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FHO Partners 3Q 2010 Market Report


FHO Partners\' 3rd Quarter 2010 market report

FHO Partners\' 3rd Quarter 2010 market report

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  • 1. A DTZ AFFILIATE Commercial Real Estate Value-Addvisors B O S T O N T H I R D Q U A R T E R 2 0 1 0 MARKET
  • 2. ECONOMY According to a September report released by the National Bureau of Economic Research (NBER), the recession that began in the fourth quarter of 2007 officially ended in the second quarter of 2009. Based on economic indicators such as gross domestic product (GDP), gross domestic income (GDI), wholesale/ retail sales and industrial production, NBER defined the recession’s end as the period at which the economy reached its trough – not a return to pre-recessionary levels. However, it should be noted that according to the NBER report, employment did not bottom out until six months later, in December 2009. This has lead to what analysts refer to as a “jobless recovery” and is the main reason improvement remains lethargic. At 8.8%, Massachusetts posted a lower unemployment rate than the national rate of 9.6%, and the lowest since August 2009, according to a September report from the Bureau of Labor Statistics. As we saw at mid-year, this dip is partly due to discouraged workers dropping out of the work force or settling for part-time employment. Nationwide, private sector employment grew by 64,000 positions in September. However, the gain was offset by a loss of 159,000 positions in the government sector as the last of the Census workers completed their tenure. Given that the economy must create 150,000 jobs per month just to keep unemployment levels static, we expect recovery and a resulting demand for office space to remain sluggish through at least the first half of 2011. High unemployment coupled with stagnant consumer spending, depressed home values and elevated rates of foreclosure mean that growth will likely remain weak for the foreseeable future. Although eco- nomic indicators are not improving as drastically as in previous recessions, it is unlikely that the economy will slide back into another downturn. MARKET SUMMARY In the first three quarters of 2010, greater Boston posted negative absorption of 12,216 square feet – a significant improvement over 12 months ago when absorption totaled negative 5.7 million square feet. While pockets of leasing activity are keeping the market afloat, we have yet to see a consistent return to pre-recessionary levels. With an overall availability rate of 22.7%, greater Boston is still enduring the effects of the market contrac- tion. Availability rates have decreased nominally across nearly all markets, indicating an improvement is in sight although it may not be as soon as we had anticipated. Overall asking rents in the region are down year-over-year, but appear to be flattening since the end of the second quarter. OUTLOOK As mid-term elections approach, bringing with them uncertainty surrounding fiscal policy, regulations, taxes and healthcare costs, many companies are still reluctant to begin hiring and spending in earnest. Until businesses begin to see discernable signs of recovery, it is unlikely that Boston’s commercial sector will see a sustained uptick in leasing activity. While a significant upturn is not likely until mid-to-late 2011, the space that has flooded the market for the past two years is slowly beginning to be re-absorbed. Insulated by a non-existent construction pipeline, we expect the region’s recovery will be driven by a lack of supply, rather than a spike in demand. M A R K E T W A T C H l T H I R D Q U A R T E R 2 0 1 0 Executive Overview Q3 2009 Q3 2010 DJIA 9509.28 10829.68 US Unemployment (August) 9.7% 9.6% MA Unemployment (August) 8.8% 8.8% US Employment (August) 139,433,000 139,250,000 MA Employment (August) 3,167,102 3,171,545 Overall Market Statistics YTD 2010 Summary The State of the Economy by the Numbers Unemployment Rate Greater Boston Market Snapshot Asking Rent Vacancy Absorption Boston Cambridge Suburbs Sources: Dow Jones, Bureau of Labor & Statistics 6% 8% 10% 12% Aug. 2010 July 2010 June 2010 May 2010 April 2010 March 2010 Feb. 2010 Jan. 2010 Dec. 2009 Nov. 2009 Oct. 2009 Sept. 2009 Aug. 2009 July 2009 June 2009 May 2009 April 2009 March 2009 United States Massachusetts Q3 2009 Q3 2010 Overall Availability 21.6% 22.7% Average Rent (Office) $32.08 psf $29.79 psf Net Absorption YTD 2010 (5,685,889) sf (12,216) sf 2 l FHO Partners
  • 3. A DTZ AFFILIATE 3 l FHO Partners Boston Market Overview The Boston office market continued to stabilize throughout the third quarter of 2010. While it is unlikely we will see the abrupt improvement we have seen after past reces- sions, it appears we have entered an official period of recovery. While market-making deals are still scarce, an amalgamation of smaller deals in the 30,000 to 50,000 square-foot range has contributed to an uptick in leasing activity.  At (485,248) square feet (sf), net absorption in downtown Boston remains nega- tive year-to-date. However, this is a marked improvement over Q3 2009 when absorption totaled (1.81) million square feet. The Financial District continues to post the most significant loss of net occupancy with absorption totaling (462,146) sf. But, like the overall CBD, this is much less severe than twelve months ago when absorption totaled (1.1) million square feet.  At 18.7%, overall availability in Boston is down 20 basis points (bps) quarter-over- quarter, but still up from both Q3 2009 (16.4%) and year-end 2009 (16.9%). This is the first decline in availability since Q2 2009. Availability in the Financial District is still elevated (up 2.2 percentage points in the past 12 months), but declined 40 bps to 21.0% quarter-over-quarter.  We are still experiencing “flight to quality” as evidenced by an increase of 3.2 percentage points in Class B availability in the past 12 months (19.3% in Q3 2010) compared to an increase of 1.9 percentage points in Class A buildings (17.9% in Q3 2010) during the same period.  At $39.75 psf, overall asking rents are down 7.2% year-over-year. Overall asking rents in Back Bay are down 9.1% in the past 12 months ($41.84 at Q3 2010). Class A rents have declined 7.0% in the past 12 months while B and C have declined 5.3% and 3.1%, respectively. At $43.04 psf, overall asking rents in the Financial District remained flat quarter-over-quarter, but are still down 6.2% year- over-year. While overall asking rents in the CBD are down year-over-year, it is worth noting that in the past two quarters, there has been a significant spike in Back Bay’s Class A rents, both asking and achieved.  The Back Bay submarket posted significant positive absorption year-to-date. This is largely due to Bain Capital’s 208,000 sf lease at the Hancock Tower in the second quarter. However, there appears to be a sustained uptick in leasing activ- ity – especially for tenants in the 15,000 to 30,000 square foot range moving into Class A buildings. Boston Overall Availability vs. Average Asking Rent by Class Inventory 59,750,735 sf Availability Rate 18.7% Net Absorption YTD 2010 (485,248) sf Average Asking Rent $39.75 psf 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 2008 2009 Q3 2010 20072006200520042003200220012000 Class A Rent Class B Rent Class A Availability Class B Availability Market Highlights 100,000 1,100,000 2,100,000 3,100,000 4,100,000 5,100,000 6,100,000 7,100,000 8,100,000 9,100,000 10,100,000 Square Feet 2008 2009 Q3 2010 20072006200520042003200220012000 Sublease Direct Boston Direct Available vs. Sublease Available Market Perspective Availablility vs. Asking Rent 5% 7% 9% 11% 13% 15% 17% 19% 21% 23% 25% $15.00 $19.50 $24.00 $28.50 $33.00 $37.50 $42.00 $46.50 $51.00 $55.50 $60.00 W ashington D.C. Seattle San Francisco Philadelphia M anhattan LosAngeles Houston Denver Dallas Chicago Boston Atlanta Availability (%) Asking Rent Availability Asking Rent
  • 4. M A R K E T W A T C H l T H I R D Q U A R T E R 2 0 1 0 Cambridge Market Overview Because Cambridge entered the recession from a position of strength (being some- what insulated due to demand from high tech and life science companies) fundamen- tals remained comparatively healthy through the third quarter. Large office deals in East Cambridge contributed to the continued health of the Cambridge office market. In the lab sector, a dearth of high-quality lab space is keeping asking rents from experiencing the deterioration seen elsewhere in the greater Boston area. OFFICE MARKET  The Cambridge office market closed Q3 2010 with a 15.2% availability rate. This represents a decline of 1.6 percentage points quarter-over-quarter and was large- ly driven by Microsoft’s commitment to 113,000 sf at One Cambridge Center and Hubspot taking 37,000 SF at 25 First Street.  Overall asking rents for office space averaged $35.65 psf. While they have re- mained flat quarter-over-quarter, average asking office rents have declined 7.2% in the past 12 months.  The office market posted positive absorption of 338,229 sf year-to-date – a notable increase over the (393,731) sf reported at Q3 2009. LAB MARKET  In the lab market, availability also declined to 16.3%. This represents a 1.2 percentage point decline quarter-over-quarter and a 30 bp decline in the past 12 months.  At $49.26 psf NNN, asking rents for lab space are up 2.0% quarter-over-quarter, but are still down 3.7% year-over-year.  The Cambridge Lab market posted positive absorption through the first three quarters of the year, totaling 37,790 sf year-to-date. This marks a slight improve- ment over Q3 2009 when lab absorption totaled positive 11,089 sf.  Sanofi-Aventis committed to over 100,000 square feet at 640 Memorial Drive. This is the largest lab deal executed year-to-date. Cambridge Overall Availability vs. Average Asking Rent Office Inventory 10,046,144 sf Availability Rate 15.2% Net Absorption YTD 2010 338,229 sf Average Asking Rent $35.65 psf Lab Inventory 7,751,645 sf Availability Rate 16.3% Net Absorption YTD 2010 37,790 sf Average Asking Rent $49.26 psf NNN Market Highlights Cambridge Direct Available vs. Sublease Available 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00 $60.00 2008 2009 Q3 2010 2007200620052004 Overall Office Rent Overall Lab Rent Overall Office Availability Overall Lab Availability 0 200,000 400,000 600,000 800,000 1000,000 1200,000 1400,000 1600,000 1800,000 Square Feet 2008 2009 Q3 2010 2007200620052004 Direct Office Direct Lab Sublease Office Sublease Lab 4 l FHO Partners Lab Inventory vs. Availability by Submarket 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 Boston 128 Central 495 Central Inner Suburbs Cambridge SubletDirectOccupied (SF) Market Perspective
  • 5. A DTZ AFFILIATE 5 l FHO Partners Suburban Market Overview For the second consecutive quarter, the overall suburban market is displaying a stark contrast between the office and R&D sectors. While the office market posted positive absorption, the R&D market is still feeling the effects of contracted demand. Sub- markets along the 128 corridor were the most active, buoyed by larger deals such as Dassault Systèmes committing to 320,000 sf at 175 and 185 Wyman Street in Waltham. Despite elevated availability, the suburban market has not been exposed to a flood of newly constructed space or the glut of sublease availabilities that weighed down the region in the recession of 2001 to 2003. As a result, we anticipate that recovery will be driven by finite supply, rather than a spike in demand.  The suburban office market posted positive net absorption of 577,365 sf year- to-date. This is a considerable improvement over 12 months ago when YTD ab- sorption totaled (1.35) msf. While still negative, overall suburban R&D absorption totaled (480,352) sf YTD. This is also a significant improvement over 12 months ago when R&D absorption stood at (2.12) msf.  Overall availability in the office market remained virtually unchanged quarter-over- quarter – increasing by only 30 bps to 23.3%. In the past year, availability has increased by a full percentage point from 22.3%.  At 28.9%, R&D availability declined a full percentage point quarter-over-quarter but is still up a full percentage point year-over year (27.8% at Q3 2009).  At $22.11 and $10.26 psf, respectively, average asking rents for both of- fice and R&D space remained flat quarter-over-quarter but have declined 7.2% and 4.1% in the past 12 months. Suburban Overall Availability vs. Average Asking Rent 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% $7.00 $12.00 $17.00 $22.00 $27.00 $32.00 2008 2009 Q3 2010 20072006200520042003200220012000 Overall Office Rent Overall R&D Rent Overall Office Availability Overall R&D Availability Market Highlights 0 2000,000 4000,000 6000,000 8000,000 10000,000 12000,000 14000,000 16000,000 Square Feet 2008 2009 Q3 2010 20072006200520042003200220012000 Direct Office Direct R&D Sublease Office Sublease R&D Suburban Direct Available vs. Sublease Available Office Inventory 74,752,089 sf Availability Rate 23.3% Net Absorption YTD 2010 577,365 sf Average Asking Rent $22.11 psf R&D Inventory 52,674,829 sf Availability Rate 28.9% Net Absorption YTD 2010 (480,352) sf Average Asking Rent $10.26 psf NNN Market Perspective 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Q3 201020092008200720062005200420032002200120001999 Sublease SF Available Unemployment Rate Suburban Sublease SF Available Boston Sublease SF Available Massachusetts Unemployment Rate Cambridge Sublease SF Available Recession Recession Sublease Available vs. Unemployment Rate
  • 6. M A R K E T W A T C H l T H I R D Q U A R T E R 2 0 1 0 Market Total Total Availability Total Vacancy YTD 2010 Direct Weighted Inventory Available Rate Vacant Rate Net Absorption Average Rent BOSTON OFFICE 59,750,735 11,159,213 18.7% 6,749,238 11.3% (485,248) $39.75 Back Bay 12,182,324 1,398,634 11.5% 854,977 7.0% 320,085 $41.84 Charlestown 1,748,336 186,167 10.6% 141,795 8.1% 14,364 $24.35 Fenway 1,911,890 186,682 9.8% 48,318 2.5% (149,082) $30.06 Financial District 28,202,230 5,928,263 21.0% 3,692,461 13.1% (462,146) $43.04 Government Center 1,878,278 372,278 19.8% 287,656 15.3% 35,494 $34.37 Midtown 1,863,609 376,711 20.2% 193,618 10.4% (41,593) $24.89 North Station 1,638,642 338,237 20.6% 99,693 6.1% (82,184) $28.26 South Boston Waterfront 6,187,511 1,851,431 29.9% 1,154,873 18.7% (26,411) $30.06 South Station 4,137,915 520,810 12.6% 275,847 6.7% (93,775) $36.56 CAMBRIDGE OFFICE 10,046,144 1,530,101 15.2% 1,068,911 10.6% 338,229 $35.65 Alewife/West Cambridge 1,714,404 388,018 22.6% 292,739 17.1% (35,553) $26.06 East Cambridge 6,160,198 908,796 14.8% 642,229 10.4% 371,522 $40.69 Mass Avenue Corridor 2,171,542 233,287 10.7% 133,943 6.2% 2,260 $34.16 CAMBRIDGE LAB 7,751,645 1,263,816 16.3% 1,006,757 13.0% 37,790 $49.26* Alewife/West Cambridge 533,311 50,987 9.6% 50,987 9.6% 20,307 $34.13* East Cambridge 4,900,679 911,248 18.6% 729,519 14.9% 59,467 $48.46* Mass Avenue Corridor 2,317,655 301,581 13.0% 226,251 9.8% (41,984) $54.24* SUBURBS OFFICE/R&D 127,426,918 32,599,669 25.6% 22,017,489 17.3% 97,013 $22.11** 128 Central 41,596,965 9,706,878 23.3% 6,828,260 16.6% 179,785 $25.37** 128 North 9,628,176 2,563,379 26.6% 1,773,178 18.4% 284,967 $19.69** 128 South 14,495,529 3,810,594 26.3% 2,541,054 17.5% (286,471) $18.19** 3/24 South 1,982,663 483,774 24.4% 398,897 20.1% 30,471 $22.05** 495 Central 17,559,942 4,193,311 23.9% 2,706,778 15.4% (47,692) $19.69** 495 North 31,706,695 10,204,769 32.2% 6,554,007 20.7% (336,433) $18.12** 495 South 4,292,816 937,591 21.8% 695,862 16.2% (1,550) $19.92** Inner Suburbs 6,164,132 699,373 11.3% 519,453 8.4% 1,504 $22.52** TOTAL 204,975,442 46,552,799 22.7% 30,842,395 15.0% (12,216) $29.79** *Rents quoted on NNN basis **Average of office rents only Market Summary 6 l FHO Partners
  • 7. A DTZ AFFILIATE 7 l FHO Partners Glossary of Terms METHODOLOGY The information included in this report is the result of a compilation of informa- tion on Class A, B and C office, R&D and investment properties located in the Boston area. The information was obtained by FHO Partners from representa- tives of each property. All of the information gathered is stored in a FHO Partners database which is updated quarterly. From this database, total inventory, vacancy rate, rental rate and absorption figures may be calculated and presented. Total inventory may change from year to year as a result of newly constructed or newly renovated buildings, recently remeasured properties, or significant change or deletion of a particular building status. The database is thoroughly checked and balanced from year to year. The appropriate adjustments are made in order to balance the figures and calculate the most accurate vacancy and absorption figures. DEFINITIONS Inventory: Includes all existing competitive office and R&D buildings over 20,000 sf as well as significant buildings less than that size. Under construction, government, medical, educational and 100% owner-occupied buildings are not included. Direct Space: Space available directly from the building owner. Includes space available for occupancy within the next 24 months. Does not include space in under construc- tion buildings. Sublease Space: Space available through a lessee to a third party for the remainder of the original lease term and/or beyond. Includes space being actively marketed. Vacancy Rate: Space, available both directly and by sublease, that is currently vacant and being marketed for immediate occupancy. Does not include space under construction. Availability Rate: Available space is generally defined as space that is being actively marketed and/or available for occupancy within the next 24 months. Construction Completions: Buildings which have received their certificate of occupancy in the stated time period. Under Construction: Buildings which have had excavation work commence, but have not yet received their certificate of occupancy. Office: Space designed for general office use. Buildings are generally two or more stories and offer tenants a higher-level of finish than R&D space. R&D: Space designed for high technology, office or light industrial use. Buildings are generally one or two stories. Net Absorption: The net change in occupied space over a given period of time. Calculations are based on available space. Rental Rates: Gross: Rents which include tax and operating expenses, but generally not electric- ity. Triple Net: Rents where the tenant is directly responsible for all tax, operating and utility expenses. Weighted Average Rent: An average rental rate that is weighted by the amount of square footage available at each respective rental rate. 495 495 90 95 93 95 24 3 2 128 128 3 Chelmsford Lowell Westford Acton Littleton Wilmington Billerica Andover Tewksbury Boxborough Maynard Hudson Marlborough Woburn Southborough Westborough Hopkinton Concord Framingham Milford Franklin Wellesley Lynnfield Peabody Stoneham Lexington Bedford Burlington Lincoln Newton Waltham Medford Somerville Allston Brookline Needham Natick Wakefield Saugus N. Andover Methuen Lawrence Danvers Beverly Malden Revere Foxborough Mansfield Taunton Brockton Pembroke Rockland Dedham Norwood Westwood Braintree Weymouth Hingham Norwell Randolph Canton Quincy 495 South 128 South 495 Central 3/24 South Boston 128 North 128 Central 495 North Inner Suburbs Submarket Map
  • 8. ©2010 FHO Partners. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to FHO Partners. For more information contact: Ashley E. Lane Director of Research FHO Partners One International Place Boston, Massachusetts 02110 Direct Tel: +1 (617) 279 4570 Email: Bethany A. Bockmann Research Analyst FHO Partners One International Place Boston, Massachusetts 02110 Direct Tel: +1 (617) 279 4589 Email: Commercial Real Estate Value-Addvisors