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 Whether office use will still be the highest and best use for poorly located, outdated B properties which do experience a large vacancy.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