Boston's office rents slide as vacancy rate soars
boston.com
By Charles Stein, Globe Staff | November 1, 2004
As the one who handles finances for Community Catalyst, a local healthcare nonprofit, Rosemarie Boardman worries about costs. So when the organization's lease at 30 Winter St. was about to expire, Boardman grew nervous: How hard would it be to find new space at a reasonable price?
As it turned out, not hard at all. Boardman looked at 15 buildings that met her requirements. The landlords in some locations were willing to offer inducements such as a period of free rent or money for improvements.
In the end, Boardman decided to stay put for no more rent than she pays today. ''If you are a tenant, this is a great time to be in the market," she said.
For owners of commercial real estate, however, Boston is home of one of the worst markets in the nation. Over the past year, office rents in Boston and its suburbs dropped a little more than 5 percent, according to Reis Inc., a New York firm that tracks real estate trends.
That 5 percent doesn't sound like much, but it was the biggest drop in the 80 cities that Reis follows. Over the past four years Boston rents are down 27 percent. Only San Francisco and San Jose have experienced bigger declines.
The office market is a reflection of economic trends, and in Boston's case those trends have been mostly negative. A job-killing recession has given way to a recovery in which employment growth has been modest. Cost-conscious employers are squeezing workers into ever-smaller spaces. And in the financial services business, which once gobbled up space all over the city, mergers and downsizing have led a handful of big companies to put up for sublease more than 1.5 million square feet of space, enough to fill a 60-story office tower.
While most real estate specialists think the market has hit bottom, they do not anticipate a quick recovery. ''It is conceivable that rents could stay flat for two or three years," said Joseph Sciolla, a principal with Cresa Partners, a national real estate firm.
Boston fell from a lofty perch. Just four years ago, the office market here boasted a vacancy rate of 3.2 percent, one of the lowest in the country. In downtown Boston, rents in the fanciest buildings touched $60 a square foot.
The slide has been steep. In the third quarter of this year, the vacancy rate reached 19.8 percent, according to Reis, and rents in the best buildings are closer to $40 a square foot.
''Commercial real estate is all about jobs," said Bill McCall of McCall & Almy, a 40-year veteran of the real-estate market, explaining the decline in Boston's fortunes.
Between January 2001 and March 2004, Massachusetts lost more than 6 percent of its jobs, the biggest drop of any state. About 215,000 jobs disappeared; roughly 20,000 have been created in the past six months. Continued...
Page 2 of 2 -- The situation has been particularly bleak for the elephants, McCall's name for the large establishment companies that typically drive the real estate market. ''The elephants are killing us," he said.
State Street Corp. is one of those elephants. Like many financial firms, State Street, which provides services to institutional investors, prospered during the 1980s and 1990s on the strength of the rising stock market. The market's decline has led to a reversal of fortune at State Street. The company described its most recent earnings as disappointing and told Wall Street it was putting a renewed emphasis on cost control.
State Street has cut the size of its Boston-area workforce from 11,700 to 10,200 in the past 18 months. In 2000, State Street signed a lease for 1 million square feet at One Lincoln Street, a brand new office tower.
State Street paid $60 a square foot for the space at the absolute top of the market. ''I choke when I see that number," former State Street chief executive David Spina said last year, looking back on the leasing decision. To bring down its real estate costs, State Street is putting up for lease 375,000 square feet of space in three separate downtown buildings.
State Street has plenty of company in the financial community. Bank of America Corp., which bought FleetBoston Financial Corp. last year, and Manulife Financial Corp., which acquired John Hancock Financial Services last year, are both subleasing a substantial amount of space, according to brokers. So is Deutsche Bank, a financial company that in 2001 bought Zurich Scudder Investments, a mutual fund firm.
With the stock market in the doldrums and with less money flowing into local mutual funds, the near-term prospects for financial services are not bright, said Ray Torto, a principal with Torto Wheaton Research, which tracks real estate markets nationwide. ''One of our key engines of growth is stalled," he said.
Broader national trends are also at work in the office market. Companies in all industries are trying to get by with as few employees as possible.
They are also trying to get by with less real estate. ''Space is one place you can be efficient," said Ed Eskandarian, president of Arnold Worldwide Partners, an advertising agency with 800 employees at 101 Huntington Ave. in Boston.
Three years ago, Eskandarian said, his firm used about 250 square feet per worker; today that number is down to 210.
According to Sciolla of Cresa Partners, the amount of space allocated per employee has been steadily shrinking for the past five years. ''Productivity is killing real estate," Sciolla said.
For tenants, empty space has translated into more choice. Before Standard & Poor's moved into 225 Franklin St. this year, the company got to look at nine different potential sites. Parents United For Child Care, a social service agency, recently signed a new lease after touring 15 to 20 properties.
What tenants are not getting are bargain-basement rents. Landlords are willing to be flexible, say brokers, but they will not cut their prices much below current rates. A significant portion of Boston real estate is owned by big institutional investors who would prefer to wait for the market to recover rather than lock themselves into unattractive leases.
The news is not all bleak for landlords. In suburban Boston, leasing activity has begun to pick up after several slow years. While large firms are still cutting back, smaller companies are picking up some of the slack, brokers say.
Even in downtown Boston, the high vacancy rates have not cut the prices big investors are willing to pay to own some of the city's premier properties. Those investors are betting that Boston -- a center for finance, technology, education, and health care -- will remain an attractive place to do business longer term.
In the short-term, however, the story is less encouraging. ''We are on the floor," said Sciolla. ''We are going to stay on the floor for a while."
Charles Stein can be reached at stein@globe.com.
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