Alex Dauria – Sees stability

Boston’s office market may have limped to the finish line in 2000, but that doesn’t mean the sector is about to keel over, according to experts from Spaulding & Slye Colliers. Despite just 22,000 square feet of net absorption in the fourth quarter – or about 10 percent of the activity for the year – the Hub remains among the strongest cities in the country for office demand, S&Slye brokers said last week during their annual industry overview.

“The statistics bear out that we are in a very healthy market,” said broker Alex Dauria. “Things are still very stable.”

Dauria, a suburban specialist, and downtown leasing broker David Martel both stressed that any recent slowdown should be viewed in the context of the surge seen during much of 2000. Although some predict rental rates will tail off in the new year, Dauria said that will largely occur because the rent spikes and vacancy decreases were so sizeable that they were abnormal compared to standard conditions.

Dauria noted, for example, that asking rents in the Route 128/Massachusetts Turnpike submarket ballooned 80 percent above that which was seen at the end of 1999, while Route 128/West was up 45 percent and the Northwest region saw a hike of 67 percent. Only the South region, which has not performed as strongly as others, was on the low end, with a 6 percent increase.

“Those [increases] are impossible to sustain,” Dauria said.

From an investment standpoint, it would actually be a boon to see rents cool, maintained Scott J. Jamieson of S&Slye’s Capital Markets Group. Jamieson said many investors today are nervous about the high rental rates being attained, fearing that they are out of whack with replacement costs and make exit strategies difficult when acquiring property.

“Gravity still exists, and they suspect there might be some softening of the rents,” Jamieson said. Even with that caveat, however, Jamieson said investor interest remains strong for Greater Boston, with buyers mollified by the region’s strong educational base, diverse economy and restrictions to new supply.

“Capital still wants to be in Boston,” he said. “We are in everybody’s top three in terms of markets [because] we remain a fundamentally healthy marketplace.”

The big question on everyone’s mind at this point, Martel acknowledged, is whether the recent woes of the high-technology industry will create a lasting drain on the demand for space. With Nasdaq on a dangerous roller coaster ride in recent weeks and almost daily announcements of dot-com companies failing, Martel agreed that the real estate industry “certainly didn’t end 2000 with a bang.”

“It remains to be seen whether that general feeling will remain in the first quarter [of 2001],” Martel said.

From his perspective, Martel said he believes the current situation is more of a short-term phenomenon rather than a signal that the boom period of the past five years has finally played itself out. Even with absorption slowing down and rental rates no longer escalating, Martel said the basic law of supply and demand will likely favor the landlords in the coming year.

Landlords King
After spending much of 2000 “at warp speed,” Martel said it now feels “like nothing is getting done,” but he insisted that is largely a matter of comparison. Although it feels like demand has slipped, S&Slye estimates companies still have 4.5 million square feet of requirements and are actively seeking space in Boston, which has just 2.3 million square feet of available. While there are several major office buildings now under construction, Martel noted that as much as 70 percent of the new space is already spoken for by forward-looking companies. The 1 million-square-foot One Lincoln St., for example, is all but tied up by State Street Global Advisors, which has a lease pending with the owners, a local team of minority investors and New Jersey-based Gale & Wentworth.

“I just don’t see any amount of new space that’s going to fundamentally change this marketplace,” said Martel. “It’s going to take an incredible amount before you start seeing any real downturn in rents.”

At the very least, he added, landlords will be slow to adjust their pricing given the heady times they have enjoyed of late. One concern he and Dauria expressed was the possibility that young firms will be painted with a brush that all start-ups are a poor risk to lease space to, prompting massive security deposits while denying substantial tenant improvements.

Compared to the beginning of the year, it certainly would seem that the supply side remains in check, with S&Slye reporting that Boston alone saw 2.2 million square feet of net absorption for the year, more than twice what is typical for the city. In 1999, for example, net absorption finished at 667,000 square feet.

Overall, Boston’s average rental rate is now $61.16 per square foot, with the Financial District’s $64.79 rate tops in that category. The vacancy rate in the Hub is now at a scant 1.5 percent, compared to 2.8 percent 12 months ago. In the city’s submarkets such as North Station and Charlestown, vacancy rates are actually below 1 percent, with only the 4.1 percent mark in the Seaport District reflecting any actual space availabilities.

Reflecting tight conditions across the river, Cambridge has a vacancy rate of 1.6 percent, with just 102,000 square feet of net absorption for the year. It has an average asking rent of $55.86 per square foot, with the $57.74 per-square-foot average in East Cambridge leading the pack.

On the suburban front, the 62.9 million-square-foot market has an overall vacancy rate of 3.7 percent, with an average asking rent of $30.78 per square foot. The greatest opportunities lie in the North submarket, which sports a 7.7 percent vacancy rate despite more than 1 million square feet of net absorption in 2000. The tightest submarket is Interstate 495/South, with a 0.8 percent vacancy rate.

Statistics Show Strong Market, But Fourth-Quarter Deals Slow

by Banker & Tradesman time to read: 4 min