Average Asking Rents on Rise Throughout Region; Largest Increase Found in City's Back Bay Market
By Thomas Grillo
Pay up.
Office space is getting more expensive. Average asking rents have increased 14 percent in the suburbs, 46 percent in Boston and a whopping 48 percent in Cambridge compared to last year, according to third-quarter data from Jones Lang LaSalle.
Boston's Back Bay saw the biggest rent hike as the average asking price for Class A office space reached $60.36 per square foot, up from $39.90 in the third quarter of last year, a 51 percent boost, the global real estate services company reported.
"Ten years ago, Back Bay offered a $6-$10 per square foot discount compared to the Financial District," said William Motley, a JLL managing director. "Not anymore. Today, we're seeing higher rents at places like 111 Huntington Ave., 500 Boylston St., the John Hancock Tower and 222 Berkeley St. These new buildings have created comparable space to the Financial District."
Among the highest Back Bay rent deals, Motley said, was a law firm that leased 12,000 square feet at 111 Huntington Ave. for $72.50 per square feet. The tenant, who he declined to name, is expected to move in early next year. In addition, expansion deals have been completed at 222 Berkeley St. for $71 per square foot, he noted.
The Back Bay was not the only place where rents skyrocketed. Every submarket in Boston, Cambridge and the suburbs saw increases. Landlords in the Hub's Financial District asked an average of $57.79 per square foot, up from $39.37 for the same quarter one year ago. Cambridge's Harvard Square/Massachusetts Avenue saw asking rents swell to $45.59, up from $29.01 last year.
Ten of the 16 submarkets in Greater Boston saw availability shrink during the third quarter. In terms of absorption, Interstate 495 North had the largest amount of space filled with 614,852 square feet, while the Back Bay filled 417,713 square feet and Route 128/ Massachusetts Turnpike filled 268,463 square feet. Still, those areas have available space in excess of 3 million square feet, 1.3 million square feet and 2.4 million square feet, respectively.
'Flat' Market
In Cambridge, the office vacancy rate fell to 7.8 percent in the third quarter, down 9.1 percent from the same period one year ago, according to CB Richard Ellis data. The average asking rents grew to $43.52 in the third quarter, up from $30.78 last year. Among the tenants driving rents included the Internet search engine, Google, which took 75,000 square feet at 5 Cambridge Center. In addition, ChoiceStream, which develops personalization solutions for online consumer services, mobile operators and TV providers, renewed its lease and expanded to 39,000 square feet at 210 Broadway.
Still, while rents rose, Cambridge experienced 63,000 square feet of negative absorption in the third quarter, meaning that the amount of space leased has been less than the amount of space introduced to the market.
"The Cambridge market was flat in the third quarter from a demand standpoint," said Curtis Cole, a partner at CB Richard Ellis. "The debt-world difficulties have had an impact and people are not as aggressive as they had been earlier this year."
There were few large deals in Cambridge from July through September compared to the first and second quarters, Cole said. Tenants rented smaller blocks of space in the 10,000- to 30,000-square-foot range instead of the 50,000- to 150,000-square-foot deals, he added.
"Cambridge office rents increased because demand over the past year has been strong, with the majority of deals earlier in the year," Cole said. "Finding big blocks of space is a challenge for tenants who feel it's important to be in Cambridge."
Still, while Boston and Cambridge may be booming, the suburbs have vacancy rates in the double digits. Of the 86.3 million square feet in the suburbs, 17.5 percent is vacant, down from 20.2 percent one year ago, according to Meredith & Grew. At 24.6 percent, Route 128 North has the highest vacancy rate.
"It's not where we want to be, but the market is tightening and that number is not reflective of the average tenants seeking space," said Matthew Daniels, senior vice president at Meredith & Grew.
Among the region's facilities with available office space are Addison-Wesley in Reading, Cummings Center in Beverly and Stoneham Hospital, which is being marketed as office space. Those vacancies alone, Daniels said, account for 650,000 square feet of more than 6 million square feet of space in 128 North or 10 percent of the vacancy.
"These empty spaces are dated, older facilities that do not subdivide well and were once single-tenant users," Daniels said. "Landlords are not willing to make the investment into the buildings and would rather do a lower rent. But many of the vacancies are in big blocks of space so if you're a medium-sized tenant of 7,000-15,000 square feet, you have fewer options."
Looking ahead to the fourth quarter, there is disagreement about the office market's future. While many brokers are convinced that rents will continue to rise and vacancies shrink, Joseph Sciolla, managing principal of CRESA Partners, a Boston-based global real estate firm that represents tenants, said rents have peaked.
"The economic dynamic is not there to sustain the rent increases we've experienced over the last year," he said. "Downtown Boston might see a little more bump-up in rents, but the suburbs have flattened because activity is down. While the hype that brokers are putting into the marketplace benefits landlords because they are trying to keep rents high, demand has tailed off because the credit crunch in the residential market has bled into the commercial side."
Sciolla noted that he is working with two tenants who are seeking space in Waltham. While the landlord is offering rents at $40 per square foot, he has told them to wait, that Waltham is worth in the low- to mid-$30 range, he said.
"We think $40 for Waltham is crazy," he said. "The Wall Street surge is over and the landlords are coming to realize that they have to offer lower rents."