ROBERT B. RICHARDS
Reason for optimism

Following a year filled with falling office rents and climbing vacancy rates, commercial real estate industry watchers are looking toward 2004 with renewed hope. And as the year-end numbers for 2003 begin trickling in, things are already looking up for the market.

December closed on a positive note with almost every Greater Boston submarket realizing positive gains in the fourth quarter, according to data compiled by Boston-based Richards Barry Joyce & Partners. The data exhibits a marked improvement over mid-year 2003 figures, which showed increased vacancies almost across the board.

“Displaying growth, even in small increments, across so many submarkets certainly should be seen as a positive indicator,” said Robert B. Richards, president of Richards Barry Joyce & Partners. “As we head into 2004, there is reason to be optimistic from the fact that the market is gaining strength.”

According to a December report by the Conference Board, a nonprofit economic think tank based in New York City, gross domestic product growth will hit 5.7 percent in 2004, making it the best year economically in the past 20 years. Increased business and consumer spending has already generated growth across the country, and while the labor market is growing only slowly, a pickup in hiring may have already begun, according to Gail Fosler, chief economist of the Conference Board.

The organization also projects that the U.S. economy will generate more than 1 million new jobs next year while real capital spending, which rose by only 2.7 percent in 2003, will climb 11.7 percent in 2004 and an additional 8.6 percent in 2005.

If the Conference Board’s economic projections come to fruition, a recovery for the commercial real estate market, which generally lags the economy by about six months, may begin in 2004.

Signs and Portents

After three straight quarters of increasing vacancy rates, Boston’s Back Bay office market showed significant signs of improvement during the fourth quarter of 2003, with the overall vacancy rate declining to 10.74 percent. Overall vacancy in the Back Bay Class A office market decreased to 11.29 percent after hitting a two-year high of 13.16 percent in the third-quarter of 2003. The Route 128 and Interstate 495 markets experienced only modest improvements in vacancy – Route 128 fell from 21.79 percent to 21.53 percent while the Interstate 495 market decreased less than one-tenth of a point to 24.95 percent.

While the year-end numbers did show an improvement over early 2003, industry watchers are skeptical about any talk of a quick recovery.

There are some clouds ahead, said William P. Barrack, principal of the Boston office of Spaulding & Slye Colliers. The $10 billion merger of Manulife Financial Corp. and John Hancock Financial Services, which occurred shortly before the FleetBoston Financial and Bank of America merger, left questions about how the consolidations will affect the office market. It’s still unclear if, or how much, space will be shed as a result of the transactions. The mutual fund industry had a shakeup of its own – earlier this month, the state U.S. attorney’s office launched a probe into alleged trading abuses within the industry, including the Boston office of Prudential Securities.

“Absent of those three big events, 2004 would have posted gains as far as absorption and rent increases,” Barrack said. “Now it may be a flat year. The mergers will result in excess space and a dampening of [rental] rates.”

The signs at the end of 2003 point toward an uptick in the New Year. During the fourth quarter, Thomson Financial renewed its 380,950-square-foot lease with Boston Wharf Co. for 22 Thomson Place in Boston’s Fort Point Channel neighborhood and Goodwin Procter renewed its 359,453-square-foot lease at Exchange Place at 53 State St. in the Hub. Boston leasing activity also saw law Firm Nixon Peabody move to 100 Summer St., taking 167,000 square feet of office space, and PricewaterhouseCooper’s sign a 291,000-square-foot lease deal at 125 High St.

The long-term 100,000-square-foot-plus commitments marked significant movement in the large tenant sector, Barrack said.

“There were a lot of good trends starting to be established as we brought 2003 to a close. There were a lot of transactions and velocity was up,” he said. “In 2004, we expect that trend to continue.”

Now, brokers are looking to the class of tenants with leases expiring in 2005 and 2006.

“In 2004, we’re going to see a reduction in vacancy rates, albeit not dramatic,” said Joseph P. Fallon, principal of the Boston office of Trammell Crow Co. “We felt that there was a greater pulse to the marketplace. We hope that velocity of transactions will continue into 2004.”

The Route 128 office market remained active throughout 2003 and a surge in leasing activity during the fourth quarter helped reduce the overall vacancy rate to 21.53 percent from 21.79 percent in the third quarter of 2003. The Interstate 495 office market remained stable in 2003 with overall vacancy rates around 25 percent. For the fourth quarter the overall vacancy rate decreased slightly to 24.95 percent, according to research by Richards, Barry, Joyce & Partners.

“We’re going to start turning the corner in some of the markets,” said Tamie R. Thompson, principal of the Boston office of Spaulding & Slye Colliers. “We’ll be stopping the bloodbath, so to speak.”

Tenants on the move in 2004 include General Electrics Panametrics, expected to close soon on a 150,000-square-foot lease in Waltham, The Gift Center, now in Bedford, is searching for a 140,000-square-foot space, and Pearson, which is looking for 80,000 to 100,000 square feet in the central Route 128 market.

Thompson said that there are also a number of life sciences industries exploring options in the suburbs.

“We can only hope that there’s a trickle-[down] effect from Cambridge into the suburbs,” she said.

Overall, most industry watchers are optimistic that 2004 will bring at least an up-tick in the market and possibly even the first big wave of recovery.

“We’re beginning to get our footing with the economic improvements over the last 12 months,” said Jeffrey B. Swartz, principal of the Boston office of Spaulding & Slye Colliers. “Now real estate is beginning to improve. We expect that the first part of ’04 will look like ’03. The best real estate will maintain high values and the inferior buildings will lose value.”