Offices Firing on All Cylinders
The office market is roaring, but for the good times to last, we need more moderately priced housing, better public schools, and improved transportation, we learned at Bisnow’s recent 2014 State of Boston Office event.
The Boston office market has never looked better (it's never been a better time to be a copy machine), according our expert panel at the Copley Westin: McGladrey partner Robert Langley our moderator, Synergy Investments prez Dave Greaney, ADD Inc prez Fred Kramer, CV Properties prez Dick Galvin, Tishman Speyer managing director Samuel Schaefer, and Goulston & Storrs director Frank Litwin. McGladrey, the fifth-largest provider of assurance, tax and consulting in Boston, was also an event sponsor.
Synergy, which has mostly Class-B buildings downtown, sees the “significant ramp-up of rents” beyond the ’08 peak continuing, Dave tells us. The demand drivers for offices in updated downtown towers or new product in the Seaport are lasting. Young workers want city life, and empty nesters want back in from the ‘burbs. (It makes for a pretty diverse line at the grocery store.) For businesses, being in the right location is paramount (it trumps occupancy cost). If rents keep rising, someone will do a spec building in the next 12 to 18 months, he predicts. But the region pumps out start-ups that want short term leases or lots of flexibility. The rising cost of tenant improvements makes that tricky.
Dick, whose firm did the build-to-suit in the Seaport for State Street and the redevelopment of 50 Post Office Sq with Brown Brothers as an anchor, says that as old companies reinvent themselves, the new ones are taking their space. The Cambridge Innovation Center is back filling space at 50 Milk St that Brown Brothers left. With TI at $100/SF to $125/SF and some tenants asking for shorter, more flexible lease terms, landlords are weighing risk, reward, and credit worthiness. While a lot of spec development could create market imbalance, some new product is required. Threading the needle is delicate, Dick says. (So delicate, in fact, that we gave up sewing 11 years ago.)
Rising rents downtown are creating demand for “outer urban” locations where prices are lower; think Somerville, Chelsea, Watertown, and Needham, Fred says. For Boston to sustain and enhance its appeal to office tenants, it will need to make more inroads into the vexing issues of producing moderately priced housing, quality public schools, and efficient mass transit, says Fred. New multifamily residential buildings have few three-bedrooms for families. That’s why, Fred says, there’ll always be demand for the ‘burbs (bunk beds can only take you so far) and good reason for owners to reposition existing campus office parks.
Given Boston’s healthy absorption and a vacancy rate around 10%, Sam agrees that a spec building is in our future. There’s been more rent growth for lower floors, but Tishman Speyer is seeing rising demand for high-rise space downtown recently. For any building with reasonable cash flow that “comes close” to being core, the investor demand is staggering, he says. Around the world, investors targeting the US want to be in New York, Boston, San Francisco, and maybe DC. (They say "maybe," because it gets pretty humid.) With many of them institutional investors eyeing long-term holds, the amount of available Boston office product is a “pretty short list.”
Rising costs for land, construction, and TI are limiting supply, but for a developer, Boston’s long permitting process means they could miss a cycle, Frank says. The firm’s lender clients a few years ago wondered where the investment capital would come from; now they’re trying to figure out where to place all the capital at hand. Institutional investors are willing to venture outside of downtown to suburban and tertiary markets. Wherever they land, good transportation options are essential, he tells us.
Event sponsor View The Space’s Ryan Masiello, Jared Kaliner, and Matt Giffune say that their online service helps commercial property owners and brokers with motion picture-quality video tours and real-time digital tracking of availability, tour dates, phases of lease agreements, and related documentation. We’d also like to give a shout out to another sponsor, Vidaris.