One Federal St., Boston
By most indications, there will not be an autumn fall in Boston’s office market this year.
Bolstered by solid third-quarter numbers and reports of actual rental increases for top-notch space, several major tenants entering the leasing scene are contributing to a tone of optimism from industry observers. At least two of the virgin prospects sport six-figure requirements, according to sources, with CRESA Partners said to be helping the Hartford Group consider alternatives beyond its current home at 150 Federal St. just as Bingham McCutchen LLP prepares to leave that tower for nearby One Federal St. Also, Ixis Asset Management has retained McCall & Almy to test the local waters for about 100,000 square feet.
“They are in the market,” McCall & Almy Executive Vice President David Richardson confirmed last week, although he declined to offer further details about his client’s needs. An affiliate of Loomis, Sayles & Co., Ixis is in approximately 95,000 square feet at 399 Boylston St., a 13-story retail/office building acquired this summer by Abbey Road Investors and Rockwood Capital for $55 million. Despite a presence in the heart of the Back Bay, the firm is a good candidate to move, one source opined. “I suspect it will be difficult” to keep Ixis, said the source, claiming the floor plates at 399 Boylston St. are not large enough to efficiently accommodate such a large tenant.
If such proves to be the case, the new owners can take solace in the rapidly improving conditions, gains which many attribute to small- and mid-sized tenants filling in gaps left behind by consolidations among bigger players. According to Spaulding & Slye Colliers, Boston’s 57 million square foot office market enjoyed 630,000 square feet of net absorption in the third quarter, bringing the year’s total to 1.2 million square feet on the plus side. The vacancy rate now stands at 10.8 percent, while the availability rate is 15.5 percent.
Although the Codman Co. had more muted absorption figures of about 200,000 square feet, principal Robert B. Cleary Jr. stressed that the office sector is indeed on the rebound, concurring with CRESA Partners that there has even been a slight uptick in office rents, with CRESA estimating that Class A rents in Boston have increased from $39 per square foot to $40 in the past three months. Lincoln Property Co. saw a rise in the overall average asking rental rate from $31.03 per-square-foot at midyear to $31.41 after three quarters.
“I would describe the mood as upbeat,” said Cleary, who leads his firm’s downtown leasing team. “We’re at least seeing a stabilization in rents, and modest growth in some spots, so we’re obviously not at the bottom anymore Â… The bargain-basement [deals] have pretty much disappeared.”
Worst Is Behind
Lincoln Property Co. Research Director Emily Schwartz tracked just under 600,000 square feet of positive absorption for Boston in the third quarter, bringing the vacancy rate from 9.5 percent at midyear to 9.2 percent, and the availability rate from 16.4 percent to 15.1 percent. The vagaries between industry market reports typically reflect incongruous samplings and differences in accounting for when occupancy into or departure from a building takes place.
In any event, even the firm with the harshest review of the third quarter agreed that conditions are not deteriorating. Richards Barry Joyce & Partners places the Hub’s net absorption at negative 69,000 square feet for the quarter, but Research Director Brendan Carroll concurred that the worst is behind the city’s office market.
“In general, the fundamentals look good,” he said, particularly when gauged over a 12-month period vs. the recent three-month stretch. The slow summer season and accounting for long-anticipated merger-and-acquisition space reductions caused the recent dip, Carroll explained, adding that he anticipates a strong finish to the year.
“The business outlook continues to be positive,” he said, with RBJ also registering positive absorption for the quarter in Boston’s Financial District of about 45,000 square feet. By comparison, Spaulding & Slye put the Financial District absorption for the quarter at 277,000 square feet positive, outpacing all seven city submarkets.
If nothing else, the third quarter was a stark contrast to that same period in 2004, when Spaulding & Slye put absorption in the red by 500,000 square feet and estimated a vacancy rate of 11.7 percent. The city has not looked back since, with Spaulding & Slye principal William Barrack noting that this is the fourth straight quarter of positive absorption, partly due to a diverse mix of financial services, insurance and legal operations enjoying continued growth. Barrack was recently hired to represent the Wilmer Cutler Pickering Hale & Dorr law firm in its search for some 325,000 square feet.
“We’re pretty excited about it,” Barrack said of the assignment, adding that “all options are on the table” at present. The erstwhile Hale & Dorr is based at 60 State St. in the Financial District. While such firms once would have kept a short leash on their space search, the departure of Holland & Knight and Palmer & Dodge to the Back Bay has opened up that submarket to law firms in recent years.
Whatever the reason, the Back Bay has been among the strongest performers in 2005, coming back from a period of instability to a situation where Codman places the direct vacancy rate below double figures at 9 percent and the availability rate at a manageable 13 percent. Cleary said he is not surprised given the Back Bay’s range of amenities and the presence of several prominent office buildings.
‘A Beneficial Deal’
One of the district’s biggest coups was the renewal of Houghton-Mifflin at 222 Berkeley St. and the abutting 500 Boylston St., with the firm committing to approximately 240,000 square feet after eyeing such properties as Copley Place a few blocks away. Cleary, while not a participant in the negotiations, praised the landlord, Hines Interests, as well as McCall & Almy’s tenant representation group, with Richardson’s firm negotiating on behalf of Houghton-Mifflin.
“That’s a beneficial deal for both parties,” said Cleary. The tenant was able to reduce its exposure in upper-crust space while committing to a long-term deal in the two properties, which are so close that a wall between the two is expected to be removed to give Houghton-Mifflin access on floors three, four and five.
The lease is a super-sized version of the “blend-and-extend’ process being seen in the office market during the past few years. In many ways, it was a practice borne of the market’s shift to favoring tenants, with gluts of cheap, contiguous space flooding the pipeline following the crash of the technology sector at the start of the new millennium.
By Barrack’s estimates, some 4 percent of the city’s office supply has been converted or is in the process, leading to the tighter market. Because of that, Cleary advised any firms who have been sitting on the sidelines to step into the fray as soon as possible, and to do so with a professional on their side. “It’s the in-between markets when brokers can help the most,” he said. “That is when good advice can really make a difference.”
A tenant representation firm, CRESA Partners also sees the shift coming, with President Joseph Sciolla reporting that landlords are already cutting back on build-out packages and other concessions. According to Sciolla, “It’s better to act now than react later on.”
“We are advising tenants to be very proactive if they want to lock into favorable deals,” Sciolla added, particularly as large blocks of space get absorbed. After months of scouring the market and considering various alternatives, for example, some 300,000 square feet at One Federal St. is apparently being taken by Bingham McCutchen, with several sources last week claiming that the transaction has been consummated. Efforts to contact principals involved in the deal to confirm as much were unsuccessful, but if the lease agreement is indeed completed, it will further cut the opportunities available for tenants such as the Hartford Group or Ixis Asset Management.
