The Boston commercial real estate market, once too hot to penetrate, is cooling off.
A survey conducted by Spaulding & Slye Colliers, a Boston-based commercial real estate firm, found that available office space in Boston has doubled in the past year. Total availability – the amount of space for on the market, including subleases – has risen to a staggering 9 percent.
The report notes the company is currently tracking 3.5 million square feet of active demand space in the downtown area. And while the figures may seem high, for the first time in 24 months, the supply exceeds the demand. Just six months ago, the report noted, demand outweighed supply by a ratio of 2 to 1.
“The demand has just fallen off the table after a record year in 2000,” said William Collins, senior vice president Spaulding & Slye Colliers in Boston. “It wasn’t something we were prepared for or were expecting. We went from a one percent vacancy rate to a 3.5 percent vacancy rate.”
Still, Collins said, a 3.5 percent vacancy rate isn’t a bad thing.
“When you have a 3.5 percent vacancy rate that still means that 96.5 percent of your property is generating an income,” he said. “The problem is that the demand is down.”
According to the survey, more than 1.5 million square feet of office space has been put on the market for sublease by midyear 2001.
It’s a statistic that doesn’t surprise Jason Weissman, principal director of Commercial Real Estate at Boston Realty Advisors.
“There is an abundance of space, especially in the sub-lease markets,” he said. “Sub-markets like Back Bay are very strong, but in outlying areas like Boston and South Boston it’s not. So it really depends on where you are.”
Officials from Spaulding & Slye Colliers noted that the high number of subleases reflect the changing business climate where companies have either closed, downsized, or put on hold any expansion plans.
“People, from a pretty wide spectrum of industries, were growing and growing rapidly,” Collins said. “All of a sudden that bubble burst and companies aren’t expanding and growing anymore. That has definitely had a trickle down effect.”
Weissman said this is particularly true with high technology companies.
“The sales of technology firms are staggering,” he said. “They are downsizing as a lot of firms have laid off a number of employees. As a result they don’t have the need for as much space. It’s definitely affected the market, especially in places like Boston where the number of technology companies was really high.”
According to Weissman, the availability of sub-lease space is good for business owners.
“New tenants coming on board definitely hold the right card,” he said. “They can really negotiate what they want because there is so much space.”
Collins agreed. “If you are a tenant you are definitely in the driver’s seat now.”
That’s not good news for those who rent or sell space direct.
“People would rather negotiate with tenants for sub lease space because the price is better and they can set their own timetable as far as the duration of lease,” he said. “That definitely hurts the direct market. Owners are now in direct competition with the sublease market.”
The result is lower prices. According to the Spaulding & Slye Colliers survey, the rents in Boston have fallen to an average of $57 per square foot on all space, and just over $64 per square foot for Class A space. And while the 15 percent drop may seem drastic, the average cost of space is still higher than 1999 when the average was $45 per square foot.
Weissman said real changes in the market came early this year
“At this time last year we were seeing landlords and property owners remaining strong,” he said. “They just didn’t appear to think that the market was going to soften. By spring the bottom had dropped out.”
Collins said the recent attack on New York City’s World Trade Center has also added a new dimension to the changing market.
“All bets are off since what happened,” he said. “It’s going to be an interesting time. People aren’t going to make decisions anytime soon. I think they are going to take a wait and see attitude, and I think that will affect the market.”
