The Foley Hoag & Eliot law firm will anchor the Seaport Center West Office Building in South Boston, slated to open next year.
It figures.
For the past five years, commercial real estate professionals have clamored for new office construction to alleviate the space crunch that reached crisis proportions last summer, but with 2001 appearing to finally offer some relief, demand has tailed off sharply in recent months. Coupled with a slowdown in the general economy, several dot-com companies which poured into the city during the past year are suddenly retrenching as that industry has faltered, bringing a plethora of sublease space onto the leasing landscape.
One need look no farther than the Seaport Center East Office Building in South Boston, the 475,000-square-foot structure which last year became the first tower to be delivered to the city in nearly a decade. Although the property filled up quickly with such solid tenants as AEW Capital Management and Cabot Corp., Internet consulting firm Breakaway Solutions is now subletting all 100,000 square feet which it had scooped up prior to that company’s mounting fiscal difficulties. A competing firm, Viant Corp., has placed 90,000 square feet which it leased last year at 100 Summer St. back on the market, while two high-tech players that took the 100,000-square-foot 343 Congress St. in Fort Point Channel are now offering the majority of their space to subtenants as well.
To date, high-tech companies have accounted for most of the sublease space, but it appears established players may soon add to that inventory. As Banker & Tradesman reported last week, for example, Verizon Communications is thinking of subleasing upwards of 350,000 square feet at 125 High St. in Boston.
What such a trend means for the rash of office projects underway or about to break ground remains open to debate. Most industry observers continue to exude long-term confidence in the city, with the office sector’s overall vacancy rate a fraction of what it was during the real estate crash of the early 1990s. Projects such as the 36-story 111 Huntington Ave. and 10 St. James Ave. in the Back Bay have both been aided by strong pre-leasing, while the largest of the new offerings, One Lincoln St., has been negotiating for months with State Street Global Advisors on a lease that would absorb the lion’s share of that 1 million-square-foot project.
Activity at other properties has also been brisk, with sources reporting strong activity at the 11-story, 350,000-square-foot 131 Dartmouth St. project now under construction in the Back Bay. The Foley Hoag & Eliot law firm has already committed to anchor the Seaport Center West office building slated to open in 2002, while ManuLife of Canada will take all 475,000 square feet at the Parcel F development site in South Boston.
Less clear, however, is the appetite for space that will follow the current projects. A partnership of Lend Lease Real Estate and several local developers has vowed to begin construction of 33 Arch St. next month, even though the group to date has no signed leases for the 31-story tower planned for Boston’s Downtown Crossing district. Along with that 600,000-square-foot piece, the Pritzker family of Chicago is hoping to kickstart its Fan Pier mixed-use complex in the city’s Seaport District, a venture that will yield more than 1 million square feet of office space, while Rose Associates is forging ahead with a tower known as Two Financial Center in the city’s Leather District.
Tentative Tenants
According to Ronald K. Perry of Meredith & Grew, there is currently 3.5 million square feet of new office space underway in the city, with another 6 million square feet waiting in the wings. In a recent market presentation, Perry acknowledged that demand has cooled, but nonetheless characterized the fundamentals as “healthy.”
“Demand will be more disciplined and will continue to be led by the traditional firms,” said Perry, including financial services, the legal industry and insurance companies. Such outfits accounted for 85 percent of the 1.5 million square feet of net absorption seen in Boston last year, Perry said, with so-called New Age technology companies making up the remainder.
Perry is among those who feel upbeat about the long-term prospects for the new arrivals. Along with approximately 2.5 million square feet of requirements currently in the market, Meredith & Grew estimates there will be another 10 million square feet of leases rolling over in the Hub during the next five years. If the average of 1 million square feet of annual net absorption holds true for the city, Perry said vacancy will still remain in the 3 percent to 7 percent range five years from now.
“Due to limited supply, steady demand, consistent lease rollover, we do not predict a rental decrease in the near term,” said Perry.
While that may be the case, brokers such as William Goade of Cresa Real Estate Partners say the new supply will provide additional options for tenants. Goade, whose firm represents tenants exclusively, said last week that the subleasing and new projects will help swing the pendulum away from landlords, who heretofore have enjoyed one of the quickest run-ups in rents ever seen locally.
Along with the office towers, there are several smaller projects that should provide a measure of additional relief. NAI Hunneman is underway with a 70,000-square-foot building at 303 Congress St. in Fort Point Channel, while the Boston Wharf Co. is building 50,000 square feet of office space just around the corner on top of a parking garage it is constructing. Also, Modern Continental Enterprises hopes to be finished with its 335,000-square-foot rehab of 470 Atlantic Ave. by the fall. In North Station, the Intercontinental Cos. has begun preliminary work on its plan to rehab a former warehouse into a mix of residential units and 200,000 square feet of office space.
