PETER FARNUM
‘Feeling good’
Single-digit office vacancy rates are in Boston’s future and rents are rising, according to the principal of one of the city’s commercial real estate firms.
“Precluding any kind of global event or economic catastrophe, all signs are that we will be at an 8 percent vacancy rate in 2009,” said Peter Farnum of Trammell Crow Co. “The other good news is that rents have increased by 25 percent for high-rise space. Other cities may be experiencing a more robust recovery than Boston and people are a little nervous, but we’re feeling good about the future.”
The bullish news was given late last week at a gathering of the National Association of Industrial and Office Properties, a commercial real estate trade group, where developers touted their latest downtown projects and discussed the challenges of building in Boston.
In a presentation titled “Height Is Back: Boston’s Changing Skyline,” Farnum said the office market is almost “balanced,” an environment where tenants and landlords have equal leverage.
“Usually we consider equilibrium to be about a 10 percent vacancy level,” Farnum said. “The overall downtown market has an 11 percent vacancy rate, the Financial District alone is 11.5 percent and Back Bay is at 13.8 percent, which includes sublease space.”
Downtown Boston may be ripe for more office buildings because tenants are seeking about 3.1 million square feet of space and are anticipating a tightened market with higher rents, he said. Farnum gave an example of a high-rise rent at a Boston tower that was $47 per square foot a year ago. Today, that same space is $60, he said.
“It is increasingly difficult for tenants to renegotiate with existing landlords,” said Farnum.
Another reason to build, he said, is that with the exception of 33 Arch St., 10 Saint James St. and 111 Huntington Ave., the average age of downtown office buildings is 25.
“The inventory is getting some whiskers,” Farnum said. “The existing stock is old, while space layouts, designs and footprints have changed.”
The other factor supporting construction is that tenants seeking 100,000 square feet of space in Boston have fewer than five options in the Class A market, he said. Executives typically prefer to examine more choices in the existing supply, he added.
Still, there are challenges. While the financial sector and private equity markets are seeking larger spaces than a decade ago, the industry is not absorbing a million square feet annually as it once did, Farnum noted. Another factor is that development costs have increased dramatically. Today, it cost as much as $500 per square foot to build, he said, compared to $400 per square foot for 33 Arch St.
“Rents have to be in the $60s and $70s [per square foot] to support such construction costs,” Farnum said. “We are not quite there yet, but there’s an argument that many people make that we are building into a market that is increasing.”
In addition, he noted that the office market’s dynamic has changed with fewer large tenants in Boston as a result of mergers and acquisition. Gillette, which moved its corporate headquarters to Cincinnati, is one example, he said. And, he added, don’t forget the politics of getting anything built in Boston.
“The complexity of building in Boston with the approvals, the politics and the tight site constraints – all those factors add up to the fact that it’s a lot harder to build in downtown than past the Allston-Brighton tolls,” Farnum said.
In the Pipeline
Still, 6 million square feet of office space is in the pipeline, compared to 5.5 million in the last development cycle. Among the projects:
• Fan Pier developer Joseph F. Fallon has plans for 2.9 million square feet of mixed-use development on 21 acres in a nine-block waterfront neighborhood with a pair of office buildings totaling 1.2 million square feet.
• Vornado Realty Trust, which recently purchased the historic Filene’s building on Summer Street for about $100 million, has proposed a 1.2-million-square foot, 38-story tower above the existing building with a mix of retail, luxury condominiums, a hotel and office space.
• Boston Properties has expressed interest in building 888 Boylston St., a 258,000-square-foot office building.
• At the MBTA’s South Station, a 960,000-square-foot office complex has received its environmental and zoning approvals. The project would be built behind the railroad station by Hines, an international firm whose U.S. headquarters are in Houston.
• Russia Wharf, a mixed-use project of Equity Office Properties, is fully permitted for a 31-story, 500,000-square-foot tower that will include 200 condominiums in the historically preserved building.
• New England Development is developing the former Anthony’s Pier 4 site with a 1 million-square-foot project that will include a 16-story facility with 440,000 square feet of office space and 200 housing units.
• Mayor Thomas M. Menino has announced a Request for Proposals for 115 Winthrop Square. The RFP calls for a combination of residential, retail and restaurant uses that demonstrate the city’s commitment to creating a 24-hour downtown neighborhood. Submissions for the 1,000-foot tower will be accepted until Nov. 13.
David Perry, senior vice president at Hines and developer of the South Station project, who also served on the NAIOP panel, said construction of phase one is expected to begin next year. The tower, with an entrance on Atlantic Avenue, will offer easy access to the T’s Red and Silver lines as well as the commuter rail and Amtrak. The second phase will include a 200-hotel room and 150 condominiums. The final phase is a planned 500,000-square-foot office building.
“The tower, which through the permitting process has been shrunk, will be the third tallest building in the city,” Perry said.
Robert Winter, executive vice president of Equity Office Properties, the developer of Russia Wharf, said he started working on the waterfront development five years ago.
“We are an office company, but this site and the preservation of this historic building lent itself to a good multi-use project with parking at the base, housing in the older building and a new tower to be built between the waterfront and the Rose Kennedy Greenway,” he said. “The views will be spectacular.”
