Boston by Square Foot in The Fullest

A Quick Note about the “Benefits of lowering the capital gains tax.

2012-01-26T13:06:00.001-05:00

The argument in favor of lowering the cap gains tax because, in the past, it has shown to result in an increase in government revenues, is faulty on its premise and in its time horizon.

First, there are a wide variety of reasons why someone sells a capital asset. I am not arguing that, in the past, IRS collections have gone up after a decrease in the rate. But it's not about capital generations, new jobs, and all the nonsense behind the arguments. It’s because, with a lower rate, the value of your asset went up in the moment, and you are more likely to sell, which sets off a higher rate of collections.

The problem, which most economists make, is that they fail to look beyond what happens after the first year as far as collections. They also fail to see that capital gains collections are subject to countless variables other than the tax rate, perhaps, above all, the stock market.

But talk is talk. Below are two tables showing the effect of two recent reductions in the cap gains tax rate. The first table shows the rate of increase or decrease in percentage terms in IRS cap tax collections. The other shows the change in GDP as a proxy for the multivariate elements that go into capital gains tax collections.

All changes to IRS revenue and GDP occur one year after the tax act.

Long term capital gains tax rate       GDP        IRS Collections

Previous      New   Year        Percentage Δ          Percentage Δ

                            1996                     4%                   4.5%

28% 20% passed in 1997                    5%                     4.4

in effect                 1998                     4%                     4.8

                             1999                      5%                    4.1

                              2000                     4%                     1.1

                              2001                      1%                    1.8

                              2002                     2%                    2.5

20% 15% passed in 2003                      3%                    3.5

in effect                  2004                      4%                      3.1

                              2005                      3%                     2.7

                               2006                    3%                       1.9

                              2007                    2%                       -0.3

                              2008                     -3%                       -3.5

                             2009                      -4%                        3.0

                             2010                       3%                          3%

Sources: Congressional Budget Office http://www.cbo.gov/ftpdocs/108xx/doc10871/Chapter4.shtml.

Bureau of Economic Analysis http://www.bea.gov/national/index.htm#gdp

Consider years 1996, 1997, and 2003. There were no tax policy changes that went into effect in these years. And yet, the increases in each of these years are among the highest in the table. More importantly, look at the years AFTER the first year of the tax cut. The best example is the cut passed in 2003 and in effect in 2004. In 2004, collections did rise by 4.1%. Then look at the next four years—so much for the long-term impact of a one-time change in the capital tax rate.

When the price you pay isn't the price you pay in Massachusetts

2012-01-19T17:05:00.000-05:00

Seems like there’s been a surprise waiting for a few cellphone purchasers these days in Massachusetts. In the infinite wisdom and most-likely unconstitutional action of the Department of Revenue, when you purchase your next cell phone, you won’t pay tax on the price offered. No, you will pay on the “full wholesale price.” We all know that the purchase of a cellphone is a bundled purchase. The retailers give you a discount on the phone but it comes with an obligatory contract, on which your monthly service charge is heavily taxed by the state.

Seems like the Department of Revenue in a “Directive” dated April 29, 2011, forced the seller of a cellphone which included a bundled package of services, to tax the phone itself at “full wholesale value.” Of course, they did not define the wholesale value. The Department of Revenue basically argues that the price of an object or service sold is not the final sales price, even though the bundled service is taxable. Nothing like turning over a few centuries of the nature of sales and negotiations.

When I go to Macy’s and a sweater has been marked down 50%, with the original and reduced rate shown on the price tag, I have never been taxed on the higher price. Nor have I been forced to sign a contract to wear the sweater, paying Macy’s on a monthly basis. When I go to purchase a new car and the sales price invariably comes in below the original asking price, I have never been taxed on the original sales price. And, no, I don’t have to pay General Motors a monthly fee to drive the car. The world has been and is ruled by fair market price determined by the actual sales price at the point of transaction. Any further laws that specific transaction may set in motion, such as sales taxes or levies, should apply to the actual sales price.

The DOR directive is clearly in conflict with Mass. General Laws, Chapter 64H, “Tax on Retail Sales of Certain Tangible Personal Property”. In Section 1, paragraph 19, the “sales price” is defined by “the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise” with the clear stipulation in subparagraph c that “(c) there shall be excluded (i) cash discounts allowed and taken on sales.” These are the same cash discounts the state is now taxing.

To selectively apply an archaic and unenforced “full-retail tax policy” to cellphones alone is both random and dismisses the concept of tying taxes to sales prices. Inexplicably, the Globe endorsed this although, in reading the editorial, I really have no idea what they’re writing about. I guess in Massachusetts, the price is wrong.

The Only Casino that will be built in Massachusetts

2012-01-12T18:17:00.001-05:00

It’s nice that the Governor divided up the state into three regions for a casino. The problem is that nobody is attracted to Southeastern or Western Massachusetts if they are coming to gamble in a casino that meets the grand visions of all of us. Sorry, I don’t want to drive to Brimfield and play blackjack in a cornfield. And I don’t care if there are fifteen 5-star restaurants on the site. I don’t want to drive by abandoned warehouses and play roulette in the equivalent of Massachusetts’ Atlantic City in Fall River.

This leaves 2 options: Foxboro and Boston. I love the Pats, think the Kraft family has been an extraordinary citizen of the state, but I don’t want to drive down route 1 south, pass the 16 liquor stores and turn into a “world class” casino.

We are all forgetting one thing. A casino unto itself does not make the casino “world class” or even desirable. Casinos need access for very impatient customers and they need amenities unique to their location. Remember, we are not talking about 25 casinos along a strip in Las Vegas. Suffolk is a 10 minute van ride from Logan (not sure where the airport is in Brimfield). When your significant other wants to explore the neighborhood, I think he or she might prefer the 10 minute bus ride to Faneuil Hall than the footbridge adventure into Patriot Place. I truly have no idea where one goes if one goes outside at all in Fall River or Brimfield.

Do we want a world class casino? Then put it in a world class city. I can hear western Mass. complaining already. “We’ll depend on New England visitors!” No, not if there is a more exciting choice. Isn’t that what casinos are all about? Excitement. And nobody from Chicago’s flying in to gamble in Fall River. And no businessmen in Boston are going to drive 2 hours to hit the cornfields of Brimfield.

Further, once Suffolk is chosen, there will be no other casinos in the state. They can’t compete and they won’t compete. Look at what they’d be up against. Where would you go to play?

The Day the Product Broker Died

2011-10-19T22:27:00.000-04:00

Today I reviewed the same 15 emails that I receive from the same 15 brokers every Wednesday. I’m sure I’ll do the same tomorrow. They are very nicely done. Some take you to lovely web sites which extol the values of the property. Some lead you to floor plans. All list 3 or 4 brokers ready and waiting to answer your call. The vacancy never changes.

Product brokerage is dead, and it is the entire landlord community that has allowed it. The typical broker feels that he is actually marketing and leasing a property if he or she does four things:

1. Stick a listing on CoStar.

2. Send the same lame email out weekly.

3. Present his or her client with a list culled from any responses to the above together with the classic and useless “tenants in the market.”

4. Wait for the phone to ring.

Product brokerage is a discipline that brokerage has given up on. The discipline is really quite simple but requires hard work. And the “big houses” don’t like hard work anymore as long as nobody demands hard work from them.

Product brokerage requires that a broker fully assess the attributes of the property-its location and neighboring submarket; the current tenant roster and why those tenants chose the property; its perceived class in the market—A, B, or premier; the reputation of ownership and management; all of its physical attributes from floor plate size to HVAC capacity.

From knowledge of the property attributes, a true product broker will match these against the tenants most likely to have an interest in the property. But a good broker can only do this if he or she maintains a detailed database of all tenants in the Boston market, appropriately categorized by submarket, lease expiration, preferred building quality, industry, and history of relocation, among other attributes, and the contacts at each firm.

Brokerage houses don’t have this information and that’s my challenge to the entire brokerage community. And my challenge to the entire landlord community. Tomorrow, ask your broker to provide you with his or her own list of the target tenants he or she is pursuing, EXCLUDING calls from CoStar, calls from emails, and the ubiquitous but useless “tenants in the market.” Your broker will not have a list. I guarantee it. They do not have demand side information that they have developed themselves. They may ask for a few hours but don’t give it to them.

Then the landlord community may just realize that, in their broker’s opinion, no matter how slick their latest email may be, or how fascinating their web site may appear, that you’re just another building with a “for lease” sign on it. Along with the other 10 buildings they’ve hung a shingle on.

Wouldn’t it be nice if brokers actually marketed your buildings?

Why urban Planning Fails--especially in Boston

2011-10-03T08:46:00.000-04:00

The Boston Globe’s article “Urban Analysis” (Monday, October 3, 2011) is another self-indulgent look at what urban planners want to do and what urban planners can do. And none of it is new or cutting edge.

The Romans were perhaps the world’s most successful urban planners. Why—because Rome, at the height of its power, was an absolute dictatorship, with a Senate thrown in for good looks. It was a lot like Mayor Menino’s Boston with the City Council along for the ride. Urban planners hold tight to the belief that a good plan creates good development. The problem with that thinking is that there is a complete lack of recognition that land transfer and ownership in this country is private. Yes, government must and should control infrastructure and common land uses such as parks and recreation. But you can plan your heart away and if the CEO of a company doesn’t agree that point x generated by some type of Urban Network Analysis toolbox, the game’s up. Planners cannot execute.

And adding more and more data does not help. Nigel Jacob, in the Mayor’s office, who, by the way, needs to realize he works for a man who gives lip service to urban planning but absolute interest in Menino planning, needs to take a serious course in what is and is not “revolutionary” in urban planning. Nigel and the weekend data warriors should stop playing with numbers first and spend some time realizing they are not urban planning revolutionaries. Some suggestions: Ptolemy, Erastotshenes, Alexander von Humboldt, William Hunt Morris, and Robert Moses. Phone apps for removing graffiti and choosing great spots for bike racks is not exactly the stuff of revolution.

There is a fine line between setting a context for development and developing. Vornado and Filene’s come to mind. Ouch, that hurts. The planner and his toolbox are on the context side. Private capital, motivated by no set rules, is on the other. I have a good sense of this. I studied geography and economic development in college and have practiced commercial real estate for 29 years in Boston.

I must say I didn’t foresee “Occupy Boston” as a land use for the so-called Greenway. Was that in the plan?

When the law is not the law--destroying the New England fisheries

2011-03-28T11:14:00.000-04:00

The Gloucester Times reported today that a long-standing Congressional mandate (1954) that 60% of tariffs on imported seafood were to be directed to fishing industry projects has been ignored virtually since it came into existence. Instead the monies have been "redirected" to the NOAA. How's that for gallows humor. The NOAA, which has been suffocating the local fishing industry with its everchanging regulations, has also been pocketing the money the industry needs to recapitalize and rejuvenate itself.

Oh yes, I guess I forgot one important thing. Over the past ten years, the diversion has only been $400 million. In 2009, the total tariff was $108 million. Under the law, $65 million should have been spent on the fishing industry. Instead, the total allotment was------ZERO.

But at least the NOAA has those sporty new SUV's they use to patrol Provincetown Harbor to make sure the 3 fishing boats docked in what was a thriving port aren't breaking the law by overfishing.

I wonder how our wonderful rice growers in Texas would respond to a similar "diversion." And then there's all those patriotic farmers growing corn for ethanol. I don't think they'd take this very well. But this is fishing where we seem determined to erase the last ship from our fishing ports.

Mutual Funds Still Drive the Boston Economy

2011-03-18T12:55:00.000-04:00

Before we attack the largest industry employer in the city of Boston—the mutual funds industry—let’s remember that the tax breaks referenced in the recent decision of Fidelity to vacate its space in Marlboro were granted to all mutual fund companies. The mutual fund industry alone occupies over 35% of the Class A office market in Boston and vendors to the mutual fund industry are a major source of occupancy and employment as well. Mutual funds drive the Boston economy.

And the mutual fund industry in Boston is a proven success. We are not talking about subsidies and incentives to unproven or unstable industries. The Evergreen Solar debacle is the best example of the latter.

If we are going to provide tax breaks or subsidies at all, and I often question that wisdom, the least we can do is to make them available to all of the companies within a target industry. And we should begin by making sure we work with our successful industries first. The success of many other industries depends on the success of the core industry of a region.

Massachusetts' Gateway Cities to Nowhere

2011-03-12T13:04:00.000-05:00

Apparently, Massachusetts has 24 “Gateway Cities”, including Fitchburg, Pittsfield, and Springfield. As Gateways Cities, the State has spent hundreds of millions ($247 million on housing alone) to “revitalize these gateways. Which begs the question: gateways to what?

We need to accept the fact that some cities will never recover their former standing whether as industrial centers, mill towns, or fishing ports regardless of how much taxpayer money is spent attempting to do so. Over time, functions of all cities change relative to each other. Springfield was founded as an armory because British ships could not navigate up the Connecticut River. While its role as a major maker of munitions did lead to a thriving small machine tool industrial town, it has been on the decline for decades. No amount of money is going to bring Springfield back, and I emphasize back, to its past heydays. And there is really no functional objective that Springfield currently offers locationally that justifies continued subsidies.

Fitchburg was one of the nation’s leading centers of furniture production. I need say no more.

Perhaps some of the Massachusetts “Gateway Cities” have futures in a new economy. But spending millions of dollars on imaginary revitalization is an exercise in fantasy, an invitation to patronage, and an enormous waste of capital in a state whose trains don’t run on times and whose school systems are crumbling.

If we are going to put money into true growth cities, we should put it into those cities that are currently successful and thriving. This may sound counterintuitive but it is the success of these cities that will pull the train of success for the entire state.

Buildings Do Not Create Jobs--Let's Cut the Rhetoric

2011-02-13T20:58:00.000-05:00

It’s time we put an end to the political rhetoric that “buildings create jobs.” Companies create jobs and a building is but one of the three classical components of production, along with labor and capital. But it has become the norm in every announcement of a new commercial building for the government official and/or private developer to announce that the building of “One XYZ Place will create 100 construction jobs and 600 permanent jobs.” The claims are pernicious because it is often the rationale for government approval or public financing for the building and for public infrastructure expenditures (see Assembly Square link).

Buildings do not create jobs. Companies create jobs and then, as needed, assemble the factors of production necessary to produce a product or service. One of these factors of production is land, which, for our purposes, can be considered commercial space. The other factor is capital, such as the machinery necessary to manufacture a product or the telecom system necessary in a new office. The third and most important is labor.

To say that one factor of production—land (or commercial space) -- creates another factor of production—labor-- is not only theoretically wrong, it is absurd on the common sense level. A building is a box. If, and the” if” goes to the very core of commercial real estate, the building attracts a user, it will still be a box. It will not create the jobs; it will only house the jobs. And if the company leaves, it will not sprout new jobs. It will still be a box.

Buildings do not create construction jobs either. If the building is constructed by and for a specific user, the user, by creating the building, creates the construction jobs. If the building is constructed on a speculative basis, derived from an investor’s perception of the need for commercial space, then the construction jobs are created by the investor, not by the building. Again, the building is a box, just one factor of production.

One might argue that this is an issue of semantics. I beg to differ, because the “buildings create jobs” battle cry is used as a justification for virtually every new commercial construction project. If a private investor constructs an office building purely on the basis of its judgment of supply and demand and exactly within the zoning and building codes, I have no problem with semantics. Of course, this happens in the Land of Make Believe. Every office building constructed in Boston, even those meeting zoning and building codes, must still receive Boston Redevelopment Authority approval at the design level. And then the sensational claims come gushing out about buildings creating jobs. And then come the requests for public financing or incentives. And then the taxpayers start coughing up money based on an untruth. This is not an issue of semantics when semantics become a weapon of deceit.

The citizens of Massachusetts have now learned the issue the hard way, spelled E-V-E-R-G-R-E-E-N. Taxpayers paid for the building to the tune of $58 million in direct subsidies, incentives, and tax breaks. Evergreen created the jobs. And then Evergreen eliminated the jobs. The building is empty. It is not “creating jobs.” It is just a big empty box, which is all that it ever could be. It may once again become an active factor of production if a user chooses to produce a product or service in the box. But until then, the building will not be creating jobs.

Unfortunately, the Governor had already drunk the “buildings create jobs” Kool Aid, and his erstwhile development director, Greg Bialecki, is still handing out cups of the stuff all over the state. And we all keep drinking it. By the way, Mr. Bialecki considers Evergreen as a minor mistake. Makes you wonder what a major mistake would be.

If you want an idea how deeply entrenched this wishful thinking extends, simply visit the Boston Redevelopment Authority website, look up any development project, and read how many jobs the project will create. It’s a complete farce. I know a lot of landlords who wish that their existing half empty office buildings started to suddenly create jobs one day.

Saying a building creates jobs is like saying that making a hammer will create jobs. It leaves out the fact that hammers do not stand up, grab some nails, and start pounding away. A person (let’s call that person Mr. Labor) picks up the hammer first. And someone (let’s call that someone Mr. Producer) informs Mr. Labor what he wants him to do with the hammer. And, if we all hold our breath, maybe Mr. Producer will find his way to Fort Devens and rescue us all from the Evergreen debacle.

I’m a real estate broker. If buildings created jobs, my profession would not exist.

The Geography of Disaster: The LNG tanks of Everett, Massachusetts

2011-02-02T00:44:00.001-05:00

While the Commonwealth continues to debate the wisdom of onshore LNG plants in Somerset and Fall River and while the populace cries foul at Cape Wind over price concerns, the Department of Energy recently and quietly painted a frightening picture of the onshore LNG industry. Liquefied natural gas, exposed to air or water, forms a pool of superheated, inextinguishable fire. Its burn rate depends on the amount of the spill, wind, waves, and currents. By its own assessment, the DoE, working in conjunction with the Sandia National Laboratory, estimated that a breach of only 3 of the 10 compartmentalized tanks on a typical LNG tanker would kill anyone within a ½ mile radius in less than 20 seconds. In 8 minutes, a breach would cause 2nd degree burns within a 2.5 mile radius.

Using Census Bureau and City of Boston estimates of workday populations under the 3 tank DoE scenario, over 80,000 people would die within 20 seconds with an additional 540,000 people suffering severe burns, many fatal, within 8 minutes. Within 12 minutes, fire would engulf all of Charlestown, East Boston, South Boston, the South End, the North End, North Station, Beacon Hill, the Back Bay, the West End and the towns of Chelsea, Everett, all of East Cambridge and over one half of Somerville.

Those are the aftermaths of breaches in tankers. The actual tanks at Everett, at equal if not greater risk of a similar breach, contain over 125,000,000 cubic meters of LNG, ten times the amount carried in a single ship.

There are 9 operating LNG plants in the United States. As the table below shows, Everett is the only plant located in a populated area and the only plant served by passage through a narrow, active harbor.

The Geography of Risk: The Relative Location of Existing Liquefied Natural Gas Plants in U.S.A.

Location of LNG Plants     Surrounding Area   Nearest Major City     Distance (miles)

Sabine, LA                         Island in lake              Shreveport                 72

Kenai, AK                       Port on Cook Inlet        Anchorage                    65

Freeport, TX                     Isolated bay                  Houston                      61

Cove Point, MD              Isolated riverfront     Washington DC               46

Cameron, LA                   Isolated bayou              Lake Charles              24

Lake Charles, LA            Island in lake              Lake Charles                 18

Peñuelas, PR                    Offshore ocean               Ponce                         7

Elba Island, GA       Unpopulated Island in river    Savannah                    6

Everett, MA            Heart of major city port            Boston                       1/4

The Unpredictability Factor--The Myth of Telecommuting and the Growth of Central Cities

2011-01-30T22:12:00.000-05:00

I never quite understood the appeal of working in my pajamas, although, evidently, the ability to do so makes one the member of an exalted class—the telecommuter. It’s all very George Jetson--like and it’s made folks like Steve Jobs very wealthy men. It’s also the topic of countless and generally boring visions of telecommuter nirvana where we are all in our pajamas looking out at the smog free home of the brave. The problem is it doesn’t work. Yes, jobs that have specific instruction and little deviation from the norm can be done in your home. They can also be done in India or Brazil. But you just can’t do much when the unexpected happens. The value of the American worker will be increasingly based on his or her ability to react to and deal with the unexpected and unpredictable world of global business. That’s tough to do in your jammies.

Let’s start with the latest rather startling evidence. The latest statistics from the Census Bureau indicate that office jobs have been growing at a faster pace in central cities than in their surrounding suburbs. Yes, the cities who our many experts told us 15 years ago would be virtually empty while we all sat and watched the grass grow in squat brick buildings in suburbia are outpacing the dull worlds surrounding them.

Considering that a suburban office worker is one step up the ladder from a telecommuter, things don’t bode well for the pajama party. Nor does it matter how many apps you’re running on your IPhone, because you can’t run an app for something that doesn’t yet exist, such as an unexpected visitor. It’s not difficult to see why suburban office use is on the relative decline. And it’s very easy to see why telecommuting rates have barely changed in 20 years. And it won’t change regardless of how much more of a toy we make our phones. It’s still a phone. Period.

I offer up the “unpredictability factor” as a new determinant in the location of the workforce. In short, the more unpredictable events that may occur in a given business day, the greater the necessity that the worker be located in or in close to a central city. And unpredictability has three components.

The first component is one of unexpected demand for services. Examples of the first would be commercial loan officers. Although one could argue that a loan officer can stay in his pajamas until the day and hour of his meeting, that would imply that every meeting must be a scheduled one. Not being in your office when a successful businessman wants to discuss a loan is not providing your core service. Other examples include real estate brokers, who must be ready for unexpected showings; attorneys who are unexpectedly called to court; and most public workers, who must be available for unexpected public business such as a marriage license. All of these workers possess the same qualities—the ability to deal with and react to new, unexpected business events.

The second component of unpredictability is the unexpected need for supplies or connections to provide the service. Examples from the unexpected supply side can be direct—an architect’s unexpected need for large scale renderings and a premium restaurant table for an out-of-town client unexpectedly in town for the night. They are more frequently indirect –the commercial loan officer’s need to meet with a rating service’s local representative about the creditworthiness of the unexpected seeker of the loan mentioned above.

The third component of unpredictability is the endless series and cycles of the unexpected meeting whether that be during a walk through the city, at a popular lunch spot, or while attending a seminar or lecture. This component is the one most cited by advocates of doing business in the city, and it is entirely one of making one’s presence known simply by being in the midst of your potential clients and vendors. As Woody Allen said, “80% of life is just showing up.”

It’s hard to accommodate the unexpected in your pajamas. And once you strip away the chic and false notion that an IPhone is somehow more than a phone, you can see that a telecommuter is the most replaceable of workers. By design, their work cannot deal with the live unexpected world of business on either the demand or the supply side. You don’t run in to many potential business partners in your kitchen. It’s nice to be able to email me a picture of your cousin’s new baby from your living room couch, but that’s not business.

A worker’s value in America is increasingly tied to his or her ability to deal with and respond vigorously to the unexpected. The closer a worker is to the central location of any geographic area makes that worker more capable of dealing with demand for and supply for unexpected business. It also dramatically increases the chance of the serendipitous meeting. The role of the telecommuter is to operate within dictated boundaries. But, of course, you get to wear your fluffy slippers at the same time.

For Every Love Letter Written, There's Another One Burned--A Little Balance Please

2010-12-27T17:08:00.000-05:00

Banker & Tradesman’s lead article today was “Boston Tenants Vacate 1 M Square Feet in 2010.” A good grabber. And it’s even true. Gritty reading as Jim Cronin covered all of the properties that saw tenants pack up and go. He even got some respectable industry quotes. The problem is that his article was only half-a-story, as they say. What he forgot to cover or just plain overlooked is that more than 1 M Square Feet was occupied by fresh tenancies in 2010. Let’s get into the detail.

Banker & Tradesman (“B&T”) failed to balance off the vacancies to space that came to the market in 2010 with companies that did indeed, contrary to some of the article’s quoted sources, backfill the vacancies. Every good real estate researcher knows that backfilling takes place across markets, not within individual buildings. If B&T does not analyze the data this way, then B&T would be showing massive negative absorption in Boston of over 1 million in 2010. Every brokerage house and I have already noted positive absorption for the year. I will use B&T’s list first and then cover the properties they ignored.

1. International Place—Yes, when Ropes moved, nobody backfilled the space. But B&T failed to mention that Ropes’ move to 800 Boylston completely backfilled the vacancy left by the Gillette Company after its purchase by Procter & Gamble to the tune of 400,000 square feet.

2. One Federal—B&T is right on with this property. Between One Federal and 125 High, Tishman is sitting on the largest amount of space of any landlord in the city.

3. One Congress—I would not consider a converted garage to even be in inventory and thus not truly vacant. Under Tom O’Brien, the property is being marketed as future office space, and Tom is seeing a lot of interest.

4. 225 Franklin—This is B&T’s biggest mistake. Bank of America leased 226,000, followed shortly by Ameriprise Financial for 130,000 square feet. Along with 100 High, covered below, 225 Franklin was the success story of 2010. B&T’s numbers are completely wrong.

5. 99 High Street—How can B&T mention a vacancy increase without talking about the building’s largest tenant, KPMG, taking over 100,000 square feet to anchor Two Financial Center?

6. 53 State—Same question. The entirety of the vacancy at 53 State consists of Choate’s backfilling massive relocations out of Two International Place. The same will be true at 75 State when Wellington vacates 300,000 square feet there and at a handful of properties to anchor 500 Atlantic in a 400,000 square foot lease.

B&T missed the remarkable leasing efforts at 100 High Street—net 140,000 square feet slowly chipping away at what Bingham left behind; at 200 Clarendon led by the Bain Capital lease; and by way of Liberty Mutual’s expansion into 500 Boylston and its announcement of a new tower which will represent net growth. And many more pure growth stories.

B&T needs to make a choice—accurate net absorption figures or scary stories. You can’t have it both ways, no matter how much of a “grabber” it is.

What's Right about Boston's City Hall

2010-12-13T19:01:00.000-05:00

It's my guess that about 95% of Bostonians would not mind if Boston City Hall were demolished tomorrow. About a year ago, the Mayor was so desparate to get out, he almost built a building in the ocean.

But the entire problem and the tremendous potential of the building is the landscape upon which it sits. Consider the State House (New State House, as a proper Bostonian would say.) If the building were built on the vast acreage that City Hall sits on, it would immediately lose its glory. City Hall is a majestic building. It is a city on a hill unto itself, but inverted. The problem is that nobody ever thought to bring the grandeur of City Hall itself to what could be the grand approaches to City Hall.

And I am not talking about the brick. I’m talking about bringing light and activity in concentric circles out from the base of City Hall. Doing so should have been simultaneous with the design of the building. Any building with an inverted base will naturally have a dark and shadowy base. Kallman et al forgot about this. As you approach City Hall, instead of looking up to see how the levels build upon each other, you look down into the pit of the entry. The lack of attention to light, a clear entry, and clear entry “flight paths,” if you will, defeat the architecture of the building. You feel like a mouse trying to find the hole into a massive hunk of cheese.

Grass is not the answer. It would be as unused as the brick plaza or the Dimway, oops Greenway, and would belittle the architecture itself. The answer to the context is varied, gentle elevations leading up into City Hall rather down into the pits. Imagine a series of ramparts approaching a castle except that along the ramparts we could build appropriately designed commercial, retail, and entertainment space—perfect space for an opera house which we embarrassingly do not have. But the approach must be up and toward the top of City Hall, not down and into the pit.

Back to the Old State House. How would you feel if there were McDonald’s bags on the lawn or plastic planes of glass in a few of the Governor’s office windows? The City has never taken care of City Hall. It is a disgrace. This is OUR building, and its care should be a matter of civic pride. The only response we manage to come up with is “tear it down, tear it down.” That’s fear speaking, not logic. About 10 years ago, the same crowd wanted to “re-clad” the Prudential Tower.

And all the architects who praise its design do that and nothing more. We are all wonderful critics and cynics, but few of us feel obligated to do anything. If the 1 million architects (that’s my estimate) who bobble around Boston and Cambridge want to bring life back to what, without dispute, is one of the country’s greatest examples of Brutalism, then they and we better look at the context of the property and the disgusting manner in which have let this property rot.

If we condemn City Hall to the wrecking ball, we condemn ourselves for a lack of will and imagination.

The Angry Man and the Guillotine

2010-10-29T11:04:00.000-04:00

I like John Palmieri, the Director of the Boston Redevelopment Authority. He approaches development thoughtfully. His work at Seaport Square, Fan Pier, South Station, Liberty Mutual, and countless other development sites have been noteworthy and worth commending.

Unfortunately he works for the Angry Man. And after the latest self-induced debacle at the Filene’s site, the Angry Man, as is his custom, will be looking for any head to roll other than his own. Alas poor Yorick.

For two years, the Angry Man has been threatening Vornado and its partners at the Filene’s site with any combination of removal of permits to eminent domain. I wrote about the nonsense of such an approach on September 25, when the editors of the Globe started drinking the Angry Man‘s Kool Aid and demanding the same.

Fast forward one month and the Angry Man, using Mr. Palmieri the way President Bush used Colin Powell, had admitted that his approach was not thought out financially or procedurally.

I don’t want to beat a horse that’s not only dead but nearly buried, so let’s focus on how the Angry Man works. The Angry Man can never be wrong even when he is wrong. I didn’t hear any apologies for the money spent analyzing and developing renderings for a new City Hall in the unreachable docks of the easternmost piece of Boston Harbor. And you won’t hear any apologies for his nonsensical behavior with Vornado. His plea for help from Mayor Bloomberg was an embarrassment to Boston. His latest desire for unachievable vengeance on Messrs. Roth and Hynes is a further embarrassment.

This brings me back to Mr. Palmieri. The guillotine has been delivered to floor 9 at City Hall. And the Angry Man will pass the blame on again. Good luck John. Maybe intelligence and practicality will prevail at City Hall. But between Chiofaro and Vornado, the Angry Man needs to strike out at someone.

Report on Massachusetts Home Sales is Not Accurate

2010-10-28T14:02:00.001-04:00

Yesterday, most media sources reported that single family home sales had declined year over year in September. The Boston Globe chose to run this at the top of the business page with the ominous and incorrect title, “Mass. home sales dropped 12.9 percent last month.” The report was on existing single family homes and condominiums, not “homes.” I guess that’s the old-fashioned attention grabber.

The story was not technically incorrect. It was selectively correct. The Globe gave short shrift to pricing, which, if included as I do below, paint a very different picture.

As an example, suppose the lead article of the Globe Sports Section that same day discussed the previous night’s game against the Heat and covered all of the Celtics’ scoring but never mentioned the Heat. The title would read “Celtics Score 88 Points.” I don’t know about anyone else, but I think I might want to also know how many points the Heat scored so I could at least know who won the game. But that’s exactly the way the Globe played the news.

The correct approach would have incorporated both numbers of sales and pricing. Every industry measures its performance by GROSS REVENUE and GROSS PROFIT. Let’s look at the numbers in that light.

Gross home sales revenue in September 2010: 3,285 homes x $287,000 = $940,000 gross sales.

Gross home sales revenue in September 2009: 3,771 homes x $284,000 = $1,070,000 gross sales.

Gross single family home sales, expressed in revenue dollars, decreased by 8.3%, not by 12.9%. The same analysis of existing condominium sales results in a gross revenue decrease of 16.2%, not 21.5%.

Declines of 8% and 13% are certainly not comforting news, but they are a far cry from 13% and 22%. It’s not as bad as you think. When sales are declining while prices are increasing, that is simply the market at work constantly seeking market pricing.

While we're talking about the Green--I mean Dim-Way

2010-07-28T15:46:00.000-04:00

So much bickering. So much wasted time and land. Here's a solution to the Dimway running up the City's gut.

BUILD ON IT. NOT AROUND IT. ON IT. I've studied what every parcel can bear. Insure the use is open to the public but not free. Stop thinking of the long monotonous strip as an oasis. It isn't. And we have one called the Common, among others.

Think of it as a cultural playground. Begin by building a raised, glorious Opera House right in front of One Financial Center in the vast wasteland of Dewey Square.

Go from there.

Innovation District??

2010-07-28T15:36:00.000-04:00

I don't know where to begin. Should we rewind to Mayor Menino in 1999 and again in 2002 and 2003 declaring the "Seaport" as the "New Boston" for high rise office and luxury reidential development "on a scale not seen since the Back Bay?"

Do we need yet another planner, this time the dubious Kairos Shen of the BRA, still wondering why nobody wants to build 12 story buildings along the Dimway?

Does anyone really believe that Joe Fallon wants to see his Fan Pier propertiesl filled by startups looking for "cheaper rent than Cambridge?"

Nobody's paying rent on the 14th floor of a new high rise on the harbor and the frustrated Mayor wants us to believe that kids playing with helium baloons while paying no rent constitute a good trend?

This is not unlike bad sports teams who change their uniform design every year hoping the fans won't notice that nothing has changed.

There are industries well suited for the east portion of the area. North Coast Seafoods is an excellent example. As is Massport.

With patience in what is already a recovering office market, office tenants like Fish & Richardson, who actually pay Joe rent, will come.

In the meantime, let's not assuage the Mayor's unlimited need for instant gratification by allowing him to generate more nonsense. I do believe the same Mayor wanted to move City Hall to this new Innovation District. Even he couldn't silent enough critics on the utter lack of a shred of sense in that brainstorm.

The Mayor's lack of inagination and reality has already killed the Dimway over a personal vendetta. Next thing we know he'll have his driver roaming up and down A Street demanding the buildings have crowns.

The newest business to open in the Innovation District is "Whisky Priest" on Northern Avenue right across from the Seaport Hotel.

Boston -- the GLOBAL leader in innovation

2010-04-20T10:37:00.000-04:00

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.

The Boston Office Market Recovery--Acceleration Stage

2010-04-09T14:06:00.001-04:00

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.

Real Numbers on Boston Real Estate

2010-04-01T12:34:00.000-04:00

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.

How Not to Get Things Built--Kairos Shen, The Mayor, The Greenway, and Filene's

2010-03-25T13:17:00.000-04:00

So the Mayor is worried about the Greenway. He’s also worried about Filene’s. He should be. Let’s start with the Greenway and the real world.

If anything is to be built along the Greenway, there must be a compromise between aesthetics and economics. Unless the public sector is going to construct buildings along the Greenway, which it is not, then only the private sector will do so. And the private sector will only do so if they can make a profit. Simple as that. There are 2 components to the cost of construction--the price of the land and the cost of construction. The land along the Greenway is among the most expensive land in the Northeast. Why--because it is on the Greenway and on the waterfront.

The price of land is usually measured in terms of the price per square foot of land per square foot of the development on the land. Right now, on a per square foot basis, land along the Greenway would easily carry a price of $150 per square foot of development. The construction cost for a Class A property, both hard and soft, is roughly $400.00 per square foot. The combined market “price” of land and building is therefore $550.00. But we need to account for profit. To achieve a 20% annual return on the land and building costs, a developer would need to carry a hypothetical purchase price, as opposed to market price, of $440.00. At 20%, this would enable the developer to receive a return at the $550 market price.

Let’s consider a real proposal. Don Chiofaro purchased the Aquarium Garage for $150 Million. This is a land purchase--not a garage purchase, unless the City feels Don can rent parking spaces for about $2,000 per day per space. The land measures 57,346 square feet, so Don paid $2,615 per square foot of land. Now he has to knock down the garage and construct income producing property large enough to generate revenue to justify the $2,615 purchase price per square foot of land. He also has to construct a building large enough to justify a $550.00 development cost. And he needs to profit. I have stated this at 20% per year.

So how much building does Don need? If Don built a property using every inch of the land area, the property would have to be at least 17 stories tall to justify the land cost ($2,615 / $150 market price).

Today's market net income per square foot of office space is $35.00. To get a 20% return, Don needs to carry a “purchase price” of building square footage of $28.00. At 20%, this “price” meets the market rent of $35.00. To justify the cost of construction alone, a hypothetical property would need an additonal equivalent of $35.00 in net income per built square foot. If Don utilized every inch of the site, he would need additional property height of a minimum of 14 stories of space ($400 of construction cost / $28.00 per square foot of net income.

So, at a minimum, Don requires a 31-story building which covers every inch of the site. The building would have 57,000 square foot floorplates. Nobody builds 57,000 square foot floor plates because they are not acceptable to the Boston tenant market. The City would never allow anyone to build to the entire perimeter of the site because it would leave a) no open space at ground level, and b) no open vertical space for views and light.

The building plate acceptable to the market is 35,000 square foot at the most. This would leave over 20,000 square feet at ground level as open space along the Greenway. The much more slender building would also allow better views of the water than the existing garage.

At 30,000 square feet, the tower would need to be at least 50 stories tall.

Now Kairos Shen can imagine all he wants about low rise buildings linking the Financial District to the sea. And because of a person like him and the Mayor and everybody else that is afraid of heights in the City, nothing will happen. The Greenway will remain as exactly what the Mayor fears it to be: "cold and boring." Maybe he’ll threaten eminent domain again. We’re a big city. It takes big buildings to justify big prices or else we end up with Big Nothing.

Speaking of eminent domain, let’s talk about the Mayor’s favorite project in the City—the Filene’s redevelopment. Remember the Mayor’s idea to move City Hall to a fish pier at the end of South Boston? That was right about the time he thought he could, by dictum, create a 110-story building on the sliver of land at 133 Federal Street. Well, space is available long-term now at the existing 133 Federal Street and nobody talks about South Boston City Hall.

So how’s this: a swap. Let John Hynes and his development team at Filene’s create a New City Hall right in the heart of the City. And, in exchange, extend a 99-year lease to Mr. Hynes and his team on the land under and surrounding City Hall. The former would certainly revitalize Downtown Crossing. And the latter would certainly bring long overdue life back to the brick desert. And there would be no need to tear down the existing City Hall. Just a thought.

There's still snow on the Himalayas and people are moving to Boston

2010-03-24T16:37:00.000-04:00

High housing costs. Cold weather. High taxes. Bad traffic. Hidden politics.

How about:

High paying jobs. The nations's best universities and hospitals. 4 seasons. Taxes per capita below the national average. A 15% rise in home sales. A CBD office market with the 2nd lowest vacancy rate in the country behind only D.C. ( for obvious reasons.) Culture.

I hate to report that, contrary to the pending demise of Boston, we're not " de-mising."

By the way, year to date net growth in CBD occupied space is POSITIVE 290,000. Who woulda thunk it?

I love this town.

Fear of New York, fear of heights, and Boston's Greenway--a fool's paradise of Menino's own making

2010-03-20T14:03:00.000-04:00

"Mayor Thomas M. Menino said the height restrictions on these particular properties are intended to prevent shadows and strong winds thrown off by tall buildings from making the Greenway a cold, uncomfortable place."

I think the Mayor means well. But, Mr. Mayor, in all due respects, have you been on the Greenway lately? It already is a cold, uncomfortable place. In fact, it's also boring and utterly unused. Every proposed non-profit project has collapsed. I for one don't look over my shoulder at New York all day (“I don’t want to Manhattanize the Greenway,’’ the mayor said.) Why not? Manhattan is exciting. Or try the waterfront of Sydney, or Hong Kong, or any major, thriving city in the world that is not afraid of itself.

Now let's get to the economics. Columbus Center let out its final death knell on Monday. The project was not feasible from its inception due to height restrictions on air rights requiring decking. The pictures were pretty, but nobody ever believed in the project. And we gave money to the "developer" every time he whined.

On the south side of the Harbor, nothing is really happening in the private sector. One new office building in 10 years. We are a market of 72 million square feet. The total amount of space under construction and not already leased is 230,000 square feet in exactly 2 buildings--One Marina Park Drive and Russia Wharf. From the start of construction, it takes 3 years to construct a building for occupancy. The City is not prepared for the future demands of the modern tenant, because we are not allowing the construction of tall, modern, green, highly technical buildings which our companies will demand.

To connect the city to the sea, as the Mayor desires, we must provide a reason for people to approach the connection itself. Nobody uses the Greenway today because it is perceived as a curving linear path between South Station and North Station. It is shorter and far more interesting to walk up the streets of the Financial District, stopping at the Langham or Faneuil Hall for a beverage or lingering on the grass at Post Office Square, than it is to walk a barren stretch of disconnected parcels of grass.

If we want a thriving Greenway, we need to get over our fear of heights and our fear of the private sector. Otherwise, we will end up with the country's most expensive dog-walking parks.

How connected is Boston to the world?

2010-02-17T14:25:00.000-05:00

I enjoyed today's article in Mass High Tech (link above) written by Doug Banks, entitled "Checking the Traffic Density Jobs Indicator." Doug was musing about the lightness of traffic over the past year and its correlation to employment in Boston. As a geographer and a broker, I realized that Doug had become a student of geography and specifically of aereal connections which is a significant subset of the field. I'm getting boring so here's a story.

On August 6, 2006, Madonna performed at the Stadio Olympico in Rome. This is the rather infamous concert in which she sang while on a cross. All cellphone usage was measured coming from the Stadio. The lines terminated at major cities around the world and the thickness of the line indicated the volume of flow. Interestingly, NYC did not have the thickest flow (nor did Miami!). The strongest flow was to Paris. There are several 3D maps of this cellphone phenomenon.

I’ve included one showing the flow right over Rome.

Mapping connections between places in a formal manner had its beginnings in maps of the railroads in the 1870's, which showed freight tonnage flows between cities. NYC was still the dominant hub but in 10 years, Chicago had claimed its position atop the freight world as shown by the thickness of the volume of freight of all kinds coming into the City of the Big Shoulders.

A more recent example of aereal conncection maps is this DOT map of the volume of vehicular freight movement among major US cities in 2002. It served as a guideline for anticipating major roadway repairs.

So what does this have to do with Boston and real estate? Everything. We are exporters of knowledge and technology. We don't send barges of wheat down the Mystic River nor do we load much coal to ship to China. And if we are exporting something you can't touch, how do we measure our impact?

There are numerous links showing Boston's connections as measured by number of flights and passengers on the FAA website and the Massport website. But the best site I have ever seen, because it is animated, can be found at http://www.aaronkoblin.com/work/flightpatterns/. What Aaron has done is cover flights on a continuous basis over the course of a day. And it is absolute artwork. Watch Boston and San Francisco. You will notice a particularly thick line between San Francisco and Boston? Ditto for internet traffic and ditto for cellphone traffic. There are not many flights between Boston and Toronto and not many between Boston and Dallas. And both of these cities are much larger than both Boston and San Francisco. NYC is the most connected city to Boston and, in fact to every other city in the US, but it is flow of all types of communication between two cities that determine the degree of their intreaction. And high tech, high knowledge cities tend to connect with other high tech, high knowledge cities. Boston is connected where it counts. And connections mean jobs which means demand for real estate. Boston's vacancy rate has been hovering between 9 and 10%. The vacancy rate for space in the the Dallas CBD is 30%. Connections are good.

So when you're cruising or crawling down 93, you can thank Doug Banks and be happy about the economy. Or you can just mutter under your breath.

Been away for a bit but nonsense is still nonsense

2010-02-15T23:15:00.000-05:00

Yes, I know most of my posts deal with the Boston office market. And I appreciate all of your who have followed me, corrected me, encouraged me, and made this all fun. I've been in a bit of a pause--call it an extended start to the New Year. So forgive me if I start my going astray again. I had to.

Kerry Emanuel ("Climate Changes are proven fact," Boston Globe, February 15) is obviously passionate in his beliefs about climate change. But what are we to make of his statement that "We have never before dealt with a problem that threatens not us, but our distant descendants?" The statement is ludicrous and typical of single-issue thinkers.

Never before? What about the nuclear arms race? I would consider that a problem that might affect our descendants. What about the increasing discrepancy in incomes worldwide? What about families in our inner cities for whom the only "job" that keeps people fed is the drug trade? What of their descendants? What of the growing chasm between the Islamic and Western worlds? Are the Taliban not a threat to our descendants? What about the state of public education right here in Massachusetts? Shall we put climate change in front of ignorance as a future threat? What about AIDS, human rights, child slavery? We have limited resources to deal with the many, many threats to our descendants. Does Emanuel truly believe that we must put his climate change crisis first on the list when, as he admits in his own article, there are simply too many factors to state fact when it comes to climate change? Which makes me wonder where he came up with the title.

I apologize. I'll get back to real estate. But as I see it, people working, people learning, people that are healthy, people that feel secure and safe, all create the world in which people like me are incredibly fortunate to play a small role in. There wouldn't be much need for office space in any other kind of a world.

Veritas: Harvard, Allston, and the Future

2010-01-15T10:31:00.000-05:00

I know the issue of Harvard and Allston creates, well, a bit of discussion. In one of my recent posts, “The Influence of Higher Education on Boston Real Estate”, dated December 17, 2009, I stated what I felt were the positive impacts of our local universities and colleges not only on the real estate market in Boston but also on the general economy and job market. The impetus for my post was the recent purchase of the former Bayside Convention Center by UMASS but also included thoughts on the growth of Harvard in Allston.
I was pleased to see that a number of people brought a number of opinions to the fore, particularly regarding the Allston, or more specifically, North Allston development plans. From those who did not agree with me that Harvard’s expansion into North Allston was an eminently ideal development, I learned a great deal about what the points of confusion and anger are. From those who did support my view, I learned further about how others saw additional benefits to Harvard’s presence.
In fairness to those in opposition, particularly a number of people who are part of the Allston Brighton Community Blog, I took some time to do some first hand research. The primary complaint of the opposition was timing. Many felt that Harvard was unnecessarily 1) sitting on land, 2) not living up to a commitment to build and to provide new jobs, and 3) had forced out a number of important businesses.
I reviewed all of the public information prepared by the Boston Redevelopment Authority, Harvard, and the very active Allston Community Planning Group. I can say that there has been no shortage of effort and creativity in the joint planning for North Allston. But I can also say that I do not accept the claims of the opposition.
1. Is Harvard “sitting on land?”
The answer is yes. Harvard has been sitting on land in North Allston since the turn of the century. Harvard Stadium opened in 1903; the Business School in 1924. Of the 200 acres of land Harvard owns in North Allston, 100 acres have been owned by decades.
The recently acquired 100 acres represent a coherent and concentrated assembly of land along Western Avenue, North Harvard Street, Soldiers Field Road, and adjacent streets. Any entity, in planning to construct a major facility, be it scientific labs or a sneaker factory, must assure that it purchases sufficient land to enable the scope of development necessary to accommodate its plans.
Harvard’s purchase of land actually led to a master plan for over 760 acres of land in North Allston. From a planning standpoint alone, Harvard’s purchase triggered intense public scrutiny of what the community wanted not only Harvard but anyone to do or not do in North Allston.
Sitting on land is a bit of a vague term, but I think I understand the complaints of those who feel that Harvard may just be buying up buildings and land with no purpose in mind. There has been very little construction other than the completion of the foundation of the new Science Center and Harvard’s work in assisting in the development of the new Charlesview Apartments, approved today by the City.
But, in looking through every document issued by the city, by Harvard, and by the community, nowhere will one find a time-specific commitment made by Harvard or by the Community to build or occupy space at any time. In fact, I will quote from the report “Strategic Framework for Planning, Thomas M. Menino, Mayor of Boston; Mark Maloney, Director, Boston Redevelopment Authority, May, 2005” (see References).
This report was prepared by the BRA, the Mayor’s Office of Neighborhood Services, and the North Allston Community Planning Group, consisting of forty representatives of residents, businesses, institutions, and non-profits with interests in the area. I know that term “community group” is often overused and rather amorphous. I included a list of all of the members at the end of this post. This group was later expanded in 2009 to include 30 additional local entities.
In this report, which is one of many reports of which reference is made at the end of this post, the following statement is made quite prominent:
“It was understood that the planning framework’s timeframe would
cover the next 20 years of a development strategy that would occupy
Harvard over the next 50 years.”
Yes, Harvard is sitting on land. But they are doing so in accordance with a plan that the community approved. While I can understand that this may upset some members of the community, I think it is fair to say that any member of the community has had ample opportunity to air his or her thoughts.

2. Has Harvard reneged on its promise of new development and new jobs?
The answer is no. In some ways, this is another way of phrasing the issue of sitting on land. Harvard made no commitment to immediately begin construction on any property or any commitment on dates when specific jobs may be available. However, Harvard has already set up a separate office for all inquiries regarding future job opportunities at the Science Center and in North Allston in general. But the key issue is simple: Harvard in the most prestigious univerisity in the world, whether you like it or not. And I’m a Dartmouth guy having to write this! Its endowment, at over $27 Billion is nearly twice the size of Yale’s, which holds the second largest endowment. For local reference, BU, who has battled the community many times, has an endowment as well. Harvard’s endowment is 33 times the size of BU’s. Harvard receives more government research money than any other university. Its student body is over 18,000 and Harvard is the 3rd largest employer in the entire state.
The land that Harvard purchased in North Allston was primarily abandoned industrial space, weeded asphalt lots, truck depots, rail yards, and an assortment of low-end retail. Other than the soon to be redeveloped Charlesview, there were and are no residents. Yes, I recognize that people miss Charlesbank Cleaners, the VW dealer, and Kmart. But if anybody thinks that those uses are what is best for North Allston in the long run, as opposed to simply the possibility that Harvard will build, then I will say that is not only shortsighted but preposterous. There’s a reason North Allston has been economically dead for decades. Nobody has had any interest in building anything there. Harvard is the Golden Goose. Is it good for Harvard? You bet. In fact, it’s perfect. Is it good for the community? Consider the alternatives. There are none.

3. Has Harvard forced out a number of businesses?
The answer is yes, and this was addressed above. The real questions are; 1) what is the impact on the community of the departure of these businesses in the long run? 2) what will Harvard do with the vacant properties it now owns and 3) what is the long term value to North Allston and to the City in Harvard’s purchases?
1) The departure of the local businesses, while perhaps temporarily inconvenient, has no impact on North Allston in the long run. The businesses were primarily small retail establishments providing few jobs and few tax dollars to the City.
2) Harvard has begun a very public leasing program for all of its vacant properties. On January 10, 2010, President Drew Faust specifically addressed the leasing program in her Letter to the Community of January 10, 2010. The link follows this post. (Harvard has made over 100,000 square feet available after renovating existing properties it purchased. In the past 10 months, Harvard has signed leases with six new companies, primarily research and technology tenants, and has signed a new lease with Mahoney’s Garden Center on Western Avenue that will significantly expand its outdoor market area in 2010. On the public side, this week Harvard opened a free skating rink on Western Avenue.

3) Long Term Value
When I speak of the “value” that Harvard brings with its purchases, I speak of what is known in the real estate industry as the “highest and best use” theory of land ownership. Simply put, every piece of land has a theoretical “best use”, defined in the private sector as that use which will return the greatest profit to the owner of the land over a given period of time. For example, the highest and best use for a parcel of land on State Street in Boston is not a gas station. But for a parcel on any within ½ mile of any exit of route 93, a gas station is ideal.
Measuring a return in terms of profit for Harvard is difficult since it is a non-profit and, by law, any surplus Harvard sees at the end of any measured period of time must be retained by the University, most typically through its endowment. But what of the community? What of its highest and best use? The community does not own the land, but it is the nature of our government that land planning is not only acceptable but is the norm throughout the country. Harvard cannot do whatever it wants to do nor has Harvard at any time not acknowledged this fact.
Earlier I said that Harvard and the community have both agreed that Harvard’s development plans are long-term. So how do we determine whether Harvard’s purchase of the land will result in the highest and best use not only for Harvard but for the community in the long term?
I reviewd 41 separated land purchases Harvard has made over the past 8 years. Harvard does not occupy any of these properties, which are all assessed by the City as “Commercial Land” or “Commercial.” In other words, Harvard pays real estate taxes on all of the 41 parcels.
The 41 parcels represent 38 acres of land or roughly 40% of the total land purchases made by Harvard. Property values for any purpose, including for tax assessment, use one or a combination of any of the following three methods: 1) by the use of comparative sales information; 2) by the use of replacement cost; or 3) by the income approach. Overwhelmingly, number 3, the income approach, is the method used by the City to determine assesed value of commercial properties. This is particularly the case in North Allston where there have been few comparable sales and where valuing a property based on the cost to build an outdated industrial building simply makes no sense. Land and property value is all about the potential income of the improvements made to the land, where improvements mean whatever is built on the land.
Public assessed values do not necessarily reflect what a given parcel of land or building will sell for in an open market sale. However, I used these values to determine the “potential” of Harvard’s land by analyzing comparing the assessed value of the 41 Harvard parcels with a sample of 23 developed properties in North Allston and Cambridge. Each of these parcels was “improved” by a midrise office or research and development building, the type of buildings Harvard is contemplating for North Allston.
To determine Harvard’s land “potential”, I looked at the ratio of assessed building value to assessed land value. I used this as a proxy for highest and best use, where the higher ratio is considered a higher and better use.
In the aggregate, the 41 parcels purchased by Harvard have a total assessed value, as of 2008, of $92 million, of which $60 million is assessed building value and $32 million is assessed land value. The ratio of assesed building to land values is 1.9. Of all of the 41 parcels, only 10 have a higher building value than land value.
In the 23 parcel survey of developed land in North Allston and Cambridge, the average ratio of assessed building value to assessed land value is 4.1. North Allston is woefully underdeveloped and this is reflected in the relative lack of value realization of the land in North Allston. And the only way that will change is when Harvard changes it. Will this also be better for the community? If we determine community benefit based on new development intended to house new employees, how can it not be?
In closing, let’s go back to the importance of Harvard to North Allston. Last week, Harvard went to the markets with a $460 million bond offer for capital projects. The bonds were rated AAA by both Moody’s and Standard & Poors’s, the highest rating possible. Only one company in the United States has an AAA rating—General Electric. And that rating is only from Moody’s. Standard & Poors lowered GE’s rating last March.
Thank you to all of my followers who keep me honest.
References and Information Sources:
From Boston Redevelopment Authority

1. Allston Strategic Planning Framework 2004 http://www.bostonredevelopmentauthority.org/Planning/PlanningInitsIndividual.asp?action=ViewInit&InitID=134
2. Harvard Allston Campus Planning and Institutional Master Plan 3/2006
http://www.bostonredevelopmentauthority.org/Planning/PlanningInitsIndividual.asp?action=ViewInit&InitID=115.
3. Allston-Brighton Neighborhood Planning Initiative 2007.
4. http://www.bostonredevelopmentauthority.org/Planning/PlanningInitsIndividual.asp?action=ViewInit&InitID=123
5. North Allston-Brighton Community-Wide Plan (CWP) 2008.
http://www.bostonredevelopmentauthority.org/Planning/PlanningInitsIndividual.asp?action=ViewInit&InitID=34.
.
From Harvard University
1. 2007 Harvard University Allston Campus Institutional Master Plan Notification Form
http://www.allston.harvard.edu/imp/imp.htm
2. Letter to the Community, January 10, 2010
http://www.president.harvard.edu/speeches/faust/091210_allston.php.)

Members of the North Allston Neighborhood Strategic Planning Group
*Paul Berkeley, Co-Chair
*Ray Mellone, Co-Chair
*Robert Alexander, resident
Teddy Arvanites, Cambridgeport Bank
Harris Band, Harvard University
State Senator Jarrett T. Barrios
Adam Berger, Cabot, Cabot & Forbes
*John Bruno, Brookline Bag & Paper
Jeffrey Bryan, resident
Jim Creamer, McNamara House
*Paul Creighton, resident
*Michael Curran, resident
*Rita DiGesse, resident
Josephine Fiorentino, Charlesview Apartments
*Ellin Flood-Murphy, resident and Gardner School
*Brian Gibbons, resident
State Representative Brian Golden
*Michael Hanlon, resident
Pastor Gary Andrew Heart, Hill Memorial Baptist Church
Father Daniel Hegarty, St. Anthony's Parish
State Representative Kevin Honan
*Proctor W. Houghton, Houghton Chemical
Paige Kane, CSX
Shirin Karanfiloglu, City of Boston
Shaun Keefe, Romar
Kevin McClusky, Harvard University
Councilor Jerry McDermott
Kathleen P. Phenix, Joe Smith Community Health Center
Juan M. Prieto, Cabot, Cabot & Forbes
Beth Shepard-Rabadam, Harvard University
State Senator Steve Tolman
Bob Van Meter, Allston-Brighton CDC

Burying the Future -- Literally or should I say Figuratively

2010-01-05T17:54:00.000-05:00

It’s getting harder and harder to find out who is actually opposing Cape Wind. But the bigger question is why?
We’ve been through the NIMBYs, which unfortunately include the Kennedys who apparently prefer that we carry out the creative new energy developments they so advocate just as long as they can’t see a sliver of silver in the ocean. And they have plenty of like-minded neighbors.
Then we have the self-important towns of the Cape, who literally tried to cut the cable before the cable was even laid. “Over my dead body will we deliver electric power to the entire Cape in my little town.” Fortunately the Federal government did remind the good old folks that electric transmission was Federal turf.
And now we have the Wampanoag Tribe, specifically the 91 people, per the 2000 census, who occupy the Aquinnah Reservation at Gay Head on the Vineyard. I have no issue with preserving cultural history. I want to make it very clear that I do not pretend to know the intricacies of Wampanoag culture. I know a bit of their history, gleaned primarily from their own website. They have every reason, just as I do if I had a reason, to oppose far offshore wind turbines.
But the last time I checked, the Wampanoag’s’ most important cultural desire was a casino. But that was before their tribal leader, the infamous Glenn Marshall, who failed to inform his tribe that he had been convicted of rape and fabricated his military record BEFORE he subsequently was sent to Federal prison for his actions while tribal leader for tax fraud, wire fraud, campaign law violations, you name it. But they still own sacred land in Middleborough—can you see the ocean from there?
The Wampanoag’s do not want windmills because, according to the release from the U.S. National Park Service, who concurred with the tribe and overturned a previous federal ruling allowing the windmills, a) Nantucket Sound was home to the Man-Giant Maushop and the Sea Woman Squant; b) there may be artifacts dating back 11,000 years ago when glaciation created a land plateau; and c) Nantucket Sound unto itself is a sacred place to the tribe.
• Let’s look at these for a moment. Maushop is not unlike Paul Bunyon. According to the Wampanoag website, he created the Elizabeth Islands by flinging sand from the ocean; he caught whales with his bare hands; and he could, in one step, go from Nantucket to Martha’s Vineyard. Bunyon operated out west but I think we put some windmills there.

a. Not that it matters I guess, but NO artifacts have actually been found. There are isolated areas of buried brush and forest where the sea came in but nobody has found a human artifact and certainly not one of the Wampanoag Tribe. Of course, the Park Service glosses over this nicely by saying such findings are “possible.” Wow, that opens up some territory. In fact, the Park Service stated that it was not customary to place entire bodies of water under cultural protection, especially so when the tribe and the Service have not completed the study of how the Sound defines the entire Wampanoag cultural area. Hey, it’s only Nantucket Sound. Oh, by the way, there was no Wampanoag tribe 11,000 years ago. According to their own website, they date themselves as an organized group to about 4,000 years ago. According to the U.S. Geological Survey, the famous single tooth discovered at the “Rich Site” in Barnstable County several years ago could only be described as a “Paleo-Indian.” That means something that came before an Indian.

• I find Nantucket Sound sacred as well. There are no actual accounts of the Wampanoag tribes conducting any types of ceremonies with regard to specific times in the cycle of the seas. Of course, they cite Maushop, the Giant Man, and Squant, his Sea Woman lover who controlled all the winds and waves in the world, as evidence of sacred attachment.

There are estimated to be 2,000 Wampanoag’s alive today, but the vast majority are of mixed tribal ancestry. Of the 2,000, 1,200 live in Mashpee and the remainder lives in Rhode Island and eastern Connecticut. And the 91 members at Aquinnah who are managing, for whatever reason, to keep those oil tankers coming right across the ocean. Maybe we can barter—the casino for the windmills.

Boston would be a strange city if the 4/5 of it that are landfill were never filled. Not much room.

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

2009-12-28T16:14:00.000-05:00

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.

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

2009-12-21T22:48:00.000-05:00

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!

The Influence of Educational Institutions on Boston Real Estate

2009-12-17T09:56:00.000-05:00

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.

Unemployment, Re-Employment, and the Boston Office Market

2009-11-19T22:40:00.001-05:00

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

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

2009-11-13T17:28:00.001-05:00

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 www.nasa.org.

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

2009-11-12T15:31:00.000-05:00

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?

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

2009-11-11T17:42:00.001-05:00

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 Economy.com, 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 Economy.com for its expert forecasting.

I looked for a description of the methodology used by Economy.com 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?

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

2009-10-28T12:36:00.000-04:00

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.

Evidence

2009-10-23T21:56:00.000-04:00

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.

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

2009-10-18T14:22:00.224-04:00

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.
Let:
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.

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

2009-10-08T21:33:00.000-04:00

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.

x5kivnq9za

2009-10-07T13:55:00.001-04:00

x5kivnq9za

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

2009-10-07T13:08:00.000-04:00

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.

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

2009-10-02T10:53:00.000-04:00

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.

And the Mutual Fund Beat Goes On

2009-10-01T12:16:00.000-04:00

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.

Congratulations to the Brokers Getting it Done in Boston

2009-09-18T09:50:00.000-04:00

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.

Boston Brokers Weigh in on Boston Office Outlook

2009-09-15T14:47:00.056-04:00

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

Boston's Fear of Heights and Fear of Greatness

2009-08-31T13:29:00.008-04:00

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,
Bareheaded,
Shoveling,
Wrecking,
Planning,
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.

A Real Estate Strategy for Boston hot dog vendors

2009-08-25T14:25:00.003-04:00

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.

The Mayor of Silly Hats

2009-08-23T16:08:00.003-04:00

It is a rather sad commentary on the state of the quality of Boston's architecture and development when the City's Mayor has evidently developed a new approval code based on building's "hats." (The city the mayor (painstakingly built), Boston Globe, August 23, 2009). Perhaps it is not as arrogant as his cellphone call to change a zoning code "on the spot" described in the 2nd paragraph, but it is certainly more indicative of a Mayor desperately in search of a development legacy, a Mayor suffering, as most do, from a case of severe Edifice Complex.

I have been involved in commercial real estate in Boston for 28 years. Fortunately, I have not been a developer and have thus not had to please the whims of an individual rather than of a citizenry. But if, in your article, you seem to have come to praise Caesar, maybe we best look at what Caesar has "painstakingly" accomplished.

First, you can toss out the ridiculous concept of development "per square mile." At a whopping 48.4 square miles, Boston is roughly 1/4 the size of the 10th most populous city--San Jose. In fact, Boston does not make the top 150 in area. Boston could comfortably fit inside of the 469 square miles of Los Angeles nearly 10 times over. The truth is that, of the top 10 most populous cities in the US, only Philadelphia has added less new construction since 1996. STRIKE ONE ON THE FACTS.

During Mayor Menino's tenure, 15.3 million square feet of office space has been built in Boston. Not bad for a 16-year reign which has no sight in end. During Ray Flynn's 9-year tenure, 36 million was added. Yes, Mayor Flynn in 7 years more than doubled the amount seen in the Menino era. Considering that the inventory during Mayor Flynn's tenure lacked the 15 million added during Menino's days, the percentage growth on a yearly basis under Mayor Flynn averaged roughly 8% per year. Menino has averaged 1.3%. Need we even mention Mayor White who, during 16 years, saw the construction of 24.3 million square feet? Again, looking at Boston before Mayor White, the percentage growth of the City was exponentially larger than our current Mayor's at nearly 7% per year in an era when developers did not line up to build in Boston. STRIKE TWO ON THE LEGACY COUNT.

And what specifically has the Mayor, other than hats, added to the skyline? In the entire 16 year tenure of Mayor Menino, a whopping 6 new buildings over 500,000 square feet, the minimum amount of space anyone in real estate internationally would even consider as a "tower", were built. Six. And of the six, three of them fell under the approval process of Massport--Fidelity's two office buildings on the Seaport and Manulife's new headquarters on Congress Street in the Seaport. The Mayor speaks frequently of 111 Huntington Avenue, that of the famous hat. And I would agree that some people know of the building. Quick, name the other skyline changing gems--10 St. James?; 33 Arch Street? The soaring State Street Global tower is worthy of mention and merit, none other. STRIKE THREE ON SKYLINE IMPACT.

The only thing less impressive of a Mayor who brags about his singular ability to stall projects "in my City", i.e. those of Mr. Chiofaro, is a Mayor who, one day on a whim declares that a 150-story tower will be built in Boston as if the Development Fairy was planning a visit. How many years ago did that triumphant horn sound--3,4? Perhaps that will be the tower built when it's 80 degrees in January.

Mayors do not build. They allow others to build. Buildings do not create jobs. The companies that choose to occupy them do. Mayor Menino has followed the similar path of his predecessors not only in Boston but in almost every major city. They need the tower and they need the power. The problem is that our Mayor Menino has struck out in doing so, no matter which way you count it or obscure it.

If you don't believe what the press writes, you can listen and watch the Mayor say the same thing on his wonderful video of his ride around Boston at http://multimedia.boston.com/m/25995125/mayor-menino-s-development-tour-of-boston.htm

Where (and when) Big Government is Good

2009-08-19T11:41:00.002-04:00

I just took a walk past South Station on my way to the South Street diner. Yes, it is 90 degrees but I need the burger.

South Station is more than a train station. It also houses over 120,000 square feet of Massachusetts government agencies. And the State is not the landlord. In total, all components of government--city, state, and federal--occupy over 3 million square feet of office space in privately-owned property in Boston. The government accounts for nearly 7% of the private office market. Including the space which the government owns, the total presence of government use in Boston exceeds 10 million square feet. The "multiplier effect" of the government is enormous as law firms, non-profits, unions, and everyone having business to do with the government tends to want to be near the government--big surprise, huh?

I am sure nobody is falling off their chair, marvelling at this unbelievable tidbit of worldly information. But the Boston office market might fall off its chair if Boston and Massachusetts were like any other major city state, or minor city and state in the country.

Consider these 10 cities:

1. Albany

2. Sacramento

3. Harrisburg

4. Springfield

5. Lansing

6. Olympia

7. Dover

8. Tallahassee

9. Annapolis

10. Salem

With the exception of Atlanta, there is no other city in a major state that is at the same time:

A) The largest city.

B) The business center of the State.

C) The cultural center of the State.

D) The educational center of the State.

E) The health care center of the State.

F) The nexus of all means of transportation, private and public.

G) THE CAPITAL

From my seat in the diner, I am looking back at the city skyline of which I can just pick up the Northeast edge. There are two 500,000 square foot towers to the far north and a beautiful, gleaming aluminum tower to the East. The first two are the JFK buildings of the Federal Government. The latter is the Federal Reserve Bank. Just these 3 buildings measure over 1.8 million square feet.

Let's look at what this means right now, in the streets. The EPA is looking for 250,000 square feet. The FBI is looking for 450,000 square feet. The Mass. Divisions of Insurance, Banking, and Affairs, and Telecommunictions are all in the market for a total of 150,000 square feet. The US Department of Education, at 75,000 will begin to consider options in the private market within one year.

Do you think Og Hunnewell at Nordic Properties likes Big Government? He just leased 140,000 square feet to the Mass. Division of Consumer Affairs at 1000 Washington Street, a former Teradyne manufacturing building Nordic renovated for office use less than a year ago.

Boston was founded in 1624. Its major business street came straight off Long Wharf where it became King's Street. After we threw the actual King out, it became State Street. It is still the primary business street in New England. As the city grew, every road, every rail line, every bus route had and still has one thing in common. They all lead to Boston.

All roads due indeed lead to Boston and, for the Boston office market, Big Government is a four letter word: RENT.

Mutual Fund Inflows, the Boston Office Market, and the Recovery

2009-08-18T19:18:00.004-04:00

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.

According to the Investment Company Institute, the national association of U.S. investment companies, all categories of mutual funds, with the exception of money market funds, continued to experience net inflows in June, a trend that has picked up speed throughout the year.

Long-term funds — stock, bond, and hybrid funds — had a net inflow of $43.00 billion in June, vs. an inflow of $52.82 billion in May. These are the funds, particularly those actively managed, that Boston specializes in. The foundation of Boston’s longstanding role as a global money management center stemmed largely from the iconic image of the prudent bond investment firms of the city. Net inflows into international funds exceeded slightly those into the US. The clipper ship opened the Far East to the world in the 1800’s, and Boston’s fund families are considered the leaders in global investing.

Boston-based funds exceeded the rate of increase with a net inflow percentage increase of 1.9% in June alone, nearly double the national average. In June, Fidelity and MFS were the two top-selling mutual fund groups in the world. Natixis, State Street Global, Eaton Vance, and GMO all reported percentage increases well in excess of the national average. Natixis continued to have an extraordinary year with $1 B in net inflows in June, bringing its YTD inflows up to $7.6B. State Street at $923M, Eaton Vance at $861 M and GMO at $418M, among others, all registered significant gains. The strength of the underlying stock market has led to an increase in assets under management in Boston further in excess of net inflows.

What does this mean for the Boston office market? In short, it means the recovery is underway. While I do not expect to see substantial net growth through the end of the year, I similarly do not expect to see significant occupancy declines. And by the first quarter of 2010, the underlying recovery in Boston business will lead to robust market growth in 2010. Why the confidence in a contrarian position? Mutual funds and firms providing specialized services directly to the funds account for 19.8% of the Boston office market and over 37% of the Class A market. There is no city in the world with this level of concentration of mutual fund occupancy. Including private money management firms and the city’s world-recognized private equity firms brings the total “Investment Advisor” occupancy to 29.2% of the overall Boston market and a remarkable 44% of the Class A market. As the mutual funds go, so goes Boston.

There is, of course, more to the Boston office market than the mutual fund industry, and the City, although a peninsula, is not “an island unto itself.” The market has been buffeted by national and international winds. And so I add two facts to support my recovery statement.
1. The healthcare industry, area schools and universities, and all levels of government (Boston is unique in being both the largest city and the capital city of a major state) account for 13% of the private office market. And all three are growing, with total current demand for net new space of 450,000 through August 2011. Washington’s stimulus plan is a direct contributor to this growth.
2. The vacancy rate is only 8.4%. In most cities, that would be cause for rejoice and certainly indication of equilibrium. A vacancy rate of 6 to 7% is certainly considered equilibrium, even in Boston. To reach equilibrium, at 6.5%, Boston must record net absorption of 1.9 million square feet. That would represent growth in occupied space of 2.3%. For perspective, consider absorption trends in the Boston market over the last decade.

Since and including the year 1999, occupancy in Boston has expanded at a median growth rate of 1.6% and an average growth rate of 1.5%. Boston’s experienced its highest growth in 2000 at 4.9% and its largest decline in 2001 at 6.4%. To attach square footage to these numbers ignores the reality of a changing supply of inventory and/or vacant space throughout the decade but Boston, more or less absorbs roughly 650,000 on the median and 1.2 million rsf on the average In 2002, after the market’s largest decline, growth rose back to 1.0%. In 2005, the year following a smaller decline of 2.0% in 2004, the market made up the entire decline, growing at a rate of 2.1%.

Since 1982, Boston has never experienced two consecutive years of net absorption. As I write, we have lost 1 million square feet, year to date, in occupied space. We may lose more. We will not lose 2.9 million. My money is on 2010 and beyond.

Finally, the very nature of the business of Boston is investing in new business. I would contend that, with its concentration of specialized financial institutions, necessary government agencies, and core sources of new ideas, such as MIT or the Longwood Medical Center, Boston “knows how” to recover much more quickly than any other city. It is a city geared to the leading edge, be it in science, finance, or healthcare. As such it is a city geared to provide the channels of finance necessary for a strong local recovery. Look for net absorption of 350,000 in calendar year 2010 and 750,000 in 2011. By year end 2011, vacancy in Boston should be at or around 6.4%. I would consider that a nicely recovered market.