RBJ officeSTATus Survey: 2011 Office Market a Numbers Game

BOSTON—Five, 80 and 15—that is how Richards Barry Joyce & Partners research chief Brendan Carroll quantifies Greater Boston’s office market as the second quarter of 2011 commences. Carroll’s generally upbeat Q1 report concludes that the top 5 percent best properties are sailing along, whereas the next 80 percent have essentially stopped the falling rents and rising occupancies. Any erosion of fundamentals are left to the bottom 15 percent, the RBJ principal says, with landlords of those assets seemingly helpless as tenants defect to buildings sporting better locations and features.

For that constituency, “it doesn’t look good” anytime soon, accedes Carroll, although he adds even those owners are making small strides towards solvency. Carroll otherwise says the 203,000 sf of negative net absorption recorded in the first quarter is essentially flat for an inventory of 179 million sf, a preferred stagnation compared to the freefall experienced since 2008. The bulk of the red in the latest review was concentrated in a few “one-time” negative events and submarkets, Carroll stresses, including the relocation of Wellington Management to a new home on Boston’s Fort Point Channel. While a boon to owner Boston Properties, the 450,000-sf deal left gaps in three competing office buildings, holes that exceed the amount of space Wellington requires in its more efficient digs that came on line in 2010. Also, Also, Bank of America left 100,000 sf at 100 Federal St., helping drive negative net absorption in the Financial District to 465,000 sf. Take those out of the formula, and the Cambridge and suburban office markets were up by 344,000 sf in Q1, relays Carroll. For the Hub, the Bank of America and Wellington impacts were “one-time events,” he adds. “That’s not going to occur every quarter,” he says, while acknowledging the city’s CBD does have a hefty block of space to plug before rents can rebound, having fallen another 1 percent in the opening quarter to $48.14 per sf, the same drop-off when compared to year-over-year averages. By comparison, the Back Bay is now at $51.49 per sf, a 1.6 percent gain from the beginning of 2011 and an impressive 11 percent jump versus Q1 2010. Three major leases topping six figures last year have driven the 13.1-million-sf Back Bay office market to a thin 8.7 percent vacancy, according to RBJ’s quarterly officeSTATus review. Boston’s supply of 68.2 million sf is at 13.3 percent vacant, with a 16.4 percent mark in the Financial District, home to 35.4 million sf.

The Back Bay is among four markets identified by RBJ as being especially difficult to lease space in, joining East Cambridge, Framingham and Route 128 Central, anchored by Waltham. In East Cambridge, for example, available office inventory could be completely filled by 2013 if demand remains constant, while Framingham has a vacancy rate of just 9.2 percent for its 4.0 million sf. Route 128 Central was the focal point of speculative construction during the 2005 to 2008 boom, producing 2.7 million sf of new supply. Of that delivered, there is just a 0.4 percent availability, Carroll reports. That tidbit underscores the popularity of modern product, says Carroll, noting his firm’s ranking of the best Cambridge space has those buildings at just 1.0 percent vacant for 2.1 million sf, versus 9.7 percent for 12.3 million sf citywide. The average rent for those top Cambridge assets is $48 per sf, he adds, whereas the city average is $39.25 per sf, that rate up 2 percent since the start of 2011. The East Cambridge district remains the most dominant submarket, but Mid-Cambridge is only 5.4 percent vacant for 2.9 million sf. The West Cambridge office market has fared far less admirably, however, posting a 20.4 percent vacancy for 1.7 million sf surveyed in the RBJ review.

Minus the darker reaches of the Greater Boston office market, Carroll says the activity is actually encouraging. “It’s mostly sunny,” he says of the early returns in 2011, with more buildings reviewed seeing space gains than those experiencing contractions during the opening quarter, and regions such as Route 128 North considered exceptionally bright. That submarket that begins in Bedford and extends to Billerica and Burlington up to the North Shore has enjoyed one million sf of positive net absorption in the past 12 months, according to RBJ, which tracks 25.8 million sf in that area.

In terms of his market breakdown, Carroll says the top 5 percent of assets remain fairly untouched by the recession, and overall are posting slight to moderate rental increases. Beyond that, he says, “the prospects for everyone are improving,” partly because the bottom has seemingly been reached, making it likely tenants will be more apt to commit to space instead of waiting for further rent drops.

Landlords can also be mollified in knowing the sublease phenomenon that hurt owners in the technology bust a decade ago have largely been avoided in the latest bust. RBJ shows just 4.9 million sf of such product, a 26 percent drop compared to the peak of 6.7 million sf in Q3 2009, and well below the top figure of 11.2 million sf registered in the opening quarter of 2004 in that crash. “Sublease space is really not an issue, and in many ways, it never was in pressuring landlords on rents the way it was in 2004,” Carroll says. “That is a good thing.”