Alexander D. Dauria
Activity increasing

Greater Boston’s commercial real estate sector may have reached the quarter-pole mark in 2002, but for many industry observers, it does not appear the hoped-for progress is materializing.

“Right now, the best way to describe it is one step forward, two steps back,” Richards Barry Joyce & Partners principal Robert Richards said last week. “There’s still plenty of bad news out there.”

Although Richards reports there have been some signs of activity among tenants after a silent fourth quarter of 2001, he added that there continues to be a slew of corporate consolidations and downsizing that many thought had run its course. But Richards said his firm has tracked another 61 new subleases in the city of Boston alone during the past three months. “There continues to be some givebacks,” he said.

McCall & Almy principal William F. McCall concurs with that outlook, explaining that many companies continue to seek ways to cut costs rather than eying opportunities to expand. While there was some leasing during the first quarter, McCall said most of it was driven by lease expirations than growth. He also noted that in many of the deals, the tenants actually contracted into less space than they had previously occupied.

“I don’t think anything spectacular happened in the first quarter,” McCall said. “We’re still seeing almost negative absorption … We’re certainly not seeing any positive [activity], that’s for sure.”

Figures from Spaulding & Slye Colliers seem to bear McCall’s observations out, with the first-quarter numbers for Greater Boston’s office market showing an alarming 1.2 million square feet of negative absorption for the quarter, bringing the overall availability rate to 19.2 percent and the region’s vacancy rate to 9.6 percent. While traditionally not a sign of severe weakness, the vacancy rate is considerably higher than it had been a year ago. The overall suburban market, meanwhile, has posted an average vacancy rate of 12.3 percent, with only the Interstate 495/North and Northwest submarkets currently in single figures.

In Boston itself, Spaulding & Slye is reporting a 5.9 percent overall vacancy rate, with an average availability rate of 12.7 percent. Spaulding & Slye differentiates between the two, with the vacancy rate being that space that is actually empty and the availability rate measuring space that is being marketed. That figure includes the sublease opportunities, which have dominated Greater Boston during the past year.

At present, only Boston’s Seaport District has a vacancy rate in double figures, posting a 10.8 percent mark, but four of the six submarkets have availability rates over 10 percent, including 12.9 percent in the Financial District, where 4 million square feet of the 31.5 million-square-foot market is available for rent.

As for absorption, only North Station saw positive activity in the first quarter, finishing with a scant 239 square feet of net absorption in the first quarter. There was 166,000 square feet of net absorption in the Financial District and a troubling 228,000 square feet of negative absorption in the Back Bay.

‘Catatonic’ Quarter

One saving grace across the river in Cambridge has been the advent of the biotech industry. In response to a nosedive in office leasing, many Cambridge landlords have turned to biotech as their salvation, with the Massachusetts Institute of Technology said to be landing several prominent biotech and pharmaceutical tenants for Building 300 at its Technology Square complex. According to sources, Diax is leasing 80,000 square feet in the property, while TolerRx and Xanphas Life Sciences have also committed to lab space in the property.

Richards agreed that the biotech equation is adding up to good times for Cambridge buildings, citing both an influx of federal research money into the region and the desired Cambridge, a location for which such firms are willing to pay a premium.

“The prime opportunities for lab space in Cambridge are definitely filling up,” Richards said, although it appears other landlords may be considering the conversion concept for their office space. Once Cambridge dries up, demand could spread to buildings in secondary locations, Richards said.

According to Spaulding & Slye, Cambridge posted a 9.7 percent vacancy rate at the end of the first quarter. Two years ago, the city had vacancy rates fundamentally at zero, but there has been a significant backslide since, due largely to the demise of the technology industry. There was 108,000 square feet of negative absorption in the first quarter, Spaulding & Slye reported, with 40,000 square feet of positive activity offset by 137,000 square feet of negative absorption in the primary East Cambridge market. With a large glut of sublease space, the availability rate in Cambridge now stands at 21.3 percent. Sources said that figure could still increase before reversing itself, with one source predicting that HQ will seek takers for space it recently leased at 245 First St. in Cambridge.

On the suburban front, Spaudling & Slye estimates there was just over 700,000 square feet of negative absorption in the first quarter. That number includes negative absorption of 202,000 square feet in the I-495/North market, negative 401,000 square feet in the Central Route 128/Massachusetts Turnpike market and a whopping 598,000 square feet of negative absorption along I-495/Massachusetts Turnpike, an area also brutalized by the technology crash. The overall suburban picture was, however, aided by positive absorption of 323,000 square feet in the Northwest submarket and another 189,000 square feet along I-495/South.

Despite the generally depressed situation, Spaulding & Slye broker Alexander D. Dauria said he is encouraged somewhat by recent momentum in the suburbs. “Activity has definitely increased,” Dauria said last week, reporting that several large users are busy weighing options and predicting that the industry could witness a spate of lease signings in the coming months.

Business is more cloudy on the investment front, said CB Richard Ellis/Whittier Partners principal Gary Lemire. Not only are office building owners reluctant to put assets out in the currently depressed market, Lemire said it is almost impossible to correctly price those buildings which do make it out due to the lack of leasing that has been done during the past year.

“The property market remains strong, but the big question about office investment right now is, ‘What’s the market rent for space today?'” Lemire said. “That’s one [number] that people can’t seem to get some good answers on, and it has put a crimp in the sale of office properties.”

CB/Whittier did manage to sell one office building during the first quarter, with a private investor paying $75 per square foot for 420 Providence Highway in Westwood, a vacant 43,000-square-foot building. Interestingly, Lemire said there remains plenty of capital out there, but stressed such sources of funds are only looking for buildings with strong credit tenants and lengthy lease terms.

“Nothing happened in the first quarter,” Lemire said. “It was catatonic.”