous leap of improvement,” Richards Barry Joyce & Partners Research Director Katie Kelley said last week. “There has been an increase in activity, but transactions are taking a long time to get finalized.”
RBJ&P and Spaulding & Slye Colliers both posted slight increases in Boston’s office vacancy rates compared with the end of 2002, while Trammell Crow Co. reported that some suburban vacancy rates are now above 45 percent. Between office and flex properties, Greater Boston’s suburbs have 35 million square feet of vacant space at present, according to Trammell Crow Co. principal Brian T. Hines. “That’s a rather troubling number,” Hines said.
Teaming up with colleague Michael Dalton, Hines brokered one of the few significant leases of the first quarter, representing Zoll Medical in its sublease of 160,000 square feet in Chelmsford from Tellabs. Along with a 65,000-square-foot sublease by Siemens at the adjacent Mill Road property, the late-quarter Zoll agreement filled a major sublease hole left by Tellabs, but Kelley said it did little to heal the problems facing the Interstate 495 North market where Chelmsford is located.
“We don’t see that market improving significantly in the near term,” concurred RBJ&P President Robert B. Richards Jr., whose firm represented Tellabs in both negotiations. Fringe markets are suffering from a flight to quality, as well as a flight to value, said Richards, with Boston and East Cambridge likely to see the greatest benefit from that trend.
Notwithstanding the lingering Cisco Systems sublease space waiting to bloat the I-495 North inventory further, the flood of sublease offerings hitting the streets has begun to slow, said Kelley, although Richards added that several life sciences companies are bringing research space out to the market, reducing the likelihood that life sciences will help fill the void from office users, as had been the case in recent months. BioTransplant is subleasing space in Charlestown, while TKT is said to be placing 50,000 square feet up for sublease at 195 Albancy St. in Cambridge and 25,000 square feet at 141 Portland St.
Cambridge overall went backward a bit in the first quarter, with the year-end vacancy rate of 12.6 percent rising to 14 percent, but that was still better than the 15.8 percent posted at the end of the first quarter of 2002. “The market is sputtering along,” Richards said of Cambridge, with the only major six-figure deal of the quarter occurring at Discovery Park in the city’s Alewife district. In that agreement, Tiax took 125,000 square feet. Despite that, as well as a 30,000-square-foot lease brokered by Cushman & Wakefield at 100 CambridgePark Drive, Alewife’s vacancy rate rose from 16.7 percent to 18.2 percent during the past three months.
‘Reverse’ Curse
The Boston office market suffered another tepid quarter, with Spaulding & Slye reporting the vacancy rate rose since year-end 2002 from 9.2 percent to 10.6 percent. More alarmingly, the Hub had another 746,000 square feet of negative absorption for the quarter, dampening the impact of several large leases that were inked such as Lexington Insurance at 100 Summer St. and PricewaterhouseCoopers into nearly 300,000 square feet at 125 High St.
“It’s like getting kicked in the gut again,” Spaulding & Slye principal William Barrack said of the dour figures. “We are continuing in that streak of the longest period of negative net absorption [nine quarters] that we have ever had in Boston, at least in my 20 years.”
The addition of two big blocks of sublease space at Two International Place and 225 Franklin St. were the biggest reasons for the dour Hub outcome, said Barrack, who also expressed concern about the woes of major space drivers such as Fidelity Investments, Fleet Bank and Fidelity Investments. “The five largest users in the tower market continue to downsize, and that’s not good,” said Barrack.
There have been some successes, including Bain & Co’s. lease as anchor tenant at 131 Dartmouth St. in Boston’s Back Bay, and a deal that will have Goulston & Storrs remain at 400 Atlantic Ave. Indeed, Codman Co. principal Robert B. Cleary Jr. said landlords are becoming increasingly aggressive in pursuing existing tenants, striking deals that dampen any fiscal benefits of relocation. While such deals may be good for current landlords, Cleary noted that will mean less volume of firms with space requirements searching for new quarters, keeping the future recovery in check. Another problem, Cleary said, is the lack of growth included in new leases, with players such as PricewaterhouseCoopers actually cutting back on their future needs.
“It’s a tough time in the market and a tough time in the industry,” said Cleary. While stressing there has been a bump up in activity, he said most of it has been for small-end players needing 5,000 to 10,000 square feet. With rents continuing to fall, Cleary said the big question at present is, “Where’s the bottom?”
Even with vacancy rates in core markets such as Waltham still above 30 percent, Hines said he believes the office market is finally beginning to hit the low ledge, with the overall suburban vacancy rate rising just over 1 percent, from 27.4 percent to 28.5 percent. “We’re still in reverse, but I think we are getting close to being in neutral,” Hines said. “It is hard not to be concerned with what’s going on, and the anxiety is still abundant, but we are hopefully seeing some lights at the end of the tunnel.”
