Tuesday, April 20, 2010

Boston -- the GLOBAL leader in innovation

As anyone who reads my blog knows, ( and thanks again to those out there who does by the way!), I am a believer in good vibes and bad vibes people. I hope the attached article, showing Boston's dominance not only nationally but internationally, as the intellectual center of the business world, finally silences the bad vibers out there--at least for a little while.

The impact on Greater Boston's real estate market is directly tied to the measures cited in this article. If there is anybody out there who still believes we are not in full recovery in the Boston office market, please raise your hand.

Of course, the right time for all of the real estate firms in Boston to raise their hands would have been 6 months ago, but it's funny that nobody did. As Satchel Paige said, "Don't look back. Something might be gaining on you."

Like a real estate recovery.

Friday, April 9, 2010

The Boston Office Market Recovery--Acceleration Stage

Please click on the title for access to the full J. Adams Commercial Boston Office Market Report for the first quarter of 2010. You may also follow the enclosure link.

Driven by the continued surge of net new cash inflows into the mutual funds, the Boston CBD office market registered 270,000 square feet of net absorption in the first quarter of 2010. This is the third straight quarter in which the A markets saw growth in occupied space and the first time in two years that the B markets also were in the black.

The healthcare industry also contributed significantly to net growth, and my projections call for continued expansion in this area due to our state’s number one position in per capita spending by the Natioanal Insitute for Health and the enormous effect the passage of Federal health legislation will have on our economy. The government in general continues to grow at a disproprotionate rate and, along with demand from the private money management sector, will join mutual funds and healthcare to account for over 70% of net absorption over the next two years.

On the supply side, we have underbuilt yet again, with only 380,000 square feet remaining available for lease in the two buildings now under construction—Boston Properties’ Atlantic Wharf and The Fallon Company’s One Marina Park Drive at the Fan Pier. Given that fully permitted projects require three years to complete, there will be no new supply in Boston any sooner than mid 2013.

Much has been made about the delta between the actual vacancy rate, which stands at 9.7%, and the so-called availability rate, which adds space which may come to the market due to the departure of a tenant to the actual vacancy. This latter figure at 16.3% implies a cushion for growth for the tenant market. I wouldn’t count on it. Available space carries three inherent elements of uncertainty:

1. Whether a tenant who has not yet made a relocation decision will actually do so.

2. Whether office use will still be the highest and best use for poorly located, outdated B properties which do experience a large vacancy.

3. Over what period of time potential space comes to the market, if at all.

With virtually no space under construction, the potential available space has effectively become a substitute for new construction. Assuming all of the potential space comes to the market, which would ignore all the uncertainties above, a total of 2.2 million square feet of A space, would be delivered through 2012. If our year to date net absorption is annualized, 2010 net absorption will total 1.1 million square feet. I am conservatively projecting 580,000 and 650,000 square feet of net absorption in 2011 and 2012. Total net absorption would thus be 2.3 million square feet through 2012.

I do not believe that even one half of projected availability will ever materialize. Vacancy is vacancy. Availability is marketing. The CBD market is not only recovering, but its rate of recovery is accelerating.

Thursday, April 1, 2010

Real Numbers on Boston Real Estate

And here come the market reports from the "big houses." I am anticipating 16 variations of the phrase "cautioulsy optimistic". I am expecting the figures to be so aggregated as to make no sense at any local market level. And I can guarantee that no firm will make an actual square footage projection of net growth or decline. I'm not picking on the firm behind this column. Other firms will be worse because the report will be written in Los Angeles or Chicago. But it's time to take a stand for accuracy and for putting your money where your mouth is.

Here's the reality. The suburban markets are still in decline. The A markets in the CBD have registered their 3rd straight quarter of net absorption. In the first quarter of 2010, net absorption was 280,000 square feet and, for the first time in 22 months, this absorption included the B markets. The total amount of available space under construction in the city is a whopping 380,000. That's 380,000 rsf in a 72 million square foot market. We are not building enough space to accommodate our current rate of growth.

I don't care about "availability". I care about what's vacant today. Availability is amorphous—it’s all about the probability that some space may come available in the future. And the CBD vacancy rate is 9.1 %, DOWN, from 9.5 % on January 1, 2010. As to the future, I am projecting net absorption of 450,000 square feet in 2010 and 580,000 square feet in 2011.

As to the financial markets, I guess nobody has paid attention to the stock market or the massive net inflows into mutual funds over the past 18 months, inflows that drive the Boston office market. I guess nobody has paid attention to the fact that productivity levels in Massachusetts are at the highest levels since the statistsic was first measured in the 1950's. Why is this important? Because it is not sustainable and companies will hire and hire quickly.

I am tired of vague, generalistic assessments of markets that provide no insights to local market differentiation and that carry "party line" messages about “challenging times.” I’m bored with companies that never actually stick their necks on the line and state what net absorption WILL BE, not what it was. I'm not cautiously optimistic. I am totally optimistic. And I’m not afraid to put the numbers out there in clear view.

My entire market report will be online within the week.