In some respects, the Massachusetts commercial real estate market cast its own Big Dig persona in 2004. Billions of dollars were interjected into the system and there were clear signs of progress, yet annoying leaks still threaten to buckle the industry’s promised road to recovery.
Even as the Bay State enjoyed its best year ever for commercial property sales and certain suburban areas showed impressive leasing velocity, other submarkets continued to struggle. Employment growth remained anemic as the outsourcing of jobs overseas continued to hit the state hard, with Massachusetts having lost an estimated 195,000 positions since 2001. The downturn led to some properties being foreclosed on or taken back by their lender in 2004, as in the case of Boston’s 451 D St., although the number of such incidents in no way approached the wave that hit the Northeast during the recession of the early 1990s.
Many experts fear that a jump in interest rates could uncover hidden fiscal scars for some properties that have managed to hang on, while a significant rise in rates could also impact the investment sales sector. Despite many unanswered questions and scattered performance seen in the industry, real estate professionals interviewed were generally upbeat about 2004, maintaining that the period may ultimately prove to have been the turning point.
“It was a positive stepping stone,” said broker Garry R. Holmes, New England chapter president of the Society of Industrial and Office Realtors. “We’re definitely heading in the right direction.”
“Down deep, a lot of us were skeptical,” Cushman & Wakefield of Massachusetts Senior Director J.P. Plunkett said of initial projections for 2004, adding that the first half of the year was indeed on the tepid side. As Labor Day approached, however, business began to pick up, said Plunkett, whose firm scored several sizeable leases late in the campaign.
“As it turned out, we had a solid year,” acknowledged Plunkett, who along with colleague Catherine A. Minnerly inked more than 200,000 square feet of industrial, institutional and office leases in the final few months. That success followed up on one of the larger deals signed in suburban Boston early in 2004, in which Cushman & Wakefield Executive Director Mark Roth and Plunkett brokered an 82,000-square-foot lease in Westwood to New York Life Insurance Co. The landlord of 690 Canton St., Berwind Property Group, was represented by CBRE/Whittier Partners brokers Andrew Majewski and Nat Kessler.
Rental rates are not likely to rebound for another 12 months, according to Holmes, while fringe markets are expected to remain depressed even longer. The Interstate 495/North office market continues to suffer from the technology sector slump which enveloped it at the start of the millennium, a downturn compounded by such firms as Sycamore Networks and Cisco Systems dumping blocks of space into the pipeline. According to Trammell Crow Co. principal John J. Boyle, the Lowell/Chelmsford area remains “one of the softest markets out there,” but he also expressed hope that it will see near-term improvement.
One deal which took several months to complete has boosted Chelmsford’s office market, with Kronos Inc. agreeing to lease space in three separate buildings. “Anytime someone commits to three buildings and 210,000 square feet of space, that is a positive sign for the market,” concurred Boyle. The centerpiece of the deal was a 110,000-square-foot renewal at 300 Billerica Road, owned by New Boston Fund, while Kronos also leased 82,000 square feet at Four Omni Way and signed a 17,000 square foot sublease deal at 285 Billerica Road.
Boyle represented Kronos along with Trammell Crow Senior Vice President Mike Dalton and Vice Presidents Cathy Hughes, Deanne Conte and Jen Elia, with Kronos Director of Corporate Real Estate Janet Greenough overseeing the negotiations in-house. Richards Barry Joyce & Partners principal John Wilson was broker for landlord Koll Bren in the Four Omni Way portion of the transaction, while New Boston Fund officials Jon Gillman and Paul Stuart represented their firm on the 300 Billerica Road lease. Torin Taylor of Cushman & Wakefield handled the 17,000-square-foot slice for the sublessor, Integral Access.
Boyle said he has been impressed by the rebound in prime suburban markets such as Waltham, which saw its vacancy rate drop from 34 percent at the start of the year to about 24 percent. “The wheat got pulled from the chaff,” Boyle said of 2004, citing a sustained flight-to-quality trend among tenants. “The better buildings in good locations are starting to lease up,” he offered.
Including a surge of renewals, suburban Boston’s office market should have about 1 million square feet of net absorption in 2004. “We had an excellent year at Trammell Crow,” reported Boyle, who also recently completed an 83,000-square-foot lease expansion for Oasis Semiconductor in Waltham.
A Bigger Snowball
In downtown Boston, Trammell Crow principal Charles S. O’Connor was involved in such high-profile leases as Choate Hall & Stewart’s relocation to International Place and Boston Private Bank’s renewal at 10 Post Office Square. O’Connor and colleague Joseph P. Fallon participated in Ernst & Young’s renewal at the John Hancock Tower for 160,000 square feet, while Trammell Crow Co. principal Peter Farnum helped Wachovia in a major Back Bay lease struck earlier in the year.
In other top 2004 leases in the Hub, Pearson Education took 100,000 square feet at 501 Boylston St., while NAI Hunneman Commercial Co. aided Boston Medical Center in its recent lease of 100,000 square feet at Copley Place, with the landlord represented by Ogden White of CBRE/Whittier Partners. Those and a series of other six-figure agreements helped boost activity in Boston, but problems in the financial services sector and other core industries conspired with fresh additions of sublease space to drag absorption into the red in Boston again in 2004.
Other markets also saw sporadic results, including Cambridge, which welcomed several new companies into the fold but still ended the year with availability rates for both office and laboratory space well above 20 percent. An improving economy and the arrival of firms such as Novartis AG are expected to ease Cambridge’s pain eventually, but as 2004 closes out, that improvement remains at bay.
The emerging “Inner Suburbs” office market also had a mixed year. Although activity remained relatively weak, there were nonetheless several prominent leases completed, including Athenahealth’s lease of more than 100,000 square feet at the Arsenal on the Charles in Watertown and student loan servicer First Marblehead Corp. expanding into 136,000 square feet at One Cabot Road in Medford. Codman Co. principal David W. Campbell represented First Marblehead in that transaction, while Christopher Curley of GVA Thompson Doyle Hennessey & Stevens in Boston was broker for the landlord, Berkeley Investments. At the Arsenal on the Charles, owner Harvard University was represented by the Beal Cos. Grubb & Ellis was broker for Athenahealth, which is moving from Waltham.
On the investment sales front, Massachusetts is expected to see between $4 billion and $6 billion in commercial properties change hands in 2004, easily eclipsing past levels. Cushman & Wakefield of Massachusetts alone has exceeded $2 billion for the year, with the firm having handled such noteworthy deals as the $340 million sale of One Beacon St. in Boston, the $145 million disposition of Museum Towers apartments in Cambridge to a condominium converter, and the $157 million iStar Financial portfolio sale to investor Raymond C. Lee. The firm also is in the process of selling Riverfront Office Park in Cambridge, with RREEF Funds agreeing to pay $177 million for the two-building complex, although that transaction likely will not close until early in 2005.
Other local investment teams taking advantage of the overheated sales environment included Trammell Crow Co., whose top brokerage accomplishments included the sale of 711 Atlantic Ave. in Boston; the $35 million sale of the Lexington Technology Park in Lexington, and the $77 million transfer of 116 Huntington Ave. to Beacon Capital Partners earlier this month. CBRE/Whittier Partners was also active on numerous fronts. Brokers Chris Angelone and B. William Moylan sold six grocery-anchored shopping centers for $120 million; Elizabeth Thomas and Phil Giunta represented Cornerstone Real Estate Advisors in its sale of two Waltham buildings for $22.5 million; and principal Gary J. Lemire oversaw the sale of two Boston buildings to Essex River Ventures for nearly $20 million.
Spaulding & Slye Colliers will broker about $500 million of commercial property in 2004, according to principal Michael Smith, whose firm peddled 1414 Massachusetts Ave. in Cambridge for $42 million, 745 Boylston St. in Boston for $32 million and the Hub’s One State St. for $13 million. Meredith & Grew Oncor brokered a Boston Wharf Co. portfolio earlier this year for $92 million, while GVA Thompson Doyle Hennessey & Stevens principal Deborah Stevens orchestrated the $83 million sale of 73 Tremont St. in Boston to Suffolk University.
Users joined pension funds, foreign capital and private investors in the competition for commercial properties, as witnessed by the Massachusetts Dental Society’s acquisition of a Southborough building that serves as its headquarters. Holmes, the president of Natick-based R.W. Holmes Realty Inc., represented MDS in that deal, and was also instrumental in SSR Realty’s sale of 2 and 3 Apple Hill in Natick to its occupant, the MathWorks. Holmes negotiated that $49.7 million sale for the tenant/buyer.
Overall, Plunkett expressed optimism about the future of commercial real estate locally, calling 2004 “an important year to get out of the way.”
“There seems to be sustained momentum,” he said, adding, “The snowball is going to continue to get bigger and bigger, and I think this is the beginning of a fun three-year run.”
