Anyone even peripherally associated with commercial real estate would have to have had their heads in the proverbial sand for the last few years to not know that speculative office development in Greater Boston is dead.
Or is it?
It may come as a surprise that some in the industry think developers could announce speculative projects as soon as 2013. But it shouldn’t come as a surprise that those developers are looking at parcels in East Cambridge, one of the tightest real estate submarkets in the region.
The East Cambridge office market totals about 6.8 million square feet. Of that, roughly 461,000 square feet, or 6.8 percent, is currently vacant, according to figures from Richard Barry Joyce & Partners.
Class A office rents in East Cambridge are now averaging $49.41 per square foot. At the area’s premier office properties – including Cambridge Center, Riverfront Office Park and 55 Cambridge Parkway – gross office rents are reaching $51 and $52 per square foot, according to industry sources.
Those rents are close to, if not already at, the approximate levels needed to support speculative development, according to Justin Krebs, principal for Normandy Real Estate Partners in Boston. The cost to build a new, top-notch Class A office development would start around $275 to $300 per square foot, including standard tenant improvement packages, Krebs said. If structured parking were included, that would jump to between $325 and $350 a square foot.
“There are absolutely people in the development business looking at a few sites for speculative office development in Cambridge,” Krebs told Banker & Tradesman. “Some could consider announcing projects within a 12-month period. Clearly … it’s driven by the rents high enough to justify the cost of construction.”
Seeing The Sites
While Krebs would not identify who is seeking potential spec development sites or the locations they’re eyeing, there are several possibilities in East Cambridge, according to Thomas Andrews, executive vice president for Alexandria Real Estate Equities. Alexandria owns a few sites along Binney Street that could be ripe for office development. Slightly farther afield is the NorthPoint development-in-waiting. There’s also a site adjacent to One Broadway on Main Street. And MIT has a couple sites within its campus it wants to redevelop, he added.
But at this point, rents still have to climb 10 percent to 20 percent higher higher than current levels in those areas to support speculative construction Andrews said. Even so, Cambridge is probably the one place where rents are perhaps approaching that level, Andrews added.
“I think the more likely scenario, as I see it, would perhaps be projects getting kicked off with a significant anchor lease in place, rather than a fully spec building,” Andrews said. “That could then result in maybe 30 [percent] or 50 percent being still available to lease speculatively.”
But not all industry executives are convinced that large speculative construction projects will come back so soon. With so many office users reducing their square footage, and some pulling out of the area entirely, the specter of large-scale speculative development is not something that’s been considered by a firm like National Development.
“I don’t think I’ve said the words ‘speculative office development’ in close to 10 years,” mused Ted Tye, managing partner for National Development. “When I started in the business it was something we did on a daily basis. We clearly haven’t seen a lot of spec office development because there’s been a lot of available office space on the market. All that said, we do have a little bit more of a robust economy right now. But it’s not something we’ve carefully considered, although we might do it in small increments.”
The firm is planning to create about 15,000 to 20,000 square feet of speculative office space at its MarketStreet Lynnfield mixed-use development. It’s a modest amount of space, Tye said, and he is confident, given the uniqueness of the location, that it will be attractive to looking to be in the midst of the planned 680,000-square-foot retail complex.
