The suburban office real estate market suffered during the first quarter of 2001, especially compared to the first quarter of 2000. But as last year’s statistics were some of the strongest on record, almost any figures will look bad by comparison – even though they are in fact normal.

From an investment sales standpoint, the year 2000 ended with suburban office sales breaking record ground. Sales totaled $1.31 billion as compared to the previous year’s $655 million, nearly a 100 percent increase. Equally impressive was the fact that the average price per square foot also jumped 26 percent, from $132.98 to $168.05. That price increase induced more landlords to sell properties throughout the suburban region.

During the heated demand for office space from the beginning of 1999 to the end of 2000, there never seemed to be enough supply; the resulting imbalance pushed rents to record-breaking levels, thus warranting the high selling prices. It is unlikely that such sales figures will be matched in the near future, as slower office demand and a great deal of available space work to drive down asking rents.

The first quarter of 2001 was marked by a dramatic increase in availability throughout the suburban market. In the Metro North the availability rate reached 9.68 percent, a considerable jump from the 5.38 percent rate at the end of 2000, but still historically low for the region. The impact was greatest in the Route 128 North sub-market, where availability went from 5.66 percent to 13.79 percent. As home to many of the state’s technology firms (both start-ups and established), Metro North was destined to feel the adverse effects of the technology sector fallout. In the first quarter, venture capital-backed Internet companies ran out of cash and closed shop. This quarter it is the larger firms, such as Cisco and Oracle, which are suffering from cutbacks in information technology spending.

First Quarter
During the first quarter, availability was also up in Metro West (where Route 128 saw the largest jump from 3.7 percent to 8.6 percent) and Metro South, in which availability increased modestly to 8.96 percent from 8.12 percent. When taken in historical context, we can see from the “suburban availability rates” chart that 2000 reached the lowest availability rate in recent memory for the suburban market. Therefore, despite the sharp increase in available space during the first quarter, the rate remains historically low – and a great deal lower than as recent as 1998.

Some of the increase in the first quarter availability can be attributed to new construction and conversion. For example, in the North the former Osram Sylvam manufacturing facility at 75 Sylvan Street in Danvers has been converted to 275,000 square feet of office/R&D space. South of Boston, new projects broke ground at 130 Royall Street and 35 Shawmut Road in Canton, adding 170,000 and 60,000 square feet respectively. At 2 Hampshire Road in Foxborough, a 117,000 square foot building is scheduled for completion this August. In the West, Boston Properties started construction of 295,000 square feet at the Waltham Weston Corporate Center, and Capital Group Properties broke ground on 82,000 square feet at Southborough Place on Route 9.

These large projects, however, account for only a small portion of the increased availability: sublease space has also affected the supply side, throwing it off balance. Conservative capital markets, however, are helping to keep new supply in check.

Coinciding with these developments in availability, as expected, absorption has reversed direction. Metro North ended the first quarter 2001 with negative 1.24 million square feet of absorption, with Route 128 accounting for 70.5 percent of the total. The Metro West market ended the first quarter of 2001 with negative absorption of over 1.53 million square feet. The vast majority of this negative absorption was a result of the Route 128 West sub-market, which posted a net increase of over 1 million square feet of available office space for the quarter. Net absorption in the Metro South market also decreased compared to last quarter.

The Metro North and Metro West office markets had seen significant positive absorption for eight years running, with the largest gains posted just last year. Therefore, despite the large negative numbers, the overall growth in the suburban office market has been substantial.

Market movement is always good for someone, and this recent market shift has helped tenants negotiate better terms and rates. After several quarters of consistently rising rents, the increase in availability has halted the trend. The average asking rent in the Metro North remained unchanged from last quarter at $25.62. In the Metro West market, the average asking rent fell 4.6 percent from its historic high of $38.55 last quarter to $36.78 this quarter. Asking rents in the Metro South also saw a mild drop – $21.22 compared to $22.97 last quarter.

After a decidedly tight market for last few years, the first quarter of 2001 revealed significant easing in office real estate and the second quarter looks to bring more of the same. The increased availability will allow tenants more selection in all space sizes. Throughout 2000, all of our tenant clients were asking for more space selection – now the options are out there.

Tenants Win During 2001 in Suburban Boston Office Game

by Banker & Tradesman time to read: 3 min
0