ManuLife is seeking takers for office space it is leasing in such properties as 101 Huntington Ave. and the John Hancock Tower (pictured above) in Boston, adding to a recent spate of sublease announcements and pushing availability rates in the city above 18 percent.

Boston’s office market turned a corner in the third quarter of 2004 – and ran into a wall.

After a promising start to the year, with a number of significant lease signings helping bolster optimism that the region’s prolonged slide was finally nearing an end, much of the enthusiasm was halted by a one-two punch of slower demand and a series of announcements that several large blocks of sublease space were being heaped upon the city’s already bloated inventory. State Street Bank, ManuLife Financial Corp. and Bank of America all acknowledged plans to sublease hundreds of thousands of square feet of downtown space during the third quarter, reversing many of the gains seen during the first half of the year. ManuLife is seeking takers for space it is leasing in such properties as 101 Huntington Ave. and the John Hancock Tower at 200 Clarendon St., while Bank of America has placed nearly 400,000 square feet on the market at 100 Federal St. in the city’s Financial District.

“There isn’t anything out there that indicates we are going to be able to absorb this [added supply] near term,” said GVA Thompson Doyle Hennessey & Stevens principal Donald Hause. “It’s going to take a long time to work its way through.”

According to Hause, the availability rate of office space in Boston had winnowed down from about 18 percent to 14 percent during the past year, but the recent developments have again pushed that figure up to about 18 percent. And while most industry experts had been anticipating the moves, with Bank of America’s and ManuLife’s downsizings rumored for months, the amount of supply added caught many off guard, said Hause, while the rapid-fire delivery of the announcements made for a bleak end to the summer.

Landlords can take comfort knowing that they will continue to be paid for the excess sublease space being put on the market, but Hause said the ability to raise direct rental rates will likely be hurt by the new opportunities available to tenants. What had already been a tenant’s market will continue that way for some time, said Cresa Partners principal Joseph Sciolla, who offered up a particularly dire outlook for the city’s office market during an interview last week.

“I think we are going to be in a flat market for another two to four years,” said Sciolla, whose firm exclusively represents tenants. “It is going to be a very slow and painful recovery.”

Rents Take ‘Beating’

Office rents in Boston barely budged during the third quarter, according to Cresa, with Class A space remaining at about $39 per square foot and Class B space averaging $23 per square foot, virtually the same levels as found at mid-year. About the only bright spot has been for high-rise space, with that niche averaging $45 per square foot and posting a vacancy rate of just 7 percent in the third quarter, well below the 18 percent mark for all Boston office space.

“That’s the only segment that has shown any improvement,” said Sciolla. “Mid-rise is flat and the low-rise space continues to take a beating.”

Although there have been several significant leases in recent months in the Hub, Sciolla said that most of the activity – about 60 percent – has been for renewals and restructuring of existing deals, indications that landlords are being motivated to retain tenants whenever possible. Most new transactions, Sciolla said, are for companies needing 10,000 square feet or less, making it less likely that any large users will eat away at existing inventory in any meaningful way.

GVA/Thompson Doyle is reporting similar trends, with Hause estimating that there are 225 firms needing about 3 million square feet of space currently circulating in the Boston market. About 60 percent of the companies seeking space need 10,000 square feet or less. “You don’t see anyone going from 25,000 square feet to 50,000 square feet because they are growing or hiring,” said Hause.

The region’s lack of job growth continues to hang over the office market, concurred Sciolla, who noted that Massachusetts lost another 4,300 jobs in August. Tighter budgets, outsourcing of positions overseas and new technology that allows firms to be more efficient or have employees work from home are all dragging on the prospects for substantial job growth in the coming months, said Sciolla.

“This is not doom and gloom, it’s just the convergence of all these factors coming together,” Sciolla said. “It’s really a perfect storm.”

Figures released last week by Spaulding & Slye Colliers also show a difficult third quarter, with the Boston real estate services firm estimating that the availability rate for the city increased from 17.5 percent at the mid-year mark to 19.7 percent, while absorption of space was in the red by 604,000 square feet. Six months into 2004, Boston had enjoyed 437,000 square feet of net absorption, but the recent arrival of the sublease space has reversed that progress.

All of Boston’s six office submarkets posted negative absorption during the third quarter, said Spaulding & Slye, save for a measly 4,400 square feet of net absorption in the city’s Seaport District. The 12.9 million-square-foot Back Bay submarket was hardest hit with negative absorption of 331,000 square feet, whereas the Financial District was in the red by 231,000 square feet.

According to Sciolla, rental rates in Boston will not begin to rise until the vacancy rate drops to between 10 percent and 12 percent, but the Cresa official said it will take a sustained period of activity before the rate drops to that level. Besides the direct vacancy, many firms still have so-called “shadow space” that needs to be absorbed before they look to lease additional supply, Sciolla explained. Shadow space is a reference to space that companies are leasing but not occupying, making it difficult for real estate analysts to account for in estimating available supply.