How connected is Boston to the world?

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.

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

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.

Boston Brokers Weigh in on Boston Office Outlook

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