Monday, December 28, 2009

Allston Brighton apologies: Call me Crazy for praising the 2nd largest employer in the State

All I wrote was a simple article extolling the virtues of having strong educational and health institutions in Boston. In fact, the world's best and I dare anybody anywhere to challenge Boston on that measure.

The responses have been...well...peculiar.

The first came from an expat Texan who, because he doesn't like traffic around Longwood, feels that we, whoever we is, need to call in the planning "geniuses"--his word--who laid out the master plan for the Rice Medical Center in Houston. Nice idea, wrong century. I addressed that in an earlier blog--in short, it's easy to plan a brand new complex where only tumbelweeds are bouncing.

Now, and I was actually waiting for this, I have fallen under the sniper fire of Allston Brighton. But, surprisingly I have many supporters there. It is, of course all about Harvard. Yes, Harvard has delayed its expansion plans. Yes, Harvard has deprived the neighborhood of such landmarks as the collapsing Casey & Hayes monstrosity on the Pike, now a future lab site. Someone was mad about a local dry cleaner.

Believe me, there is no love lost between me and the Crimson. I bleed Green for those who care. But, I don't think it's a burden to have the most prestigious university announce that all of its future growth, particularly that in the sciences, will take place in primarily abandoned industrial lots in Allston Brighton.

One reason. After Partners Healthcare, Harvard University is the second largest employer in the state. Yes, that is true. With over 18,000 non-faculty employees, many of whom reside in---you guessed it--Allston Brighton, and over 4,000 faculty members, Harvard is larger than Raytheon, Liberty Mutual, Fidelity, General Electric, John Hancock, you name it.

So, although I can understand the pain of losing a dry cleaner and the nostalgia for an abandoned rat-filled moving company's empty building, I just have to believe that Harvard's purchase of that rat home and its purchase of 26 additional acres of Allston Badlands may just be a very good thing for the residents who are most upset about it.

Monday, December 21, 2009

Geez, more bad vibes and now someone wants me to move to Houston!!

Hello all,

In reply to what I thought was a simply stated opinion of the importance of the health and education industries to our economy, and particularly to our commercial office space market, I received another bad vibe letter from one Scooby Doo. Now you know I don't have too much time for the bad vibes people. They tend to live by the creed "if it ain't broke, break it."

Now, I will take my lickings from someone debating the relative merits of our cities, be it New York, Chicago, LA, or Altoona. Each has its own style, its own strength. But please don't challenge Boston against any city when it comes to healthcare and then don't finish your bad vibes point by shooting yourself in the foot complaining about Boston's mutual funds industry. That's like me, a 5' 11" washed up hockey player, taunting Kevin Garnett to "show me whatcha gut 'fore I embarass your a..s" Not smart.

Anyway, this is what Scooby Doo wrote verbatim:

"Scooby Doo has left a new comment on your post "The Influence of Educational Institutions on Bosto...":

Whose going to pay the taxes ? The Medical and Educational sector are usually non-profit.

When i travel thru the Longwood Medical Area i cringe - Boston really needs to get it's act together and coordinate the planning for the entire medical area. Pedestrians can barely cross the street, traffic lights are not coordinated. Have you ever been to the Texas Medical Center in Houston. Send some of the planning genius's down there to learn something. I am tired of business as usual here in Boston, one day we will wake up and Fidelity will be headqurtered in Providence !!

And hear is when I decided to bring in not only a few drones but, what the hell it is Texas right, the full artillery. There was no need for detention centers. I think I left no survivors. Enjoy.

Scooby Doo,

I am not sure what you mean with regard to taxes. If you are referring to property taxes, it is true that non-profits do not pay tax on their property. However, in Boston, all of the major health institutions reach agreements with the City to pay "in lieu of taxes" when, by purchasing a private property, removing the property from the real estate rolls.
If you are talking about income taxes, you are also correct. However, by law, non-profits do not distribute profits to private individuals. All money is returned to the balance sheet.

What you truly fail to see is that the explosive growth in the Boston medical world, and the growth has always been explosive, has resulted today in over 385,000 jobs in the healthcare industry, the bulk of which are in Boston.

I do admire the Texas Medical Center. It reminds me a bit of NASA. Lyndon Johnson made sure Texas "won" the big prize for location but then NASA staffed the entire operation with MIT professors, students, and related companies. Read the details on Apollo 11. The guys coming up with a way to make a vent out of toilet paper, a rubber hose, and a white sock were all from Cambridge.

In 1900, Galveston was destroyed and Houston was, more or less born. By 1905, after Spindletop, Houston's population had reached a whopping 44,600. In 1900, the population of Boston was 620,000 with a metro population of 1,196,000. Mass. General Hospital was celebrating its 99th anniversary. Of course, Harvard Medical School was celebrating its 122nd.

My point is simple. The reason Longwood drives you crazy is because it is organic; it grows in and around itself. So does Mass. General, Tufts Medical Center, and Boston Medical Center. These were already dense neighborhoods when tumbleweeds rolled down the streets of Houston. We never got a chance at a master plan. Please keep your Texas geniuses in Texas.

But let's get to the heart of the matter. Boston has 227,000 employees in the healthcare industry. With a metro population of 5.7 Million, that's a ratio of 1 healthcare employee for every 25 people.

Houston not only has fewer health employees, at 219,000 but, considering Houston has a metro population of 9.8 million; there is 1 healthcare employee for every 45 people. Not quite the coverage one gets in Boston.
Let's look just at physicians and surgeons. Boston alone has 6,380 physicians; Houston has 4,530. Ratios: Boston: 1 per 897 residents; Houston: 1 per 2,177. I know where I want to live when I have a heart attack.

The average healthcare professional in Boston earns $78,770 per year. In Houston, the figure is $65,630. You know what they say about money and talent. Now do we really want to count the number of students in medical school? Do we really want to count the pure scientific medical research community, such as the Joslin Diabetes Center? Trust me we don't.
My point, Scooby Doo, is that income taxes generated by the sheer number and wages of Massachusetts health care workers eliminate whatever concern you have about taxes.

I see you mentioned Fidelity. I know them well. Boston, after only London, is the 2nd largest city IN THE WORLD in assets under management. I'm in real estate so I'll use real estate as my reference. Sticking with Fidelity, let's consider the mutual funds industry. First, Fidelity can move its headquarters anywhere it wants to. The problem is that none of its analysts will go there. They'll just walk down the street and work for any of the 25 other mutual funds in Boston. Ned just likes to make what he thinks is a scary threat every few years while he dines with his daughter daily right on Water Street, after he steps out of the same office as his father did.

Back to the facts, the mutual funds alone occupy 37% of the Class A market. That translates to over 14 million square feet of occupied space. Fidelity occupies 1.9 million square feet. They are smaller than State Street Global at 2.6 million square feet. If Fidelity packed up all its bags and left, Boston would still be the largest city in the U.S. in assets under management.

Sometimes business as usual is the envy of many, many cities. But you can always try Providence!

Thursday, December 17, 2009

The Influence of Educational Institutions on Boston Real Estate

The Bayside Exposition Center sort of lost its way over the past decade. The Hynes stole the best smaller exhibits while the Boston convention center took everything else. What was left was "bulk product" shows--cars, boats, and the like.

In most cities, this would lead to a whole flurry of plans paid for by the government, in other words us, characterized by Disney-like visions of what to do with 20 acres of land and property in an outlying area of the city. None of the plans would come to fruition, and the building would slowly decay. Case in point--the attempt by the city of Detroit to auction of the Pontiac Silverdome in Detroit. Nobody came to the auction.

In Boston, an opportunity like this leads to a natural expansion of our strengths. As public universities, colleges, and community colleges become more popular (in inverse proportion to the ridiculously overpriced cost of private education), institutions such as UMASS are able to comfortably plan for the future, make an acquisition, and expand the campus.

Harvard did the very same thing when it purchased the former Casey & Hayes moving company building right off the Mass Pike in Alston two years ago. BU is forever picking up buildings along the Commonwealth Avenue corridor. Northeastern has almost singlehandedly redeveloped the entire Ruggles Square area. Emerson College, in its brilliant creation of a new urban campus, purchased 5 separate Class C office buildings along Boylston and Tremont Street and converted them to administrative and classroom space. The most prolific purchaser of privately owned space has been Suffolk, most notably in its purchase of 73 Tremont Street, a 300,000 square foot office property that had lost its primary tenant, JP Morgan, and was 2/3 empty. It is now, of course, full.

What is the impact on the private commercial market when institutions carry out these expansion plans? Many of the properties purchased were available in the commercial market for lease. The Suffolk purchase is a prime example of a NET ABSORPTION of office space due to the expansion of an educational institution. The Casey & Hayes building measures over 400,000 square feet and was owned by Cabot, Cabot & Forbes. CC&F carried out a beautiful renovation (the property is the large, all glass sprawling building on the north side of the Mass Pike opposite the Allston Depot restaurant.) CC&F then alternately marketed as office space and/or lab space unsuccessfully for 3 years. Harvard's purchase reduced vacancy in the Allston Brighton market by 20% in one fell swoop.

While the Bayside purchase is not comparable in its impact on the private commercial real estate market, consider that the education "industry" accounts for over 7% of all leased space in the private market. And, over the past two years, education has increased its market share even as the schools have carried out major construction projects in the non-private market.

Again, the multidimensional character of the Boston economy provides a buffer to the private real estate market to a degree not found in any other major U.S. city.

Thursday, November 19, 2009

Unemployment, Re-Employment, and the Boston Office Market

And the unemployment rate DROPS from 9.3 % to 8.9 % in Massachusetts in one month. So much for the bad vibe folks who enjoy predicting bloodbaths in commercial real estate or the addition of 65,000 to the unemployment lines. Yes, if you have read any local paper, especially those that cover the real estate business, you have read these articles as recently as 3 days ago. After all, the "experts" said so.

Bu this drop is no surprise to me. I have frequently referred to the impact that the steady and large net inflows into Boston's mutual funds industry would have on the office market where they and their affiliated industries account for over 47% of the Class A market. As early as August, one could pick up the heavier level of activity in the market. As I projected then, we would and did see higher demand and net positive absorption in the 3rd quarter.

And today's announced unemployment drop, I believe, is evidence of the Re-Employment taking place in Boston.

My estimates of gross demand--the total square footage of tenants actively in the market seeking space in a defined time period--have increased. At the end of the 3rd quarter, I saw this cumulative demand in 2010 and 2011 at roughly through 2011 at roughly 6.1 million square feet. Today, the gross demand number has reached 8.6 million square feet. The chart below breaks out gross demand by calendar year, numbers of tenants, and their median and average size.

The initial surge of a recovering market, which first evidenced itself in late summer, has caused every tenant to examine their alternatives in light of what their competitors are doing. It is the class second stage of recovery and I simply refer to it as the "snowball" effect. Stage 3, which we will see my mid March is a very happy stage for landlords! Stay tuned.

Market Demand 2009 through 2011

Typical Tenant
Year # of Tenants Gross Demand Median Average
2009 143 2,900,000 16,700 29,000
2010 154 3,800,000 16,600 33,200
2011 110 4,800,000 24,600 56,000

Friday, November 13, 2009

Major new mixed use development planned for "L-Cross", per major developers

If the developers who attended today's joint announcement of the L Cross Business Community are correct, we could see L Cross, now an incorporated City grow to be the largest city in the world by 2020.

"It has all the dynamics of what not just global but intergalactic companies will be seeking in the future, "said Ed Linde, Chairman of Boston Properties. "We already have commitments for major blocks of space from Apple, United Technologies, and the government of Switzerland which wil enable us to immediately go forward with three buildings, each in excess of 3 million square feet. "What is wonderful about L Cross is our unrestricted ability to build as high as we choose. And we all know that's not the case in most cities" Linde stated amidst chuckles from the crowd that included Don Chiofaro, Gerald Hines, Michael Roth, and Jerrey Speyer.

Hines has already commissioned Zaha Hadid, the 2007 winner of the Pritzker aaward, particularly of interest given that the Pritzkers were present at the event, to design what Hines is calling L World, a luxury apartment complex which will literally floar 400 feet off the ground at the corner of Herschel and Hubble Street, the major crossroads of L Cross. "The building will be tethered with a new construction technology developed by General Electric" said Hines, politely nodding to Jeff Emelt in the crowd. "Each unit will be equipped with tubular access to the main recreation area which Zaha is currently designing." According to brochures ddistributed at the event, the recreation area will be the size of 179 football fields with and have both indoor and outdoor facilities as well as a faux Titanic. The entire Saudi Royal Family has purchased a total of 11110 units out of the 500,000 units Hines is building. "Marble baths, a virtual media room, and 2 launchpads, all hallmarks of both Hines' and Zaha's commitment to quality truly set the project apart.

As enthused as a boy in a toy shop, Roth of Vornado announced that immediately adjacent to the Hines Development, he will construct The Mall of Polaris, which when completed will encompass 200 square miles and include a branch of every retailer in the United States with a workforce of at least 5 people. "The folks at United Technology have come up with a horizontal elevator sytem in which shoppers will not push floor levels, but simply type in the first 3 or 4 letters of a retail establishment. In less than 21 seconds, they will arrive at their destination."

Switzerland plans to sell Switzerland itself to China while recreating the country as Switzerland at L Cross. Hans-Rudolf Merz, the current President of Switzerland, will build the new country exactly to scale. "You will feel as though you were in Switzerland because you will be in Switzerland but it will just be somewhere else." Angela Merckel and Nicolas Sarkozy, not to be outdone, promised to move to L Cross but maintain their current country's location.

The largest commercial tenant in the project will be Google. Google plans to hire 1 billion people and construct over 5 billion square feet of office, R&D, and residential space in the quickly developing Relativity Hills neighborhood. Larry Page is teaming with Tishman Speyer to develop Google Relativity Center. As a first step, Tishman will relocate the entire Stuy Town section of Manhattan to the Hills. "We love the location. We love the client. We love the lack of rent control" Jerry Speyer cackled into the microphone. Page went on to describe Google's intentions at L Cross. "We no longer want to lead you to websites whose only real relevance is that a lot of other clueless people just happened to click on the web sites before and that's how we...." Stopping himself from revealing the lemming algorithm so critical to Google, Page redirected his attention to L Cross. "At L Cross, when you Google, we'll put you IN the web site. You can stay in whatever virtual world you choose at a very low, per hour cost.

"L Cross will be Rome during the reign of Caesar, Paris during the reign of the Sun King, London at the height of the Industrial Revolution, New York in the 20th century, and Shanghai today," declared President Obama.

For more information on relocating to L Cross, please go to

Thursday, November 12, 2009

Will Somebody please Tell me to Stop Hitting Myself in the Head? It hurts.

Apparently, there are still many well-meaning Bostonians burdened with the Calvinist need to remind themselves to not only be unhappy but to seek out unhappiness wherever it may be hiding. Many pre-2004 Sox fans, including yours truly, were Baseball Calvinists. And, I must admit, I still feel that I need to suffer a bit at Fenway.

But do we need to continue to keep plunging our collective business mood ever-downward? I consider the Boston office of Jones Lang LaSalle, a firm whose long history as Spaulding & Slye and whose continued success under the JLL moniker, to be one of the finest firms not only in the real estate business but in the Boston business community.

Today, "corporate" Jones Lang LaSalle, in the person of one Thomas Doughty, International Director of the JLL law firm group based in DC, issued a press release derived from “Jones Lang LaSalle's Global Legal Perspective 2009.” The release found its way into the local press (see link) where it headlined as “Report: Boston Law Firms Shedding Jobs, Office Space.” The opening paragraph reads, “Boston law firms are shedding jobs at an alarming rate, and shedding surplus office space.” While I am not privy to hiring and firing, I do know a bit about subleasing office space, which the article covers in spectacular and wildly inaccurate detail.

Boston law firms are NOT shedding office space at an alarming rate. Far from it. I analyzed the current status of the 148 law firms who occupy space in the Boston Class A Market. These firms, in the aggregate, occupy 6.0 million square feet out of a total (including Class B) law firm occupancy of 6.3 million square feet. Of the 6 million square feet occupied, the total space on the market for sublease is 79,000 rentable square feet. That represent 1.3% of all law firm space and a whopping two-tenths of one percent of the 30 million square foot Class A Market. 0.2%. Not too alarming. In fact, barely noticeable.

But let’s dig a little deeper into the two firms specifically mentioned in the article-—Ropes & Gray and Edwards Angell Palmer Dodge. Ropes currently occupies 380,000 square feet at One International Place. They have leased 413,000 square feet at the Prudential Tower, a net gain in leased space of 30,000 square feet. When they move in December, they will make available 57,000 square feet for sublease. In terms of net effect on the market effect, the “net giveback” is only 27,000 square feet.

Edwards Angell Palmer & Dodge is not listing any sublease space publicly through channels such as CoStar. I am aware that the firm has looked at this option. However, the firm’s entire lease of 211,000 square feet expires in December 2011, and the firm is in deep due diligence to address its long-term real estate strategy. I doubt that EAPD will throw a subtenant into the mix prior to the resolution of its primary issue.

As to any of this being breaking news, Ropes announced its intention to sublease on June 14. EAPD has had a floor on and off (currently off)the market for the past 3 years.

The news is that there is no news. There are shocking titles and implication by reference. The problem stems from the need for the “global” reak estate firms to force the local markets which they cover to conform to the report’s conclusions, even when the conclusions do not apply in the local market. It's hard to make Tampa be Tokyo.

And then I realized that the Calvinists in this case were not from Boston. And I got a bit upset. Therefore, let me state that I reserve the right, on behalf of myself, to hit myself in the head for no good reason. I'm not going to do it because some guy from DC tells me to. After all, we're the Calvinists, or are we?

Wednesday, November 11, 2009

O Tempora! O Mores! O Experts! O Give me a Break!

Since it is perhaps the most overused, unjustified, unquestioned, and unreliable phrase used in the press, just for kicks, I looked up the definition of "expert." I used the Oxford English Dictionary, which happens to be a lot of fun to use. Did you know that the word broker, of which I am one, came from the French “broceur” and came into existence in the 17th century? Broceurs literally stepped in between the growers of grapes and the vintners in France who, in the endless battle between pride and price, were actually killing each other, at times, in the negotiations over the price of grapes. Now we prevent landlords from killing tenants and vice versa. Sort of.

Back to “expert.” Expert is derived from the Latin "expertus" which is a past participle of "experiri" meaning to try or test. When used as a noun, it translates to a "person wise through experience". It came into common use in the 14th Century in France but fell out of common use in the 17th century, only to resurface in 1825.

“Wise through experience”. “To try or test.” How many experts, other than your grandfather or grandmother, do you really know?

This brings me back to the “horrors” of recent news articles and press releases on the state of the economy and of the real estate market in Massachusetts. First, Jay Fitzgerald, in the November 11th Herald, pens an article with the “run for the hills title of "EXPERTS SEE MASS. LAYOFFS; 65,000 MAY LINE UP FOR UNEMPLOYMENT." Of course it is the Herald, and I do love the headlines.

I delved a bit into the article to find out who the "experts" were. It turns out that The New England Economic Project, a nice little nonprofit that’s been around for about 25 years, claimed the expert mantle. On its web site, NEEP claims that they publish macroeconomic forecasts twice yearly for the six New England states. Funny but they also announce that their latest report dated November 2008, yes 2008, is now available for viewing. I guess NEEP is very slow to publish reports, as in one year behind. What is a year old, new forecast anyway? But I wanted to know who the experts were--names, numbers, pets, hobbies. Lo and behold, their experts are none other than “experts” from, the national forecasting firm owned by that paradigm of good judgement and accurate forecasting, Moody's. We all remember how well Moody’s did in anticipating the credit swap issues of AIG –NOT!!. So NEEP pays for its expert forecasting.

I looked for a description of the methodology used by to make such remarkable, down to the individual, forecasts by state. No explanation available on the website. No access to the Company without buying access. I looked at their data more closely and recognized it as a reworking of figures from the Bureau of Labor Statistics. In other words, there are no experts.

So, the Herald’s article was taken from people paying for data prepared by other people who collect data from the government and sell it. Now there's some solid research for you.

Next up is the even juicier headline in today's Banker & Tradesman Online Editon, "ULI: There Will Be Blood In 2010 Commercial Market." Did they steal that tagline from the Daniel Day Lewis film? I mean, there was some definite blood in that flick, especially in the bowling alley scene. Come to think of it, Daniel Day Lewis would make an excellent landlord, particularly if he recreates his persona as William “Bill the Butcher” Cutting from Gangs of New York.

Sorry, I went astray again. I tried to find the expert behind this grim title and tale. B&T simply passed along, title and all, a press release from the "ULI". The ULI is the Urban Land Institute. I know it well. I was a member for 12 years, before it got boring. The ULI considers itself beyond reproach and frequently reminds everyone of that fact. After all, they've been around “since 1936 and they have 33,000 members.” Holy Institutional Intimidation, Batman!" They declare on their website that they are "the preeminent, multidisciplinary real estate forum. ULI facilitates the open exchange of ideas, information and experience among local, national and international industry leaders and policy makers dedicated to creating better places." Leaders and policy makers and bears, oh my. Of course, as one reads on, they are, of course, EXPERTS in almost everything they deem worthy to explore.

I was off on my chase to find the expert predicting that the commercial real estate market would "next year devolve into ‘an unavoidable bloodbath’... and Boston will not be immune”. I found that this was taken from a new report from the Urban Land Institute and PricewaterhouseCoopers--wait a minute, yet another expert, the venerable PricewaterhouseCoopers. Don't worry; I didn't bother with them because I didn’t have to. I actually found an "expert", one Jonathan Miller, the report's author.

John is the vice president, manager, and underwriting Counsel at First American National Commercial Services in Englewood, Colorado. I looked up the methodology of the report. Mr. Miller and Steve Blankand, the Senior Resident Fellow for Real Estate Finance at the ULI, assisted by staff from ULI and PWC stated that they "culled (information) from 900 interviews and surveys with industry leaders across the country" to produce their report. At least that's honest and transparent. What is it not is meaningful in any way. It's all subjective. I know. I have been one of the interviewed "leaders" in the past. It's a short phone call with a junior staffer who asks a lot of "on a scale of 1 to 10" questions.

So let's see. There is a bloodbath coming in commercial real estate, and Boston shall not be spared! 65,000 people are about to descend on the Division of Unemployment Insurance in Massachusetts alone to file for new benefits. THIS IS FROM EXPERTS IN THE FIELD.

Anyone who has read my posts or with whom I have had the pleasure to have done business knows that a) I believe in hard data; b) I believe that it is a broker’s responsibility, in his or her chosen market, to obtain this data firsthand through direct, daily discussions with tenants, landlords, brokers, and lenders; c) that all research be market-specific and not broad-brush data aggregation; and d) that anyone claiming expertise and making a forecast owes it to his or her audience to revisit the accuracy of their forecast after the forecast period ends.

I don't consider myself an "expert." As Groucho Marx said, “I don't care to belong to a club that accepts people like me as members." As an aside, don't you love his quote from the movie 'Animal Crackers' when asked by the actress who was his foil in a lot of films to "hold me closer", to which Groucho answered ““If I held you any closer, I'd be on the other side of you." Anyway, where was I? Oh yes, experts.

It's easy to question the forecasts, reports, and opinions of others. Cynicism is the essence of all TV news now. Yell, argue, defame, but never get of your ____ and check the facts yourself. I would not take issue with today's articles, their authors, and the absolute lack of any reasonable methodology to establish that there is any fact whatsoever in what they have said. How a “leader feels” is a bit mushy for me. Manipulating government data with no understanding of its applicability to real time and real world activity is best kept in 8th Grade social studies.

I maintain a proprietary database on the Boston office market. It is derived from direct, first hand discussions and meetings I described above. Since I issued my last market report and analysis on September 30, the end of the third quarter, in a mere 42 days the vacancy rate across all classes of space and across all submarkets in Boston has fallen by 0.2 percentage points.

Now, I am well aware that the 0.2% figure is not impressive out of context. But, in an office market of 72 million square feet, this small number translates into 140,000 square feet of net positive absorption. The level of gross demand, defined as firms seeking to acquire new space and/or to renew existing leases whether due to the need to grow, shrink, or simply due to lease expiration, has climbed from 3.6 million square feet to 4.0 million square feet in these same 42 days.

I don't think the Boston economy and its real estate market is crashing. I haven't for some time.

As to the coming "bloodbath" and mortgage meltdown, 68% of the Boston Class A market is under the control of 10 very stable landlords, listed below. The top 5 landlords control 45% of the market. None of the properties owned by these landlords has been stated to be at risk of mortgage default. The occupancy rate of the properties owned by the top 10 landlords is 92.5%, which is slightly higher than the entire Class A occupancy rate. Sales and auctions have already occurred in the normal course of real estate investment. Broadway Partners’ foolish overpayment for the Hancock Tower resulted in ownership stability at a reasonable basis when Normandy purchased the property at auction. Clarendon Street was blood-free. GE’s profitable sale of 470 Atlantic to Credit Suisse supposedly shocked the market. I don't know why. CS saw the long-term benefit of buying an existing asset in a rapidly improving market with little new construction; German pension fund GLL's purchase of 200 State and One Winthrop Square were indicative of the interest of long-term capital in Boston real estate.

Largest Landlords RSF in millions Share of Class A market
1 Equity Office 7.0 23.2%
2 Boston Properties 3.5 12.8%
3 Tishman Speyer 3.0 10.4%
4 Normandy 2.2 7.5%
5 TIAA 2.6 9.3%
6 Brookfield 2.0 7.3%
7 Beacon Capital 2.0 7.5%
8 Chiofaro 2.0 6.0%
9 Manulife 1.2 4.5%
10 Drew/Pembroke 1.0 3.8%
TOTAL: 26.5 92.4%
Class A Market rsf 40.0

Top 10 share 66.3%
Top 5 share 45.8%

I think, to use the ULI's phrase, we can comfortably "cull" about 80% of the experts responsible for irresponsible research across not only the real estate industry but across the entire news and information spectrum. In the meantime, I will return to my Latin roots by simply stating the obvious: "Caveat Emptor!" Anyone who relies on faulty second hand advice provided by unnamed or nonexistent "experts" and uses it to produce exponentially worse advice is doing a disservice to the client who is ultimately looking straight at you to make an intelligent business decision. How comfortable are you? How comfortable is your client?

Wednesday, October 28, 2009

In the city of Boston, the Sublease Market carries no weight

We all have a tendency to generalize. On occasion, we do this because it is difficult to assess the individual components of the generalization. At times, we do this because the generalization has more or a "fear factor" than a closer look at the specifics. Sometimes generalization is driven by the audience to whom we are speaking, writing, or addressing in some manner.

The real estate industry is among the most notorious advocates of generalization in the services industry for all of the reasons above. When we make a statement about the "market", we tend to aggregate markets together that have little to do with each other except proximate geography. In Greater Boston, there is certainly a link between the Financial District market and the Route 495 South market but it is marginal. Although demand is driven in part by the service functions that the Financial District provides to the suburban industrial market, i.e. legal work, that link is not the determinant of either market's real estate health.

Likewise, when we generalize, we can scare the entire market (or coddle it) to increase the impact, in the eyes of the writer or speaker, of the generalization. For example, stating that "rents have fallen over 25% in the Greater Boston commercial market" is a lot more exciting, I suppose, than, stating that "rents have stabilized in the Back Bay and Financial District office markets while the warehouse and R&D markets along the I-90 corridor have seen rent reductions of as much as 40%." That's a measurable fear, depending on what frightens you, but it allows a participant in a market--landlord, financier, tenant--to assess the true market of interest.

Finally, our so called global companies simply can't gather information on 150 cities across the world; include all of them in their quarterly report, and even attempt to avoid generalization. Whether online or on paper, the tome would be enormous. This, again, is the "audience" issue. If your audience is global, your information is generalized.

Meanwhile back in Greater Boston, articles such as the one I cite below and many others issued by the brokerage houses, while accurate in the general sense, belie what is going on in the component markets.

There is less sublease space available in the city of Boston's office market today than there was at mid-year. There is less sublease space available in the city today than there was at the beginning of the year. The most recent high point of sublease vacancy in the market was in the third quarter of 2007. The amount of sublease space at that time was 4 times the amount available today.

Let's look even more closely at specifics. At 570,000 rentable square feet in a market whose total inventory is 72 million square feet and whose total--direct and sublease--vacancy is 6.7 million square feet, sublease vacancy account for 0.8% of market inventory and a mere 8.5% of total vacancy.

The peak of 2007 correlated with the mass confusion of the financial crises where forced or coerced purchases (Merrill to BoA, etc.) caused the new owners to dump space onto the sublease market as an immediate reaction to simply not knowing what to do. Over time, there was not a tremendous amount of actual subleasing transactions. There was, instead, a more logical removal of sublease space by the companies that had originally created the vacancy. The financial situation has generally stabilized and firms could begin to make business decisions inclusive of new divisions as opposed to immediate xenophobic "I may own you but I don't love you" decisions in 2007.

Considering the actual submarket statistics and the rationale behind the decline in Boston naturally begs the question of what the heck is going on in the suburbs. That I'll leave for the suburban specialists because you won't find it among the generalists, well-intentioned though they may be.

Friday, October 23, 2009


I have sat through more than my share of "forecast by panel." You've all been there. Pick an industry-OK, real estate. The moderator is in mortgage finance, there's a broker, an economist, a government official, and a CEO. What I have never attended is a "let's see if I was right" post-forecast party (or confession.) In fact, when have you ever read of a follow-up to an event you paid $100.00 to attend? When have you ever read a real estate expert, one year after the fact, write a new piece in the Wall Street Journal apologizing for being off by 100% in his or her prediction of the trend in rental rate. No, you pay an additional $100.00 to hear an entirely new and also entirely safe from scrutiny panel of experts deliver yet another forecast, and then you get a 6-week free trial invite from the WSJ.

If you are going to make forecast, then you better check your accuracy and put your errors or accuracies exactly in the place in which you first stated them. If you follow my blog, you might have noticed that I kind of like making forecasts, pretty much about everything, but particularly about the Boston economy and the Boston real estate market. Check any prior posting, as you please, and make a judgement on my accuracy. It's time for my personal "check up."

I posted my first blog on August 18 ("Mutual Fund Net Inflows, ...) with the opening sentence: "If you're waiting for the Boston office market to recover, you missed the turning point. A market turns when its underlying drivers turn. And they have." Reaction in the market to my post was, let's say, questionable. The basis for my statements was the noticeable increase in net cash flows into the City's mutual funds. Interestingly the blog was first picked up by USA today and by the Boston Globe as a "reference article" to Brookfield Properties' announcement on August 19 of its readiness, with $4.9 Billion in hand to buy "distressed debt." Remember the word "debt." It is an important distinction. More on that later.

I issued my 3rd quarter market report on October 8 ("Yes, we have net absorption...".) My report showed positive absorption in the A Markets, in which mutual funds and private money management firms account for over 47% of the market. It showed a tripling of gross demand across all markets heading into 2010 and 2011. My prediction in August for net absorption in 1010 was 350,000 square feet. Although this can not be tested until the end of 2010, I will admit to an error in my estmate. I increased my net absorption forecast in 2010--yes increased it--to 560,000 square feet. No other firm or research firm or economist has made a case--numbers, dollars, vacancy rates, in other words a real case--for any positive absorption sooner than 2011. I had underestimated what I saw as the underlying strength of the economy. Everybody else was running in the wrong direction. But don't worry, I'll make a prediction of predictions. I will predict that every brokerage firm in Boston's 4th quarter market report in 2009 will, without actually stating numbers, God forbid, will state that they "expect slight positive absorption."

Back to distress. In response to property owners traipsing to Washington DC for TARP money and overhyped NY Times Journalists describing the SArmageddon of Collapse due to "distressed properties", I posted an article on October 7 ("Boston Properties $700 Million...") rebutting a)the entire concept of "distressed debt" and b) stating that there would be plenty of fresh capital waiting on the sidelines. Let's go to point A. I will accept the concept of distressed "debt" as simply loans on property over due or by prudent measure about to be. There is no such thing as a distressed property. There is no such thing as a distressed owner. They may be experiencing distress but that is due to individual decisions they made in leveraging their properties. The concept of giving money to property owners is utterly preposterous. An office building is an asset, not a functioning or malfunctioning industry. To give money to a commercial property owner would be no different than giving money to me because I lost asset value in the stock market over the past 2 years.

Let's get back to Armageddon. I will let the following facts speak for themselves as to the readiness of waiting capital.

First week in July" Vornado raises $1 B with express purpose of debt-driven opportunities in the Eastern office markets.

August 13: Hines Interests raises $3.5 B with express purpose of purchasing distressed debt in the U.S.

August 19: Brookfield's announcement of $4.9 B intended for distressed debt with focus on Boston and NYC in the US.

September 2: Inland Diversified $5 B for US distressed debt.

November 7: Boston Properties $700 Million for Boston, NYC, and Washington distressed debt.

November 14: Prudential Real Estate Investors $500 M fund distressed debt.

That's the evidence. You can hold me to it. In fact, I wouldn't have it any other way.

Sunday, October 18, 2009

The End of the "Tyranny of Term" in Commercial Leasing: The New Lease, its Structure and Derivation

Due to the accelerating speed of change within and among companies, an acceleration enabled by and brought on by technology, the conventional view of the appropriate length of term of a commercial space lease must and will change.

Three main factors determine the length of time that a given business can or is willing to support a business plan of operation and thus maintain or hire staff to carry out the plan:

1. The ability of the firm to project revenue forward with an acceptable degree of accuracy.

2. How quickly the firm can alter its labor force and capital in the abandonment or modification of a current business plan to retool for an altered plan.

3. The speed of innovation and its consequent threat to a firm's business plan by a) the impact delivered by a firm's closest competitors and b) the impact delivered by a macroeconomic shift whether within an industry, a geographic area, or in a paradigm shift in business thinking.

None of these three factors is new. They have existed in varying form, within and outside the business world. For example, the respective strategic changes of the governments of France and England over the course of centuries of warfare would constantly change based on a) the ability or inability to deliver manpower in the form of armies to a variety of fronts; b) the ability to modify strategy, be it by approach or more typically by technological innovation to gain an upper hand, i.e. the Royal Navy; and c) the endless quest for allies, external to the direct conflict, but critically important in terms of access to capital and to ideas.

The examples of corporate "battles" if you will are far more numerous but based on these same factors. Consider the case of Wang. The firm began as a producer of sophisticated adding machines and advanced calculators. It remained a small but successful firm following this business plan for over a decade. And then An Wang created the word processor. Wang quadrupled in size in 2 years. Its competitors within the calculating field--IBM, HP, Texas Instruments--were knocked on their heels. And Wang, due to its ability to accurately forecast revenue, was able to maintain a business plan for several years that required tinkering but not a major shift of resources and capital. In doing so, complacency stepped in, and Wang found itself at a critical disadvantage in the second factor described above, the speed at which it could change business plans and retool to meet the new plan. And then IBM introduced the minicomputer. Wang was out of business within 8 years of that event. It did not attempt to build a minicomputer for 3 years and, when it did, IBM and a new player in the field, Digital Equipment, had already upped the ante by pounding through advance after advance. Wang's first minicomputer was 2 years out of date when it was brought to market.

Most firms can implement and execute an initial business plan. Few firms are able to optimally change the alignment of their resources to allow internal product change or, as demonstrated by the French and by Wang, to respond to the threat of competitive innovation.

As a commercial real estate broker, I deal with a critical component of the resource structure of a firm, assistance in providing working space in which firms carry out their business plans. And the real estate world is about to undergo an enormous shift in its own view of time.

There is no reason for a "standard" or "conventional" length of a real estate lease. The current 5 or 10-year default is at best a reflection of laziness and at worst a cause of misallocation of capital. It is artificial because it presumes that the time horizon of a business plan can be captured in a timeframe (the lease term) which has remained static for decades in a world where the length of the business plan has shrunken significantly.

In speaking to the vast majority of tenant clients, I have witnessed the shift during my own 27 year career. It was already out of date when I began as a broker in 1982. A minimum 5-year term was already too long for the conventional length of corporate insight. However, it was not radically out of line. General technological and communication changes, such as Wang's word processor or the IPhone, have enabled companies to respond to self-imposed, competitor imposed, or changes imposed by larger shifts in the macroeconomic atmosphere. But the real estate lease is still stuck in 1975.

This creates three distinct problems. The first and by far most important is that it sets the stage for individual business failure. The domino effect leading to this disaster begins when the firm’s need to shrink or expand, to accommodate a new business plan is restricted by the length of the lease term. The minimal protections granted by rights to sublease carry an implicit loss owing to lower price the market is willing to pay in a sublease where the layout, term, and lack of direct line of control to the Landlord are predetermined and unchangeable. Termination rights are no more than buyout rights. The price of freedom by way of termination often exceeds the ability of companies that simply want to adjust their space needs to pay. Unable to innovate and carrying an unmanageable rent burden, companies fail. And smaller companies will fail disproportionately.

The second problem is the consequent damage of tenant failure or default on the financial structure of the individuals or firms that provide the office space "asset"--landlords and lenders. Tenant default can create mortgage default which then generates an inhibition to new development.

The third component is the inefficient use of capital by tenants, landlords, and, as a result of the joint nature of the misuse, by our economy. For example, the damage of default is not limited to the specific loss of rent from the failure of a single tenant nor is it limited to the consequent diminution in building value of this particular loss of income. Tenant default leads to severe capital loss both in the write-off of what I will call "specific tenant improvement capital" and to the need to increase what I will call "forward improvement capital."

Let’s look at the first since it is the most obvious. Assume a landlord has paid for the construction necessary to accommodate the needs of a specific tenant, the “specific improvement capital.” Upon default, the landlord suffers a loss of income and a loss of unamortized improvements. Landlords may choose to record only a portion of the loss based on the so-called "reusability" of space, but trapped by their own 5 or 10 year conventional lease structure, this mode of thinking is not prudent nor realistic.

More than this, what is ignored is the increase in the aggregate cost of “forward improvement capital.” A default triggers an unexpected, and thus typically unplanned for, premature expenditure to secure a new tenant. Costs are both “hard”, such as the actual cost of reconstruction, and “soft” such as architectural fees and brokerage commissions. One could argue that forward capital would occur at some point in any case, even without lease default, simply because leases expire and tenants move. While this appears correct logically, it ignores the reality of the increased likelihood that a tenant will remain as a tenant beyond the expiration of an initial term simply because the tenant avoids its own expenditure of capital in a relocation. “A tenant at rest tends to remain at rest.” I apologize to Mr. Newton for this terrible paraphrase.

Let’s now look at the consequences of the artificial lease term. It prevents a company from adjusting its resources to fit a new business plan. This causes a reduction of income to the company because it is physically constrained from a realignment of resources to enable a new business plan. If severe, it causes a firm's demise and a loss of capital far greater than any real estate costs, i.e. capital paid for by a tenant within an office building. It can eliminate most if not all of the entire capital of a company. It then weaves it way through the financial markets by way of the landlord and lender who suffer the consequential damages of loss of rental income and capital and through the finances of other firms affected by the demise of the tenant in default, such as that tenant’s own suppliers and vendors.

The solution to this problem is simple. The length of the office term must no longer be based on a conventional and thus artificial period of time. It must be based on the function it serves, as a physical asset in which production occurs over the business plans of the tenant. It must also be based on the necessity for both the tenant and the landlord to properly recognize and account for the capital costs involved in the specific and forward improvements necessary for effective functioning of the commercial real estate market as an asset.
Below are the components of determination of rent.
Lt = The conventional lease term of today's real estate market, 5 or 10 years.
Lm = The length of a specific company's business plan.
Cs = The specific capital improvements necessary for a tenant's effective use of space.
Cf = The forward capital improvement necessary for a post occupancy refit.
H = The time that a Landlord plans to own a property.
Y = Landlord's yield or return on capital over the Landlord’s holding period (H).
I = Tenant's gross profit margin over the length of a single business plan.
R = Rent payable by a tenant to a Landlord over a lease term (Lt).

Given the above, Rent is defined as follows:
R = (Cs + Y) * Lt.

To solve the problems describe above, I submit the following realignment of definitions to our industry:

Allow Lt = Lm.

This simple adjustment replaces and repudiates the concept of a market-driven or capital-driven lease term. The proper length of term will now we determined by the user of the space who, at a price, can match business plan to lease plan.

I would posit the following theorem based on this adjustment:

By allowing lease term to match the business planning horizon, tenants will have the ability to maximize gross profit margin. Minimizing rent will no longer be the ultimate objective. By allowing the same, landlords will have the ability to maximize yield over holding periods by increasing the inherent value of space by decreasing the constraints now placed upon occupancy by term.

I will now proceed to my argument and my proof, humbly submitted.

Let’s review the individual components of cost and return, beginning with capital. In my proof, I will assume that capital costs include both direct and indirect costs incurred in the initial and subsequent leasing of commercial space.

Allowing for my proposal that Lm = Lt, there will be a shift in the benchmarking of a successful leasing outcome for a tenant, as follows:

The tenant's objective in an agreement to pay a specific rental over a specific term must be driven and measured entirely by effect of the outcome on the tenant’s gross profits margin.

The objective does not ignore the specific competitive market context, the office market, which will determine the “pure” rental component of Rent. But the outcome will no longer be a measurement against market. There will be no such phrase as an “above market” or “below market” transaction. The measurement of achievement will be strictly a measurement of enhancement of gross margin.

My assertion leads to my first elemental principle of the “successful tenant.”

The tenant that will achieve the highest rate of success will be the tenant best able to match a business plan to lease term, initial or altered.

This is the heart of the capital issue for the tenant. This argument is not an endorsement of a longer term. We oversimplify the cost of occupancy when we allow capital costs of occupancy to determine the length of term. Again, first consideration must be given to gross profit margin. For example, assume a tenant is capable of a two-year business plan. The Rent will be significantly higher than a tenant capable of a five-year plan and lower than a tenant capable of a short-term plan. But the Rent is not the measured objective. The tenant must analyze the marginal additional cost of higher rent to the marginal increase in gross profit margin. Capital depreciated over a short lease term adds cost but allows the freedom to match business plan to lease term.

It is perfectly reasonable for a tenant to pay $200.00 per square foot per year for two years while a tenant of identical size, capital requirement, location, and all other factors equal, pays $100.00 per square foot per year for 3 years. The differential is entirely due to the degree of importance and measurable value the first tenant attaches to the term as a direct determinant of gross profit margin.

Let us know consider the landlord. The landlord's objective, again set in a market context--the office market--is to achieve the highest yield (Y) over the preferred holding period, H. To the landlord, the objective of a rental negotiation is a measurement not against market but against desired yield, as follows:

Y = ((R * Lt) – C) / H

I propose the same realignment in the definition of term as I did in the analysis of the tenant perspective and objective.

Allow Lt = Lm.

Landlords that embrace this new philosophy must allow for the tenant to set the term according to the tenant's business plan. However, just as a given tenant will pay a higher or lesser amount based on the ability to increase gross profit margin by matching lease term to business plan, so too will the Landlord demand and receive a higher Rent on the margin to offset the marginal increase in capital costs due to changing periods of amortization. But by doing so, the Landlord does not simply match the return on a conventional term by charging for a lesser term. The price a tenant is willing to pay to lease space from a Landlord who embraces the concept that the business plan match the lease term will increase simply because the Landlord embraces the philosophy. This sounds horribly circular but, in many ways, the real estate leasing market is just that. The actions of a Landlord in one transaction affect the expectations of a tenant in the next transaction. It’s not unlike the 1970’s feel-good philosophy of “positive reinforcement.”

My assertion leads to my second elemental principle of the “successful landlord”:

The landlord that will achieve the highest rate of success will be the landlord best able to accommodate tenancies as determined by business plan of the tenant and successive business plans of forward tenants over a chosen holding period.

Because Cs is defined as the specific improvements dictated by a specific tenant, a tenant seeking a lesser term, will, at the margin, pay the landlord a higher rent to compensate for the higher yearly capital costs of a shortened capital amortization period. Landlords must stop making the argument that they "cannot do a three year deal because we can't amortize...." as a defense. This represents a failure to adapt in an economy whose time horizon of planning continues to shrink for all of the right reasons. And if a landlord's defense is to play the foil for the lender or other holder of beneficial rights or income from rent, then these recipients of return must also accept my case to allow Lt to equal Lm. If neither does, the real estate industry will find itself in a constant state of unnecessary capital write-offs, misallocation of capital, and consequent financial inhibition to develop new space, all brought on by unwillingness to accept current business management and mathematical fact, which I will demonstrate below.

In calculating capital costs, the landlord must not only account for the amortization of capital over the current term (Cs) but the necessity for additional capital thereafter (Cf). Therefore, I propose the following redefinition of the proper measurement of capital in a real estate lease.

The capital expenditure of a transaction is equal to the capital of the specific allowance as defined above AND the landlord's estimate of the forward capital of the following transaction. The variable that will ultimately be subject to scrutiny for success will measure return (pure rent) less all capital expended over the holding period.

In summary, I am proposing that the conventional lease term, artificially constructed and restrictive in allowing the tenant to match business plan with lease term be replaced by an approach to the lease driven by its underlying function--the business plan horizon of the occupant. Both parties will then pay or receive a premium for allowing flexibility, and neither party will look to "market" as an indicator of performance. The user, or tenant, will look to gross profit margin. The landlord will look to yield, or return, over the holding period.

Below is a mathematical “proof”, or more appropriately, example of my theory.

Assume capital cost for all Tenants at $40.00, and assume that all costs are paid for by the Landlord.

Assume all construction costs are fully amortized over the length of the lease term on a straight line basis without interest.

Assume that the "market" rent, as mutually negotiated by Landlord and Tenant, and not to be confused with Rent (R) as ultimately paid by a tenant, is $25.00 per square foot per year in both for both a one-year or two-year term.

Consider two tenants, the only difference between them being the marginal effect on Gross Profit Margin by an increase (or decrease) in the length of the term of a lease of space. Assume the gross profit at the beginning of the lease term to be examined is identical for both tenants at is identical at $1,000,000 per year. Assume that both require 20,000 square feet of space.

For "Tenant A", assume that each additional year of length in term decreases its Gross Profit Margin, as uniquely determined by Tenant A and derived from the foregone revenue or associated profit caused by Tenant A's inability to match the length its business plan, by 70% per year, or $700,000 per year.

Assume the marginal decrease for Tenant B at 25%, or $250,000 per year.

I will establish the method by which each Tenant will determine the appropriate lease term and amount of Rent each Tenant is willing to pay to secure the term. For simplicity, I will allow the option of either a one year or two year term.

Since the “market rent” is identical for both tenants, it is not a determinant of the term or the premium either Tenant will pay for its chosen term. In short, the decision is purely a capital decision.

The capital cost under a one year lease is: 20,000 x $40.00 = $800,000. For a two-year lease, the cost is $400,000. due to the ability of the Landlord to amortize the capital cost over a longer period.

Below is the logic and mathematics that will drive each Tenant’s decision on term and the amount of rent each will pay.

A one-year term will require Yearly Gross Rent of $1,050,000, of which $250,000 is considered “market rent” and $800,000 is considered “capital rent.”

A two-year term will require Yearly Gross Rent of $650,000, of which $250,000 is market rent and $400,000 capital rent.

Tenant A will choose to lease space for one year at $1,050,000 because the reduction in rent that would result in a two-year term ($400,000) is not sufficient to cover Tenant A’s risk of decrease in Gross Profit owing to the longer term ($700,000).

Tenant B will choose to lease space for two years at $650,000 because Tenant B’s risk of decrease in profit owing to a longer term ($250,000) is lower than the $400,000 in additional cost in a one-year lease. Tenant B can accept the risk for the low rent reward because of the lower correlation between length of lease and gross profit risk.

I will close by opening a door.

The elimination of the conventional lease term has the potential to ignite and create a new industry. The industry will be driven by tenants and landlords and involve all firms involved in design, construction, and the infrastructure of the working environment. The industry’s sole focus will be reusable construction. It is a new industry. It involves the creation of reusable space, NOT the renovation or refit of previously used space. Reusable construction is nothing less than the construction of the commercial building of the future. It will reflect the rapidity of change in business, allow for space to reflect optimal business planning, and allow landlords to achieve superior returns in meeting a very new world. The leaders in this new industry will redefine the commercial real estate property, by changing the very nature of our concepts of permanence.

Thursday, October 8, 2009

Yes, We have Net Absorption, we have Net Absorption Today!

The Boston Office Market turns the Corner

I apologize for bursting the bad news bubble that our market seems to be stuck in. I do my own research. I never follow the crowd. And I never see anybody making projections about the future market. Isn't that what strategic real estate firms should do?

I think the brokerage firms in Boston are the best in the country, and I have heard that many times over. Their market reports are well-written, well-formatted but relentlessly backwards-looking. And that's OK. We all need to take measure of what's happened over the past quarter or over the past year. But I like the future. It's where things happen.

So without further ado:

Driven by escalating net inflows into the City’s mutual funds industry over the past 9 months, Boston’s Class A office market registered positive net absorption for the first time in over 18 months. While the net gain in occupied space was small at 65,000, it still represents a remarkable turnaround from the 650,000 square feet of Class A space that was vacated through the first 6 months of the year.

The B markets continued to see declines in occupancy with an additional 270,000 square feet of space returned to the market. However this was well below the declines of 400,000 square foot registered in each of the first two quarters of the year.

Positive absorption in the A markets and negative absorption in the B markets does not represent a confused or paradoxical market trend. It is a textbook example of first stage recovery, as firms in B space attempt to grasp the brass ring of the A market before the carousel comes to a stop—which it will, very soon, as rates in the A market increase.

Of greater interest is projected gross leasing activity for 2010 and 2011, a figure that should comfort existing landlords and those seeking to start construction. Over the past 18 months, gross leasing activity, defined as all lease transactions regardless of whether the transactions represent instances of growth or decline, measured just over 2.4 million square feet, a paltry sum in a market of 72 million square feet. Based on the J. Adams Commercial proprietary database of Boston tenancies and its associated algorithms, we are projecting that gross leasing activity will exceed 7.3 million square feet in the next two years. This represents a turnover of over 14% of all occupied space in Boston. Every landlord will have its shot. Every tenant will have company in the market.

And movement sets the stage for recovery. We are predicting positive absorption of 650,000 square feet across all classes of space in 2010, particularly within the city’s 26 Class A “Premier” properties. By submarket, the Channel/Seaport market and the North Station/Government Center market will outperform all others on a percentage growth basis, continuing a trend that began in early 2008. Growth in the Channel/Seaport has been driven by the delivery of first class road and rail infrastructure to a market with a wide variety of property types, which rent at a 20% discount to comparable space in the core Financial District. North Station has been driven by a surge in government agency leasing because Boston is the only city in the “industrialized” states that is, at once, the population center, the regional business center, and the state capital.

As a final note, all of the analysts, landlords, and brokers should stop a moment, stop crying chicken little, and see exactly where we stand as a market. The vacancy rate for space available today, both direct and sublease is only 9.7%. At the troughs of the last two downturns in the market, the comparable figures were13.8% and 17.9%. Even adding the elusive category of “Available Space” which includes, basically, what landlords believe will someday be vacant, the figure tops out at 12.5%. If this were Dallas, we’d be having a block party.

Now consider inventory. The 5th largest office market in the country, the 2nd largest city in the world as measured by assets under management (exceeded only by London, a truly amazing statistic) is building.........................1.2 million square feet of new office space of which 600,000 remains available.

There’s a reason there are 47 law firms in the market today, a group that represents over 1.8 million square feet of aggregate demand with leases expiring, on average 2 years forward. The market is moving away from the tenants. In astronomy, it’s called the Hubble Shift. It’s time we refocus our telescopes.

The full report will be on my blog tomorrow--in detail.

Wednesday, October 7, 2009



Boston Properties Sells $700M In Notes--Another Bull in the Boston Office Market

The announcement by Boston Properties (NYSE:BXP) of its sale of $700 million in notes, and the specific announcement by Doug Linde that the company expects "opportunities" is evidence not only of the recovery in the Boston office market but is the clearest statement yet that there is ample money awaiting so-called distressed owners. It throws cold water over the concept of property ownership as stewardship of an industry. Real estate is an asset, nothing more.

The catchphrase of catastrophe in the commercial office market over the past 9 months has been the approaching meltdown of the office market and then the meltdown of the world when existing mortgages come due. And all of the commercial property owners will suffer on one of Dante's rings. I'm sorry. I'm not moved. I'm feeling musical.

"Don't weep for building owners, Argentina, the truth is they never left you."

The theory behind this nonsense is that the lack of liquidity within the traditional sources of mortgage debt will close the window on refinancing, forcing great gnashing of teeth and a second wave of worldwide financial upheaval.

Actually what will happen is what Boston Properties is preparing for. If an owner has too much debt on its property, due to underlying rental rates, then, as in any refinancing situation, the owner is going to have to a) come up with equity to fill the gap and/or b) convince potential lenders that it has the capacity and standing to deserve a new loan.

There are many owners who are indeed overleveraged and who do not have sufficient capital to fill the refinancing gap. There are other owners whose profile will not appeal to traditional lenders. Boston Properties and many others plan to be there to either buy the properties prior to the wakes or be ready to bid at the funeral. As Doug Linde, the president of Boston Properties, clearly states, "It's not a question of money. It's a question of opportunity."

The real problem is overleveraged property owners attempting to live in the past world of a now subdued and cautious traditional mortgage lending market.

The loss of an owner's equity in a property and therefore the "loss of the property" is a normal occurrence. In fact, the loss of any asset because you can't make the payments is a concept that has served as the backbone of lending since the Roman Empire.

The preposterous attempt by major commercial owners to seek Federal TARP money was not only pathetic, but illogical. (Don't count that effort dead yet--for some reason Barney Frank is supporting it). Office buildings are not an industry. They are the land component, if you will, of land, labor, and capital that defines a capitalist economy. Underlying rent from tenants and expected future rents establish property value. To seek TARP money or to worry about existing owners implies that taxpayers should support anyone who lost assets in the recession.

Just think of that concept. If you lost $500,000 in the stock market (an asset loss), you would be able to petition the Fed for TARP money so your assets can "recover." Wow, I might try that.

There is ample money from REITS, private pooled investment funds, and even, as evidenced by the recent sale of Independence Wharf in Boston to Credit Suisse (VX:CSGN), from the real estate subsidiaries of the recovering investment banking houses.

Ownership will change. Some owners will lose. The lenders who did not properly assess risk will lose. New owners will come. New lenders will play. The buildings will not disappear. The economy will not crumble. The office market will continue to play its role as an underlying asset, not an industry, and will reflect the health of the underlying economy. The person you pay your rent to will be someone you haven't met yet. That's all.

Friday, October 2, 2009

Let's take the long way because there's nothing to do there

I sat on the Surface Artery of the State Legislature from 1998 to 2000. Our assignment was to come up with a way to fund new development and public spaces on the Greenway. This article confirms something I knew when the committee disbanded accomplishing nothing.

There is a simple reason that the Greenway is the Deadway. And I do appreciate the Globe for clipping that phrase from me.

The reason is money. Not public money. Not donations. Not fundraisers.

The Greenway, as the young insurance executive pointed out is NOT a destination for anything. It isn't even a "thruway" to use the young man's phrase. Take an example. You get out of work on Federal Street and want to head to Faneuil Hall to meet a friend for a cocktail. Its about 5:30 in January. Tell me your path. I know what it isn't--walking two blocks east, crossing the traffic looniness that is Dewey Square, and then taking a long, boring, lonely, even scary loop around the Financial District, stopping every 2 minutes to cross to another boring, empty lot until after 45 minutes of tension, you risk your life to get back across the line of civilization and into Faneuil Hall.
No the route you will take is Federal to Milk to Congress, with a nice walk through Post Office Square Park, and right into Faneuil Hall.

Back to money. When I served on the aforementioned commission, the ratio of businessmen to public agencies and environmental groups was 1 to 15. I know. I was the "1." On behalf of the committee, I flew to Yerba Buena Park in San Francisco to see why it ticked. While on a visit to Australia, I spent time with the developers of the beautiful urban park along the river in Sydney. And guess what they and the other U.S. parks mentioned all had in common? Buildings housing fun things to do. Buildings owned by profit-making entities or ticket-selling cultural organizations. Not history museums or horticultural halls. Sony had its Exploraton right in Yerba Buena--free admission, free interactive gadgets, but also gift shops, restaurants, and FREE ADVERTISING FOR SONY. Sydney had one part of the artificial beach (yes they built the beach) lined with cabanas served by, yes--people selling beer (oh what will Longfellow think in his grave? He'd think he wants a beer, that's what.)

Why are we afraid to allow people to have fun and pay for it directly or indirectly on the Deadway? Why are we afraid to let anybody build anything near the Deadway? It is becoming a joke. "Hey kids, let's head into Boston today and see what's happening on the "Green"way. I heard they have some really neat neon lights, fountains that come on every 4 hours, and, if we're lucky, some really bad mimes and a guy who plays every Jimi Hendrix song backwards on the harmonica.

Build--build an opera house because we need one. Elevate a restaurant off the ground in front of Rowes Wharf so we can flow under it or choose to go up and enjoy some clam chowder and a beer inside of it. Have a competition to construct Venetian--like decorative bridges connecting parcel to parcel so we can actually describe the Greenway as a continous path and not the series of stop-and-go blocks that it is.

Let us keep moving and let us stop to do something. Anything. Yes, Mayor Menino, that does include U2. With activity on the Greenway, guess what would happen Mr. Mayor? New construction. Housing that doesn't sell at auction. Tax revenue. More tourists. More visitors from Stoneham for starters.

The so-called Greenway has become a bigger barrier than the Central Artery ever was. I am actually waxing nostalgic. I can see that rusting green paint but I can see people flowing under and around it. It's noisy, some of the lights don't work, but it's alive.

Thursday, October 1, 2009

And the Mutual Fund Beat Goes On

What a surprise! Four years, two months, and and 16 days after Ken Lewis blundered into Boston promising to cut costs, relocate functions, and move Columbia Management to New York, Ken is off golfing, his firm is under, oh, about 16 investigations, and Ameriprise Financial stepped in and grabbed the BoA-neglected Columbia Management family of funds for $1 Billion.

So what's the surprise? No matter who buys them, owns them, sells them, or threatens to move them, Boston's mutual funds never leave Boston because the highly paid, highly skilled employees that work for the funds do not want to and have no reason to. In other words, there is no surprise.

And Ameriprise and Jim Cracchiolo, its apparently asute chief executive, knows that. Rather than come in with threats and pomposity, Mr. Cracchiolo calmly announces that Michael Jones, Columbia’s president, will serve as president of the US asset management business, and that Colin Moore, Columbia’s chief investment officer, will continue to serve in his role AND that the Columbia will remain in Boston.

Cracchiolo knows that Boston is the center of mutual fund expertise. Unlike Ken Lewis, he understands that the best and brightest that Columbia has now and will now attract with Ameriprise as its owner, do not want to move to Minneapolis, the HQ of Ameriprise. And I really like Minneapolis. My college roommate was from Minneapolis. But anyone asked to move to Minneapolis at Columbia has 34 other options, including Fidelity, Wellington, Pioneer, Putnam, State Street Global, GMO, Natixis ( can I stop now..NO?..OK..I'll keep going), Eaton Vance, FLAG Management, MFS, Direxion, Bank of New York/Mellon, Loomis Sayles. OK I'll stop.

And what does this mean to Boston "by Square Foot?" What does this mean to the future of the Boston office market? It means the 115,000 square feet Columbia occupies at One Financial Center stays at One Financial Center. It provides further affirmation that the future of the downtown office market in Boston is very secure because the funds are staying and the funds are growing. It confirms what I am about to release in a formal report: Contrary to chicken little(s), the sky isn't falling in the Boston office market. In fact, we're all floating back up. IN THE THIRD QUARTER OF 2009, THE BOSTON CLASS A MARKET REGISTERED POSITIVE NET ABSORPTION.

See ya Ken. Hello Ameriprise. You're gonna love it here.

Friday, September 18, 2009

Congratulations to the Brokers Getting it Done in Boston

It's been a busy couple of months, and it's time to hand out a few kudos to the people who make the city move--quite literally--my colleagues in Boston brokerage. In no particular order, sending kudos to:

Tom Ashe at RBJ who represented Carlin Charron Rosen in a relocation and expansion from 60 State into 15,000 rsf at 125 High Street.

Ben Heller at JLL for the Mass. Bankers 8,000 rsf lease at One Washington Street.

The CB team of Andy Hoar, Tim Lyne, Dave Fitzgerald, Bill Crean, and Jessica Berkey and Bill Barrack of JLL for the 115,000 renewal of Sullivan & Worcester at One PO Square. CB for the tenant. JLL for the landlord, Equity Office.

Peter Farnum of DTZ/FHO for the KNF&T renewal of 6,000 rsf at Three PO Square.

John Hennessey at GVA Thompson Hennessey who represented ITG in its pending relocation from Farnsworth Street to 72,000 rsf at the newly renovated 100 High Street.

Deb Stevens at The Stevens Group for the relocation of Netversant into 19,978 at the Schrafft's Center in Charlestown.

Barry Hynes of DTZ/FHO for bringing Joe Fallon his lead tenant, Fish & Richardson to One Marina Park at the Fan Pier in a lease of 90,000 rsf.

Ryan Hurd of RBJ who represented Ironshore Holdings into 22,000 rsf at 75 Federal.

JLL's Bill Motley and CBRE"s Chris Cuddy, Lauren Lipscomb, and Andy Hoar for the 326,000 rsf renewal of Bank of New York Mellon at One Boston Place.

Dave Richardson of McCall & Almy for Putnam's 300,000 rsf renewal at One PO Square.

Tim Lyne of CB who represented First Wind in the leasing of 36,000 rsf at the newly renovated 179 Lincoln Street.

Over at 177 Huntington Avenue, where DTZ/FHO did a fantastic job representing the landlord, First Church of Christ, Scientist, in bringing the property to full occupancy:

Steve Rich of T3 for the Altus lease of 8,000 rsf and the one pica lease of 8,000 rsf.
Tom Ashe of RBJ for the major deal in the property--a 48,000 rsf lease to CSN Stores.
Gil Dailey of Cushman & Wakefield for the Carbonite lease of 16,000 rsf.
Bryan Sparkes for the 16,000 rsf lease on behalf of The Alliance Companies.
Roger Breslin for the Pile & Company lease of 8,000 rsf.

Ogden White for the renewal of the Handel & Haydn Society lease of 6,000 rsf at 300 Mass. Ave.

Ric Lowe of Cresa Partners for the 17,000 rsf relocation of Merrill Corporation into 179 Lincoln Street.

Bob Cleary at UGL Equis for the Raymond James extension and expansion into 25,000 rsf at 225 Franklin Street.

Leigh Freudenheim of Colliers Meredith & Grew for the relocation of Altman Vilandre into 16,000 rsf at 53 State.

There are more kudos to come from the folks in the trenches on the product side in a future blog. Apologies if I left anybody out of any deal or missed a big one. Great work all around.

Tuesday, September 15, 2009

Boston Brokers Weigh in on Boston Office Outlook

I had the pleasure over the past 2 weeks to speak with 20 of Boston's finest commercial real estate brokers. My purpose was simple: to get a subjective and, a bit of an objective, opinion on where they see the Boston office market headed in the next 6 months as compared to the prior 6.

Each was asked to give their opinion on 3 typical components of the market:

1. Gross Leasing Activity: This is the total square footage of all transactions, regardless of whether the individual transaction represents growth, decline, renewal, or relocation. It's also referred to as velocity and is a way of seeing how much action there is on the street.

2. Net absorption: This is defined as the change in occupied space. If net absoprtion is up (or "positive"), it is a sign of growth in the market.
3. Rental rate: Exactly what is says.
The results by percentage of the respondents follow.
                                                 Up            Down           Flat        % Decline
Gross Leasing Activity:               41%          37%            18%
Net Absorption                          13%           63%            25%          
Rents                                          0%            80%           20%            -7%
In short, brokers feel a sense of higher activity but do not see much, if any, growth in occupied space. And nobody is looking for rents to increase over the next 6 months.
The commentary was equally interesting. The following were culled from various comments.

1. There is pent up demand, not to grow, but to transact. Tenants have been waiting to the last minute to take full advantage of what they continue to see as a declining market.

2. We need to get by the amount of sublease space still on the market before we see improvement in rents. Sublease space always undercuts the direct space market.

3. Owners are more pessimistic than brokers as they project conditions deteriorating for 12-16 months.

4. There has never been a wider variance of "asking" rents for similar space among buildings. There has never been a wider variance between "asking" and "taking" rents in the Class A market. Some landlords have bit the bullet and dropped rates 25% over the past 2 months. Others are holding high face rates but completing deals at a 25-30% discount.

5. The business community has adapted to the larger financial environment. A year ago, gross leasing activity was dropping precipitously and actually came to a virtual halt by November 2008. Companies can at least make decisions.

Finally, a personal note of thanks to all of you that participated. I have always felt that the best economists are real estate brokers. They deal with companies making future plans, and they deal with real people in real time. Hug your local commercial real estate broker.

Graphic depiction of the state of the Boston Office Market

Monday, August 31, 2009

Boston's Fear of Heights and Fear of Greatness

I am on Boylston Street, in front of the Prudential Center. I have always considered Boylston Street as Boston's Broadway, with all due respects to South Boston. It is the only street in Boston, unlike its brethren in the Financial District, that was part of a classic rectilinear plan. I do love the twists and turns of our old city, and by no means am I an advocate of this Roman template.

But Broadway means a "broad way," with wide vistas, and some viewable distance. And so, as I look straight east toward the Financial District, I see a massive, multi-colored arrangement of buildings, each seemingly growing out of each other in glass, masonry, aluminum, and, yes, even Boston brick. And they are all tall. Very tall. And I love it.

I love it because it speaks to me with the same vibrancy with which Carl Sandburg spoke of in describing the true birthplace of and still most stunning assembly of the skyscraper, Chicago, of which he wrote:

"Fierce as a dog with tongue lapping for action,
cunning as a savage pitted against the wilderness,
Building, breaking, rebuilding,
Under the smoke, dust all over his mouth, laughing with
white teeth,
Under the terrible burden of destiny laughing as a young man laughs,
Laughing even as an ignorant fighter laughs who has never lost a battle,Bragging and laughing that under his wrist is the pulse and under his ribs the heart of the people"

Analagous as cities--no. But when did we lose our fierceness and our pride? But, the better question is why?

And the simple answer is that we suffer from a fear of heights, from a fear of expression, by a false-imprinted visions of city planners that "Thou shalt build small, or thou shalt build not at all."

First, let me point out that buildings are not tall because of the inexplicable egos of those that build them. Is nybody having issues with skyscrapers in Lincoln or Dover, Chelmsford, Wakefield? Buildings derive from the density of those who seek out their counterparts in business, culture, and intellect, all to the great benefit to society. The greatest of ideas do not come from the flowery lunchrooms in Stamford. They come from the great cities--Athens, Rome, Paris, London, New York. Are we not worthy of this, to be called great, or do we relegate ourselves, at least in our architecural restriction, to seek our way into a lesser orbit?

All roads lead to Boston. It has been the port of entry to New England for 400 years. It is a walking city, all the more reason for density on the narrow peninsula on which it sits. Do we begrudge New York with its towers of business? Or Chicago, where our economy experienced most closely the shift from agriculture to manufacturing to professional business and thrust up towers to accommodate the need?

Look no further than the models of Willam Alson (1964) who so aptly described the density coefficient of the great cities or the work of Martin Cadwallader at University of Wisconsin-Madison in 1985 in his work on the density gradient of the American city. Of visit the Coloseum in Rome.

So I look down Boylston Street and I mentally start tearing down the buildings that would not meet our planning code. NOTE: There really is no such thing as a planning code in Boston--we pretend there is and the Mayor uses it selectively to deny a tall building. Or he reverses it and pulls out the magic "PDA" trump card, the "Planned Development Area", in which "if the Mayor didn't plan it, don't even think of developing it.

But this fear of heights is not the Mayor's alone. It is the acquiescence of the everyday Bostonian to believe in the false credo of urban planning in which all things tall are all things evil. We have countless choppers, cutters, pickers, none of whom has ever adequately explained why tall, in and of itself, is bad.

Please do not talk to me of shadows, of wind, and of rain, of private views now obscured. Those who advocate the small are no more than the cousins of the country mice that come to the city, enjoy its delights, but seek to turn the homes of their hosts into the tiny pieces of miceland they crave.

Our so-called zoning calls are subject to paroxsms of peripatetic behavior. The Mayor literally shuns the efforts on The Chiofaro Company to construct towers on what we are all afraid to see is our new deadspace, green though it may be along the waterfront. Quick, count how many people you saw on a Sunday afternoon in the three parcels that face The Federal Reserve, International Place, and Rowes Wharf. I counted 6 last Sunday and I think two were about to get married at the Langdon. Buth this same Mayor, 3 years earlier, wakes from a nap and declares that we shall have a 150 foot tower on Federal Street. Of course, nobody sees the point in this tower but fear not, the parking is still cheap in the city's parking garage on the site.

OK, OK, back to my view. I have just torn down the Custom House, the Federal Reserve Bank, and One Beacon Street. I miss the clock, I miss the glow, I miss the mass. But we must do what we are told. I just smashed all the glass to the Ritz Carlton, laid waste to One and 100 Federal Street and to the new State Street Global Tower. I miss the audacity and guts to turn the Combat Zone into a luxury zone. I can only commit to memory that Federal Street served as the reawakening of modern finance in Boston (my apologies, Mayor White). I say farewell to a business outpost that tried to bridge the Financial District and Chinatown. There is so left much to do but I do not have the time. I am not sure what I will see--I am not sure what our fear of heights wants us to see--squart stubby buildings with all of the dynamic flair of lego construction.

The Gods be ware. I just turned my head toward the Hancock.

Oh, yes, the maximum height that all of the buildings I just tore down, were such an arrogant attempt be made, without special favor from the mayor, could not, by law, exceed 10 stories.

Tuesday, August 25, 2009

A Real Estate Strategy for Boston hot dog vendors

Yes, Boston by Square Foot is not limited to office space. It is the entire experience of walking the streets of the City.

I've reached the boiling point, no pun intended, of the state of the hot dog vendor in Boston. The hot dog vendor is the quintessential element of a thriving commercial district. Walk down 6th Avenue in NYC and you will not pass a corner without at least one vendor. And the predominant client is not someone from Iowa, no offense intended to Iowans. The client is usually in business dress, perhaps with a few friends, enjoying two nice dogs and a coke, maybe on the library steps.
Same in Philly. Same in Chicago. Even Portland Maine has a vendor on every other corner.
What is with Boston? By my most recent count, there is a total of ONE, yes ONE hot dog vendor within the traditional boundaries of the Financial District--State Street to Atlantic Avenue to Summer Street to Arch Street.

There are vendors in the Common. There is a vendor in Downtown Crossing competing with the stinky nut guys and the Peruvian flute players. There are vendors at Faneuil Hall. There are vendors at the Aquarium. That is all well and good. When I play the tourist, I enjoy a good road dog, but if I were visiting Boston, I think I'd opt for the lobster roll.
The vendors need to rethink their strategy. It's all about the client. The clients are me. I don't like to eat at my desk. I like a breath of fresh air. To use the words of a close friend, I don't always want a "frilly" lunch with waiters who insist on telling me their names and sometimes where they are from. That's a pet peeve for another blog.

Here is my official strategic guide for hot dog vendors in Boston, based on the actual density of square footage in the City. There are 5 key corners to achieve and 7 secondary corners, all based on the density of office space within one block of the corner.

In order of strategic importance:
1. Post Office Square. Yes, I do see an occasional vendor there but nobody regularly. This is the geographic center of the Financial District. And there are benches and green grass. The Bank of America building alone is 1.3 million square feet.

2. Corner of High Street and Oliver Street. OK, High and Oliver are not exactly the quintessential streets of the city. But with the 2 towers of International Place, the two towers of 125 High Street, the State Street Bank Tower, and 260 Franklin, it is the single densest concentration of office space in the City. And Don Chiofaro lets you sit on his outside patio for free. We are talking about 6 million square feet of office space on one corner. Come on dog people.

3. Franklin and Federal. For 60 years, this has been the banking center of New England. Try Bank of America, Fidelity, State Street. Try 4 million square feet. Maybe its time for the Brahmin dog, served cold with a free Wall Street Journal.

4. State and Congress. Not worthy of any explanation. Even the English put their Governor's House, now Old State House here.

5. Where the lollipops once bloomed--Summer and High. Remember those weird spinning lollipops in front of what was the Blue Cross Building, now 100 Summer. When the wind would pick up, Blue Cross would send guys out with wires to secure it to the ground. I actually miss them. Anyway, there happens to be 3 million square feet on the corner and anyone coming from the T walks right by the building every day, whether from Downtown Crossing or South Station.

Secondary Options:

OK, you may not have what it takes to dominate the big corners. Here are your start up locations, with no comment--just check it out and stop being so lazy:

1. Broad and State.
2. Beacon and Tremont.
3. Liberty Square.
4. Winthrop Square.
5. Washington and State in front of One Boston Place.
6. Carry a box on your head, just like at Fenway, and just roam around yelling out Hot Dawwwgs, Hot Dawwwwwwwgs.
7. Hijack a Mr. Frosty.

I'm hungry and I'm not walking to the Aquarium for a hot dog.