The purchase of 55 Fairbanks Blvd. in Marlborough for $27 million in July was one of the few suburban transactions of note for the commercial real estate industry in 2002.
It was at times irrational, but there was little in the way of exuberance for the commercial real estate industry in 2002.
“It has definitely been a down year,” CB Richard Ellis/Whittier Partners President Andrew W. Hoar said in assessing the past 12 months. Whereas the technology sector bore the brunt of the economy’s wrath in 2001, Boston’s core industries were heavily impacted this year, Hoar said, with a slew of layoffs and space consolidations in the financial and legal communities contributing to the second straight year of negative net absorption for Boston, something Hoar said he has not seen during two decades in the business.
Perhaps the strangest phenomenon of the year, however, was the solid investment interest in Boston office towers and apartment buildings despite the continued deterioration of market fundamentals. CB/Whittier estimates that Boston’s office vacancy rate increased from 8.7 percent at year-end 2001 to 9.7 percent at present, while the average Class A office rent fell from $44.45 per square foot to $40.86 per square foot in that stretch. Nonetheless, several downtown buildings were well-received by investors, with such prime properties as One Boston Place, 50 Milk St. and 101 Arch St. all changing hands during the year.
In some instances, as in the case of 50 Milk St., sellers received near-record pricing for their assets, with that particular building fetching more than $400 per square foot. According to investment specialists such as Robert E. Griffin Jr. of Cushman & Wakefield, there was a clear flight to quality among investors, who preferred stable buildings featuring strong credit tenants who should be able to help owners weather the current depressed environment. At the same time, Griffin and other investment brokers said deals were much harder to complete, often taking longer or resulting in the buyer trying to renegotiate prices mid-stream.
In his annual “Bings and Bongs” review of the Bay State commercial real estate market, George J. Fantini cited the sale of trophy assets as one of the areas deserving a “Bing,” or a plus mark for the year. But the investment market was of a bifurcated nature in 2002, Fantini added, noting that suburban office buildings were not on the radar screen for most investors, especially buildings sporting significant vacancies.
While there were a few suburban transactions of note, including the purchase of 55 Fairbanks Blvd. in Marlborough in July for $27 million and the $57 million sale last month of the 3Com office complex in Marlborough, Fantini said the bulk of investor interest was concentrated in downtown Boston. Among the investment types deserving of a “Bong,” according to Fantini, was undeveloped land in the suburbs.
“Suburban land is, in the eye of the beholder, of little value,” Fantini said. “The feasibility of [developing] a suburban office building today just doesn’t exist.” Landowners who held out for higher prices will likely be holding onto their terra firma during the foreseeable future, said Fantini, provided their lenders don’t foreclose on the property.
Conditions in the suburbs grew from bad to worse in 2002, with Richards Barry Joyce & Partners reporting that rental rates along the core Route 128 market fell from a $30 per-square-foot average at the start of the year to $25.18 per square foot at year-end 2002 Vacancies, meanwhile, rose from 10.8 percent to 17 percent. The situation is even more troubling along Interstate 495, where rents now average $18.75 per square foot and the vacancy rate has risen from 8.6 percent to 12.6 percent during the past year.
‘OK Year’
In Cambridge, the biotech sector was a major influence in keeping landlords afloat, but that market still suffered record high vacancy rates and a reversal of fortune as troubling as one might ever see in a commercial real estate market. After peaking in the $70 per-square-foot range in mid-2000, Cambridge office rents now range from $25 to $36 per square foot, according to CRESA Partners. Principal Chris Cooks said he anticipates another 3 to 7 percent rent decrease in the next six months, while the vacancy rate is expected to remain in the 20 percent range for much of the year. Just two years ago, the vacancy rate for Cambridge was essentially zero, but such is no longer the case.
“Overall, tenants in the Cambridge market will continue to have numerous, cost-effective real estate options from which to choose,” said Crooks, adding the presence of Harvard University and the Massachusetts Institute of Technology should foment momentum among potential tenants.
The biggest lease in Cambridge in 2002 was clearly the Novartis pact for nearly 500,000 square feet at the Necco candy factory building on Massachusetts Avenue. But while that deal provided a needed shot in the arm for Cambridge, there are signs that the life sciences industry, which carried that market in 2002, is beginning to slow down. Perhaps most disturbing was news earlier this month that leading Cambridge tenant Millennium Pharmaceuticals was laying off several staffers. If the firm brings excess space back on the market, that could forestall a market rebound for Cambridge.
One aspect of the commercial real estate industry that also did well despite its own fundamental failings was Boston’s multifamily stock. Relying on the area’s traditional shortage of apartments, several assets attracted widespread interest in 2002, with the Gardencrest Apartments in Waltham fetching $85 million and Brookline’s Longwood Towers selling for $80 million to Teachers Insurance and Annuity Association.
The big apartment sale coup for the year was clearly the purchase of the Flatley Co.’s New England portfolio by a Denver real estate investment trust. Apartment Investment and Management Co. paid $500 million for the 4,323-unit portfolio, which is located primarily in the Bay State. The sale marked an end of an era for the state’s multifamily market, with Flatley long considered the industry leader. And while apartments have also seen a rise in vacancies recently, it has done little to keep investors from aggressively chasing the limited supply being put on the block. “Multifamily has had a real run,” Fantini said. “It continues to do fabulously well.”
Overall, Fantini said he believes commercial real estate fared remarkably well in 2002 considering the tepid leasing activity and concerns over the immediate future of the regional economy. Conditions were aided greatly, Fantini said, by the record low interest rates. “The year turned out OK, but it might not have were it not for those tremendously low interest rates,” he said. “That has camouflaged a lot of weak real estate projects.”
