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?