In a rare example of a reverse commute by office tenants, two suburban companies have opted to relocate to Boston, with 343 Congress St. in the Fort Point Channel district their ultimate destination. A former garage being renovated into first-class space, the property should be ready for occupancy by early October.

Peter Palandjian, whose Intercontinental Cos. owns the property, said last week the deals were negotiated separately. Lexington-based Nextera has committed to 50,000 square feet on the second and third floors, while Context Integration of Burlington will take a similar amount of space on floors four and five, the latter of which is being added as part of a $27 million overhaul of the building.

The deals reflect growing interest in Fort Point Channel, a market dominated by warehouses and factory buildings constructed mostly at the turn of the 20th century. Efforts to convert the area into office space have been occasionally stunted since they began in the mid-1980s, but the past two years have seen a slew of firms expand into the district.

Palandjian said he believes one key selling point for 343 Congress St. was its sizeable floorplates, with the 25,000-square-foot floors considered a rarity for a renovation project. That aspect was a major draw for Intercontinental in taking on the project, he added, as was the ability to deliver the building in a timely manner. After acquiring the property in December 1998, the firm has moved quickly to get its city approvals and funding in place, then began construction on a speculative basis last November.

Going spec showed significant confidence in the local leasing market, but Palandjian said even his firm was surprised by the strong performance of the deals. Originally projecting $32 per-square-foot rents, Palandjian said the estimate was moved to the mid-$30 range later, but even that did not come close to the blended lease rate that ultimately was achieved in the Nextera and Context deals, which were signed at $44.50 per square foot. Intercontinental was represented in the lease transactions by David Fitzgerald of CB Richard Ellis/Whittier Partners.

‘Brutal’ Market
Spaulding & Slye estimates that Fort Point Channel office space is averaging $35.22 per square foot, compared to a citywide average of $49.38 per square foot. Just two years ago, Fort Point Channel had average per-square-foot rents of $25.65.

“We’re very pleased, but we also feel lucky,” Palandjian said. “It really speaks to the supply constraint in the market.”

Spaulding & Slye Colliers broker David Martel agreed, maintaining that the biggest difficulty facing Fort Point Channel today is a lack of space, with his firm estimating that the vacancy rate for the entire South Boston market is just 0.7 percent, compared to 10 percent in 1998 at the mid-year point. In its darkest days during the early 1990s, vacancies soared past 20 percent for Fort Point Channel and most of the city’s fringe office districts.

“If there was space available right now, I think you would see leasing happening there at a record pace,” said Martel. “It’s the hot area for all the hot young firms.”

“It’s brutal,” seconded Catherine Thompson, a principal with Thompson Doyle Hennessey & Everest. “It’s extremely tight down there right now.”

Thompson, whose firm has represented the Boston Wharf Co. in numerous Fort Point Channel deals, said the market has recently done well attracting high-tech firms, especially those backed with venture capital money. Among the new technology companies which have relocated to the area are Earthweb, Boston.com and Extraprise. While stressing that other companies are also looking at the district, Thompson said “Fort Point Channel has benefited by being known as the new cyber district.”

“[Tenants] like the brick-and-beam [construction] and the rental rate is slightly lower,” Thompson said. “But it’s very competitive.”

Broker Donald M. Hause of Spaulding & Slye Colliers said there has been a dramatic shift in attitude towards Fort Point Channel and the larger Seaport District. Whereas firms previously saw the market as a mecca for cheap space, the area increasingly is considered a desirable location. That could spell trouble for young technology companies, he said, because landlords typically will favor established companies when choosing a tenant.

“We’ve seen some companies we just can’t find space for,” Hause said. One interesting aspect of the 343 Congress St. deal, he added, is the phenomenon of two suburban firms moving into Boston. While there has been some crossover between Cambridge and Boston tenants, Hause said a suburban company seldom moves into the city.

“It’s certainly not the normal trend we’ve seen,” Hause said. While calls to both Nextera and Context Integration were not returned by press deadline, Hause surmised that the firms probably wanted to tap into the Hub’s younger work force, a group which typically relies on public transportation and wants to be in the urban environment.

The current space dearth is not expected to let up over the near term, but brokers note there is quite a bit of potential new development in the pipeline. A few doors down from the Intercontinental project, for example, a development team has begun construction of 303 Congress St. That 70,000-square-foot structure, slated to open late next year, will replace a similar-sized building which collapsed into the channel in 1995 after its underwater pilings failed.

Meanwhile, Beacon Capital Partners last month acquired an 850,000-square-foot swath of properties in Fort Point Channel from Boston Wharf Co. Although company officials said last week that they have yet to formalize their development plans, sources said it appears Beacon will focus on office uses for the properties.

With the 343 Congress St. situation stabilized, Intercontinental is now turning its attention to the former Stop & Shop Warehouse on Causeway Street in the North Station market. The company acquired the property last month for $24 million after the previous owner had received approvals to develop a residential complex in the building, a plan that involved adding six floors to the existing six stories. Palandjian said his company, which is now meeting with city officials, hopes to do a mix of office and residential space, with an estimated 200,000 square feet of office space anticipated. The Stop & Shop property has 35,000-square-foot floors.

As with 343 Congress St., Palandjian said one lure of the North Station project is the ability to deliver space in a relatively short timeframe. If all goes well with the city, Palandjian said his firm hopes to begin work soon enough to complete the project in 18 months.

“We feel pretty good about that,” Palandjian said. “Aside from One Lincoln St. (one million square feet) and Modern Continental’s project at [470 Atlantic Ave.], there aren’t a lot of big chunks of space that come in under that window.”