BOSTON-New office product is finally on the way here, but it may not do too much good for tenants over the near term, or so it would seem from the latest market survey by Jones Lang LaSalle. After percolating upwards for most of the year, rental rates blasted off in the third quarter, according to the report, with the Back Bay's average asking level now topping $60 per sf, and the Financial District over $57 per sf after just hitting the $50 level at mid-year.
“The growth is pretty aggressive,” acknowledges JLL broker Ben Heller, who cites a dearth of supply as the main catalyst, coupled with robust leasing activity, especially among small- and mid-sized tenants. JLL says tenant requirements are up 26% from mid-year even after several larger deals have now been completed.
According to the review, 225,000 sf of net absorption was recorded in Boston's 58.1-million-sf office market in the third quarter, bringing the total for 2007 to 502,000 sf and dropping the city's overall vacancy rate to 7.1%. “The fundamentals are very strong right now,” says Heller, as exemplified by a super-tight 3.5% vacancy in the Back Bay. That mark was ratcheted down substantially by the departure of law firm Ropes & Gray from the Financial District to the Prudential Center in the Back Bay. Net absorption for the quarter there was 413,000 sf, compared to negative 206,000 `sf in the Financial District.
Heller cited the R&G departure as the key factor putting the Financial District in the red, although the CBD did score a measure of equilibrium when long-time Back Bay tenant Hill Holliday matriculated to 53 State St., aka Exchange Place. But after having been the perennial leader in office rental rates forever, the pendulum has now swung from the CBD to the Back Bay. The latter district had an asking rate of $56.19 per sf at mid-year, and while there was a brief spike of rents to begin the decade that approached such levels, Heller says he believes that may be a high-water mark for the submarket, one which features 12.8 million sf compared to 33.6 in the Financial District.
Rent accretion has been most acute in the class A arena, and Heller says capital-conscious companies are eyeing class B buildings as an option. Some prospects are considering suburban flight as one possibility, but Heller says most Boston companies prefer to remain local if possible. As a result, fringe districts such as North Station and Fort Point Channel are again becoming popular. Only the Financial District has negative absorption for the year, while there and every other Boston submarket has enjoyed a rise in rental rates. The city average is now at $53.07 per sf versus $46.67 per sf at mid-year.
Especially with the dominant Equity Office Properties continuing to push the leasing price envelope, it is perhaps no surprise to see such hikes in the asking rates, but Heller says there is some real teeth behind the numbers. “The landlords are holding firm,” he says, and as a result, deals are being achieved in the $80- to $90-per-sf range. Most of those have been smaller transactions, but Heller says the continued activity and lack of new space until two new towers that broke ground this year are delivered towards the end of the decades should keep Boston a landlord market for some time.” It's pretty remarkable,” he says of the recent hikes.
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