Verizon Communications reportedly is planning to sublease more than 350,000 square feet at Boston’s twin-tower complex at 125 High St.
In what could hardly be described as a busy signal, Verizon Communications is reportedly dumping additional space on Boston’s increasingly flaccid office market, with industry sources estimating that the telecommunications giant will sublease more than 350,000 square feet at the Hub’s twin-tower 125 High St. complex.
“That’s huge,” one Boston real estate broker familiar with the situation told Banker & Tradesman last week. “It’s definitely going to affect the market.”
Although most industry observers insist that Boston could actually use the supply, others agreed that such a large piece of availability will further swing the leasing pendulum more in the favor of tenants. The action comes as difficulties in the technology sector have brought an estimated 1 million square feet of sublease space onto the Boston scene in just a few months.
“From a practical standpoint, it brings additional inventory to the market at a time when demand has dropped off sharply compared to this time last year,” Ted Wheatley, a principal with The Codman Co. in Boston, said of the Verizon offering. “It’s certainly a significant block of space.”
Without counting the Verizon portion, Codman estimates that Boston has already seen 1.4 million square feet of space returned to the market since the 3rd quarter of 2000, including a mix of lease rollovers and subleasing opportunities. The vacancy rate for the 51 million-square-foot market was 2.6 percent at the end of 2000, according to Codman, following 1.6 million square feet of net absorption last year.
According to sources, Verizon is offering floors two through seven at 125 High’s Oliver Street tower, and floors nine through 15 at the High Street property. Asking rents will reportedly range between $60 per square foot for low-rise floors and above $70 per square foot for the upper stories.
Verizon spokesman Jack Hoey downplayed the rumors, maintaining that the company has merely been exploring different scenarios as part of a routine review of its office leasing costs. As of this point, Hoey said, “there has been absolutely no decision” on whether to bring space at 125 High St. to the market.
“All we are engaged in are hypothetical ‘what ifs,'” Hoey told Banker & Tradesman last Friday. “We’re just looking at possibilities, and the only way you can do that is to go out and test the waters.”
Some real estate brokers insisted otherwise, however, with one downtown leasing specialist insisting that Verizon is “definitely going that route” of subleasing the property.
“I know for a fact that it’s true,” said the broker, who requested anonymity. Others said they are already receiving marketing information related to the space.
CB Richard Ellis/Whittier Partners has supposedly been engaged to handle the subleasing, but broker David Fitzgerald declined comment on the matter. Given the lack of details offered, it is unclear what Verizon’s motivations might be in subleasing the space, but one source said real estate officials have previously outlined the company’s intentions to relocate employees into properties it already owns. Verizon’s Boston headquarters is just around the corner from 125 High St., while the company also owns another major facility in the Hub at 6 Bowdoin Square. The source said modern switching equipment has freed up space in those properties that was previously needed to accommodate older systems.
As a company that is also reaching into new markets via mergers and acquisitions, Verizon could also be anticipating another round of layoffs, another source suggested. Just before the end of 2000, for example, the company closed its Yellow Pages facility in Middletown, laying off an estimated 500 people and sending the remaining jobs in that division to Texas.
More Options
Despite the size of the potential sublease, Wheatley said he believes Boston is still strong enough to absorb the space currently available in the Hub’s office sector. Many tenants are still recovering from the sticker shock felt last summer when a dearth of supply collided with unprecedented demand to send rental rates skyrocketing. According to Codman, Class A space averaged $66 per square foot by year’s end, while Class B was averaging $45 per square foot.
Although it might seem that the commercial real estate industry is headed for trouble, Wheatley argued that such is not the case. Compared to the hyperactive 2000 campaign, the additional supply and thinner demand seen at the start of 2001 is more reflective of normal market conditions, said Wheatley.
“If nothing else, tenants have more options to choose from, and more time to make their decisions,” he said. “But despite the appearance of a slowdown, one would hardly call that a sea change in terms of tenant leverage.”
Interestingly, one thing that might lead Verizon to consider a sublease strategy would be the lofty returns the company has reaped on previous deals. According to sources, for example, the $89 per square foot that a subsidiary of Liberty Financial paid last summer for a Verizon floor at 125 High St. was a record for the Hub office market last summer. While it is possible that some boutique space might have fetched more, one source noted that the deal with Keyport exceeded 20,000 square feet.
In any event, Verizon has fared considerably better than its ownership did in the early 1990s, when the company was actually an investor in 125 High St. Indeed, if the rumors of a massive subleasing bear out, it could represent the company’s final involvement in the hulking 1.5 million-square-foot complex. Verizon’s predecessor, New England Telephone, had an estimated 30 percent ownership in the project when it broke ground in 1988. The firm had joined Travelers Insurance and Spaulding & Slye Colliers in pushing ahead with the property, one which held great promise when it was initially conceived.
By the time 125 High St. opened in early 1991, however, the office landscape had changed dramatically. Not only was the region in the depths of one of the city’s worst recessions ever, a glut of office space from new projects and companies downsizing greeted 125 High St.’s arrival. Rental rates were far lower than had been anticipated, and within a few years, both NET and Spaulding & Slye had seen their ownership percentages diluted substantially.
Spaulding & Slye ultimately lost its position, as well as its role as leasing and property manager, when Tishman Speyer stepped in four years ago to buy the building with a partnership that included Travelers. In September 1999, a 76 percent stake was sold to a German syndicator, Jamestown, with Tishman Speyer retaining the remaining piece in order to keep the management contract. Jamestown paid $377 million for its share of the complex.
