Joseph Sciolla – Few space shoppers
Labor Day has always been seen as the last gasp for summer, but when it comes to Greater Boston’s office market, industry practitioners might very well consider extending their vacations a bit longer this year.
With the office sector in a prolonged coma, many had been hoping that activity would begin to recover once the traditional summer doldrums faded away. According to local brokers keeping an eye on the situation, however, there are virtually no signs that such a rebound is in the offing.
I’m a bear, pal, leasing veteran William F. McCall Jr. said last week in giving his extended outlook. Right now, it seems very unlikely that we are going to see many people out looking to take more space after Labor Day.
Considered the dean of Boston’s commercial real estate industry, McCall said conditions simply are not ripe for a recovery. Job creation is the typical engine for such demand, he said, and the onslaught of layoffs and hiring freezes cropping up seemingly daily would suggest it could be some time before that trend reverses itself.
Right now, there’s no pop in the market, said McCall, who added that the the only signs of life are coming from those firms whose leases are rolling over. Anybody who says they are seeing positive signs are, I think, whistling Dixie.
Figures released last week by the Greater Boston Chamber of Commerce would seem to bear out McCall’s assessment, with the organization reporting that the metropolitan region alone lost 1,500 jobs in July. Suburban markets are also shedding positions. EMC recently announced 300 job cuts, Polaroid said it is laying off 475 people and Lucent Technologies is lopping off 1,000 positions in the Bay State as part of its worldwide plans to reduce its workforce by 10,000.
As far as actual expansion, McCall said he has witnessed very little to date, and predicted that could spell trouble not just for this year, but possibly all of 2002 given the lead time between positive job growth and a corresponding need for new office space.
Equally pessimistic is Joseph Sciolla of Cresa Partners, at least in the near term. Presently, he said, most of the companies he works with are more interested in cash preservation than in shopping for new office space.
I wish I could give more optimistic news, but it just isn’t there, said Sciolla, whose firm exclusively represents tenants. I think we’ve got a lot more air to let out of the balloon before activity begins to pick up again.
The reversal between last year’s record pace and the sudden demise in 2001 is unprecedented, according to McCall. In the 20 years that his company has been tracking the region’s office market, he said it is the first time that the suburbs have experienced negative absorption, as seems likely for 2001.
To go from the best year ever to what is arguably the worst year is just incredible, he said. It has been unbelievable.
‘A Great Time’
Indeed, according to a report released last week by Trammell Crow, Boston proper has seen a significant rise in office vacancy rates for the first time since the recession of the early 1990s, reaching 10 percent with 2 million square feet of negative absorption since the start of the year. To date, only the Midtown district and its paltry 27,000 square feet of net absorption has been in the black, with the remaining eight city submarkets all seeing negative activity. The Financial District bore the brunt of the difficulty with 1.4 million square feet of net negative absorption in the past eight months.
In the suburbs, Trammell Crow estimates negative absorption of 2.2 million square feet thus far, bringing the vacancy rate there into double figures with an alarming 13.2 percent vacancy rate.
It’s as quiet as can be, concurred broker Karyn McFarland, a founder of Boston-based McFarland & Finch. It’s almost as if everyone went to sleep this summer.
To a certain extent, McFarland said she believes the commercial real estate market’s shift over the past few months from one of hyperactivity to hibernation has stunned players on both sides, with landlords unsure what rents to charge and tenants remaining on the sidelines in hopes of further deterioration of rates. McFarland said she anticipates that rents will continue to decline, but maintained they are no longer in the free fall experienced between last autumn and this summer.
While acknowledging the willingness of companies to delay their leasing decisions, McFarland advised that this may be the best period for firms to act, considering the advent of sublease space and the corresponding lack of competing tenants. Several of the sublease opportunities have terms of three years or more, she said, enabling them to be competitive with direct space.
If you are a good-credit tenant today, the world is your oyster, McFarland said. It’s a great time to be out looking [for office space].
Nonetheless, McFarland agreed that it may be a difficult message to send in the current climate. I don’t think you will see things pick up in September, she said, although she did predict office leasing activity will begin to slowly increase in subsequent months.
If misery truly does love company, then at least Boston’s brokers can take comfort in knowing they are not alone in the depressed office marketplace. According to Torto Wheaton Research, the vacancy rate for office space nationally has also climbed into double figures at 10.8 percent, with 30 million square feet of negative absorption cascading onto the scene since the start of 2001.
As for the long-term outlook, there does appear to be some argument as to when Boston will see conditions improve. Whereas McCall anticipates that the region could suffer for some time to come, Sciolla said he believes the downturn is already into its fourth quarter, maintaining that the market began to slip last September even though it took until the start of 2001 for alarms to begin sounding.
The silver lining is that we are going to see a lot of pent-up demand next year, Sciolla said, predicting that the rebound could take shape by the spring of 2002.
