Next Generation recently paid $4.6 million, or about $68 per square foot, for 65 Dan Road in the Canton Commerce Center.
One of commercial real estate’s more troubled sectors appears to finally be on the mend, with research-and-development buildings – aka flex space – showing a hefty jump in leasing velocity during the third quarter.
“There has been a fair amount of activity,” acknowledged Cushman & Wakefield Senior Director J.P. Plunkett, whose firm estimates that the 62.6 million-square-foot flex market has seen its vacancy rate drop from 20 percent at midyear to 18.7 percent after three quarters. While absorption figures for the just-completed quarter were not available, Cushman & Wakefield estimates there has been 809,000 square feet of positive absorption this year in the flex market, which it terms “high-tech space.”
Spaulding & Slye Colliers puts the year-to-date absorption at 1.3 million square feet, and reported third-quarter absorption of 730,000 square feet. Not only did that pace complement a solid second quarter that also exceeded 500,000 square feet of net absorption, Spaulding & Slye indicated that the latest quarter was the best experienced for flex buildings in Greater Boston since 2000. Five of the seven submarkets tracked had more than 100,000 square feet of absorption in the third quarter, led by 345,000 square feet in the Northwest region. The remaining two submarkets remain negative on absorption for both the third quarter and the year, those being the Route 128/Massachusetts Turnpike and North submarkets.
Even with continuing pockets of distress, both vacancy and availability rates have fallen for flex properties, according to Spaulding & Slye, which puts the former at 21.2 percent and the latter at 26.5 percent. The vacancy rate, which measures direct space only, stood at a record high of 23.4 percent to begin the year and was still at 23.2 percent after two quarters. The availability rate, which includes sublease space, had begun 2005 at 32.8 percent and fell to 28.5 percent by the midyear mark. Besides more robust leasing, Spaulding & Slye attributed the tighter vacancy and availability levels partly due to the reduction of more than 1.6 million square feet of flex space for alternative uses, including residential and retail projects.
‘A Great Solution’
In his third-quarter review of the region’s commercial real estate market, Spaulding & Slye Vice President Robert Kasvinsky put average asking rents for flex buildings at $8.99 per square foot on a triple-net basis and estimated the supply of available space now stands at about 11.5 million square feet. While that has dropped from 14.4 million square feet to begin the year, Kasvinsky stressed that it remains a tenant’s market.
Companies involved in the top deals for the flex market during the quarter included Draeger Medical in Andover, T-Mobile in Norton and Selectron in Wilmington. For the most past, Plunkett said flex requirements tend to run in the 50,000- to 60,000-square-foot range, but one third-quarter agreement in Lexington exceeded 400,000 square feet, with Instrumentation Laboratory taking space left empty by Raytheon Corp.’s recent relocation of employees to Woburn.
One benefit of commercial real estate’s woes has been the lack of new construction of most commercial space, and Trammell Crow Co. indicated in its report that flex space is following that same trend, with no new projects under way. The company estimates 55 million square feet of existing flex space in 697 buildings, and already has posted 2 million square feet of net absorption thus far in 2005. By Trammell Crow’s count, the vacancy rate is now at 28.3 percent, down from 32 percent to begin 2005. The differences between various industry reports typically reflect divergent samplings and ways of recording when a lease is in place.
No matter what the precise figures, nearly every research group indicated that the region’s flex market is finally beginning to enjoy the long-anticipated economic rebound. According to Plunkett, the continued reliance on small to mid-sized tenants bodes well for flex buildings over the near term. Not only are improving fundamentals making such properties attractive to investors eyeing value-added opportunities, users are taking advantage of low interest rates and pursuing property ownership strategies on their own, he explained.
In one deal just negotiated by Plunkett and Cushman & Wakefield Senior Director Catherine Minnerly, Next Generation paid $4.6 million, or about $68 per square foot, for 65 Dan Road in the Canton Commerce Center. Totaling 67,000 square feet, Next Generation plans to use about half of the space for its own purposes, while the remainder is already leased to several tenants.
“That was a great solution for them,” said Plunkett, who acted for the tenant. Doug Mitchell of Rader Properties was the broker for the landlord, an affiliate of iStar Financial Corp. Plunkett said he believes user groups will continue to whittle away the flex inventory, which is concentrated in Massachusetts mostly in the western and northern reaches of Interstate 495. As for the leasing end, Plunkett said he anticipates “singles and doubles” will play a role in bringing the market back to health. “We still have a way to go, but things are bumping along,” he said, adding, “at least we’re heading in the right direction,” reversing the downward spiral landlords have been stuck in for three difficult years.
