According to Jim Costello, a senior economist at Torto Wheaton, Boston is one of the top six markets in the country that went from boom in 2000 to bust in 2001. All six of the top markets had exposure to high-tech failures. "The top six markets with the biggest erosion had the best 2000 and the worst 2001," says Costello. "They led us into the economic downturn and as they shed as much space as they're going to shed, the market will begin to firm up a bit."
Boston is not doing as bad as Austin, Texas--where the vacancy rate went from five percent to 19.9% over the past year--or San Jose--where the vacancy rate went from 1.4% to 14.5%--but it still saw a big change over the course of the year, notes Costello. The report looks at the vacancy rates for the sum of all markets in the country, excluding New York, and it finds that those numbers went from 9.1% at the end of 2000 to 14.2% at the end of this year. "Boston is a little less than the national average which is troubling," points out Costello. "Historically, Boston is always well below the national average." Also, says Costello, Boston has a lower vacancy rate because as an older market it doesn't grow as quickly.
There is a positive note in the midst of all this bad news though. Costello notes that the rate of change in the vacancy rate is starting to slow. The fastest erosion, according to the Torto Wheaton report, occurred from the second quarter--where the rate was 8.7%--to the third quarter--where the rate was 12.1%. By the fourth quarter, he says, the growth of the vacancy rate began to slow down.
"At least the momentum of erosion is starting to slow down," he says. Low vacancy rates are still off in the future, warns Costello, because the area does have a number of projects coming on line. "You won't see anything out there that will drive vacancies down," he says, "but at least the increase has slowed."
While the increase in vacancy rates was split between downtown Boston and the suburban market, most of the vacancies started in the suburbs and then creeped in to the downtown market, notes Costello. "The suburbs had the most exposure to high tech so it had the most erosion," he says. According to the report, the suburbs ended 2000 with a vacancy rate of 5.1% and ended 2001 with a rate of 16%. The downtown market's rates went from 2.3% in 2000 to 9.2% in 2001.
"A big portion of what is driving a lot of the increased vacancy rates is sublease space," adds Costello. The area had a negative absorption rate of 2.3 million sf in the first three quarters of 2001, most of it due to sublease space, says Costello. The good news is by the fourth quarter of 2001 the absorption rate was at negative 364,000 sf. "Compared to the first three quarters, that's pretty good," says Costello. "This suggests that less sublease space is coming into the market." Most of the firms that were going to give up space have already done so, he adds.
"It's hard to say if the market is starting to stabilize but this quarter suggests that," says Costello. "
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