The Influence of Educational Institutions on Boston Real Estate

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.

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