Robert B. Cleary Jr. – Recession over
The first quarter is dead. Long live the second quarter.
In some respects, such an attitude might be the best Greater Boston commercial real estate practitioners can seize upon after seeing the phenomenal gains of last year ripped asunder during the opening salvo of 2001. But while the brutal performance of late has the industry on edge, many observers insist conditions are not as problematic as they would appear on the surface.
“Personally, I think we’ve been in a recession and we are on the way out,” Meredith & Grew Vice President Robert B. Cleary Jr. told Banker & Tradesman last week. “There’s still a lot of money being plugged into technology companies, and that may lead to a resurgence of demand for office and industrial space.”
Cleary, who covers the downtown Boston market, also maintained that the dour atmosphere enveloping the region would seem less smothering had it not come in the wake of the white-hot 2000 campaign. A lack of new construction conspired with the meteoric rise of the technology sector to create unprecedented demand during the first nine months of last year, but Cleary said that timeframe should be viewed more as an anomaly than where the market might be headed long-term.
“One would be smart to compare 18 months ago to today, and I believe they would find similar pricing on an asking rental basis,” said Cleary, who estimates Boston has a 5 percent vacancy rate despite the recent difficulties. “It is still a very tight marketplace.”
Nonetheless, Cleary also acknowledged that the office market struggled on the leasing end during the past three months, calling activity “markedly slower” than is typical for the first quarter. Few notable deals were consummated, especially in Boston, where the biggest news was the hefty amount of sublease space that cascaded onto the scene. By M&G’s estimates, there is 1.5 million square feet of sublease available in the city at present.
For broker John Hennessey, most of the air in the market has now been let out, with the weakest technology firms already having fallen by the wayside. Because of that, Hennessey said he believes the pipeline of sublease space will begin to dry up, predicting that the second quarter will reflect more stability than seen in recent months.
“I think you will see it get better,” said Hennessey, a principal with Boston-based Thompson Doyle Hennessey & Everest. One positive outcome, he said, is that surviving tech firms might seek to hire some laid-off employees, helping spur a new wave of growth.
As with others, Hennessey said the best result from the recent turmoil will be a more balanced playing field for landlords and tenants. Some brokers even report elements of retrading, with tenants who began negotiating in a stronger market now demanding a discount in their rental rates. Good-credit tenants are particularly in the driver’s seat, according to Hennessey.
The suburban Boston market is undergoing an adjustment from the 2000 spurt as well, with vacancies on the rise and rental rates returning to more normal conditions. Jones Lang LaSalle broker John Linnell said the frenzied pace to get deals done has not carried over into the new year.
“Companies are definitely on the sidelines looking and waiting to see what is going to happen,” he said.
Cautious Optimism
Because of the recent turmoil, Spaulding & Slye Colliers will not have its quarterly figures done until later this week, said research analyst Ben Breslau, with the glut of sublease space making it more difficult that usual to compile and assess the statistics. Nonetheless, principal Tamie R. Thompson predicted that most suburban markets will see an increase in their vacancies, although she added that conditions are not as bad as they might have been if speculative construction had been more prevalent during the previous few years. Even in the most flaccid markets, Thompson said she doubts office vacancies will run into double digits.
Indeed, even with demand about one-third of what it was last year at the peak, Thompson characterized suburban leasing activity as relatively solid. Following a slow January and February, Thompson said “we are actually starting to see some deals come to a close.” And while suburban rental rates have come down from the lofty numbers seen in 2000, when some leases were reportedly inked for more than $60 per square foot, Thompson said there is no reason to panic. Burlington, for example, is holding firm with rates in the mid-$40 to $50 range that were the historical highs until the brief run-up last summer. An 86 percent spike in Waltham, she said, simply was not sustainable.
“We’re never going to see what we did last year again,” she said. “That was a fluke, and what we are seeing now is much more basic. We are still pretty optimistic” about 2001.
CB Richard Ellis/Whiiter Partners principal Christopher Tosti is also not overly concerned with the suburban market. Especially in the MetroWest region, Tosti said larger companies remain active, with several substantial deals in the works. Among them, EMC Corp. reportedly has leased all of 900 West Park Drive in Westborough, a 200,000-square-foot building being developed by the Archon Group. The data-storage company, which has had its own stock woes of late, is nonetheless said to be leasing 100,000 square feet at One Research Drive in Westborough as well.
“Everything is a little slower, but the West seems to be a stronger pocket than most,” said Tosti, citing such heavyweights as the TJX Cos., Genzyme and Fidelity Investments as firms which continue to thrive in that area.
“The big players are keeping things very active out there,” Tosti said. “All of them seem to be moving forward with growth and expansion plans right now.”
Even some lesser known outfits are seeking space, with Tosti joining CB/Whitter colleagues Robert McGuire and Rob Walles in leasing 50,000 square feet to Rachis on Parker Street in Maynard during the first quarter.
