In some respects, the Greater Boston office market is proving that less really can be more. With several sizeable third-quarter deals eroding an already scant supply of space, tenants are finding that the remaining morsels are commanding increasingly higher rental rates.
“Pricing has certainly gotten up into the $60s,” Meredith & Grew Senior Vice President Ronald K. Perry acknowledged last week. “Everyone is trying to push the envelope.”
In a handful of instances, landlords have been able to reach rents that will average $80 per square foot over the lease term, Perry said, whereas a few others have hit the $70 per-square-foot target. Still, Perry stressed that upper-echelon rents are only being commanded for smaller deals in unusually prime locations, adding that the oft-rumored $100 per-square-foot plateau would only be achieved in extreme instances.
“I think it will happen, but it’s not at a sustained level that we are finding out there,” Perry said. Nonetheless, whereas just a short time ago most deals were in the $30 to $40 per-square-foot range, Perry and others agreed that companies seeking space are experiencing considerable sticker shock.
“There just is far too little supply for the amount of demand that currently exists,” said Codman Co. principal Ted Wheatley. “Time is definitely on the landlords’ side.”
For many companies, leasing space has proven to be a gut-wrenching process, especially those in the high-tech industry who have come to be seen as potential liabilities. According to Wheatley, property owners are cherry-picking their tenants, a luxury that tends to benefit established, good-credit firms. One example of that could be found at 3 Post Office Square, the pair of office buildings in Boston’s Financial District that Wellsford Properties Trust has renovated into Class A office space.
Spaulding & Slye, the leasing agent for the conjoined buildings, had leased up much of the space earlier this year to several promising high-tech companies, but spring jitters over that market prompted the project’s financial backer, Goldman Sachs, to nix those deals. Given their new marching orders, Spaulding & Slye refocused and has successfully secured a bevy of well-heeled companies to fill in the gaps.
“They wanted it done and we told them we’d do it, and we did,” Spaulding & Slye broker William F. Collins said, adding that with the continued rise in rental rates, “it actually worked out well for us.” Among the firms who have signed up are Davis Solomon, the investment arm of billionaire Marvin Davis; Spencer Stuart, a high-end corporate search firm; and the Parsons Group, a consulting company. In all, Collins said Wellsford has about 80 percent of the 130,000 square feet committed.
Along with the dearth of available supply, Collins said he believes the quality of the renovation by Wellsford and the backing of Goldman Sachs helped attract both waves of tenants, allowing the developers to be “very selective in who they are willing to transact with.” Deals for the buildings, previously known as 24 Federal St. and 79 Milk St., are being achieved in the upper $40 per-square-foot range, with Collins citing the location in downtown Boston as another key plus.
Market Realities
According to Perry, net absorption in Boston for the third quarter of 2000 hit 260,000 square feet. Coupled with 540,000 square feet of net absorption at the mid-year mark, the city is ahead of pace to hit 1 million square feet of net absorption by year’s end. While that is typical for the city, Perry and other industry observers add that the numbers would likely be greater had there been more space available. CB Richard Ellis/Whittier Partners estimates, for example, that there are firms with 4 million square feet of additional space requirements scouring the 48 million-square-foot Boston market. The Hub’s office vacancy rate is now at 1.5 percent, Perry said, down from 1.9 percent at the end of the second quarter.
Spaulding & Slye also posts a 1.5 percent vacancy rate for Boston, with average rental rates now at $55.89 per square foot, up from $49.38 at the mid-year mark. Average rents run from $51.11 per square foot in the Financial District to a low of $37.52 in Charlestown.
Among the significant Boston leases completed in the third quarter was a deal involving Citizens Bank, which took 117,000 square feet at Exchange Place. State Street Bank took 175,000 square feet at One Federal St., while Fidelity Investments increased its presence at 100 Summer St. to nearly 500,000 square feet by leasing 181,000 square feet of low-rise space previously occupied by Blue Cross and Blue Shield of Massachusetts. Also at One Federal St., Donaldson Lufkin & Jenrette leased 50,000 square feet left over from the Fleet Bank/BankBoston merger.
For the most part, the third quarter was busy throughout, Perry said, although Wheatley maintained that the bulk of the lease signings occurred in September. He attributed that largely to tenants finally coming to terms with the current market after months of denial.
“The post-Labor Day activity was probably stronger and more active this year than any in recent memory,” Wheatley said. “The scarcity of space and the pace at which viable options have been disappearing caused many tenants to just finally make a decision and move on with running their business.”
Boston’s Back Bay continued to sizzle through the summer, with 10 St. James Ave. almost completely committed, and 111 Huntington Ave. now 85 percent pre-leased. The 10.8 million-square-foot Back Bay market currently has a vacancy rate of 2.3 percent, Spaulding & Slye reports. The tightest vacancy rate among the city’s fringe office districts could be found in North Station, which posted a 0.2 percent vacancy rate.
Wheatley said many tenants have expressed frustration with the lack of supply in Boston, but he noted there is very little relief to be found outside city limits. Indeed, Cambridge actually has a lower overall vacancy rate of 0.4 percent, and rents there now average more at $58.50 per square foot. That has tracked up from $50.56 per square foot at mid-year.
Although the average rental rate of $27.76 per square foot is considerably lower than that found in Boston or Cambridge, the suburbs are experiencing similar trends to that found in urban locales, said Jones Lang LaSalle broker Kenneth Shaffer. Minus a 10.6 percent vacancy rate in the South market, all suburban submarkets have vacancy rates in the single digits, with the Northwest region at 1.3 percent and the core Route 128/Massachusetts Turnpike sector down to 1.4 percent. The overall suburban vacancy rate is 5.4 percent, according to Spaulding & Slye.
“In many cases, it’s hard to identify even a first choice,” said Shaffer. Technology firms are experiencing the same conditions seen in Boston, he added, and the typical lack of credit makes options such as build-to-suit construction less viable. Brokers are doing their part to locate sublease options, he said, but clients must be ready to move.
“You have to be early and you have to be decisive and you have to understand what the realities of the market are,” said Shaffer. “If not, they just aren’t going to find the space.”
“Things are still very, very brisk,” added Cushman & Wakefield broker Mark Reardon. In the North market, for example, all of the space at the 200,000-square-foot Connecter Park office complex in Lowell is spoken for, while a 56,000-square-foot speculative building in Tewksbury is fully leased even though the three-story property on Apple Hill will not be completed until next month.
In Andover, at 200 Minuteman Drive, Reardon represented Tiburon Networks in a 36,000-square-foot lease, bringing that 200,000-square-foot building to full occupancy. Leases at Connecter Park ran in the mid- to upper $20s, with overall rents averaging $25 to $30 per square foot for the Interstate 495 North belt. That represents a 50 to 60 percent spike since the beginning of the year, Reardon estimated.
