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
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