Hub's Future Towers Rests On Jobless Numbers
By Scott Van Voorhis
Banker & Tradesman Columnist
07/27/09
The twin tower proposal for the Gov. Center Garage needs a series of miracles to come to fruition.Is the Boston skyline finally all towered out?
As a fan of big skyscrapers, it?s certainly nothing I want to see.
Yet for developers pushing the latest mega plans, such as Don Chiofaro, who wants to build a pair of towers next to the Greenway, or Teddy Raymond with his own equally ambitious sky-rise complex plan near Government Center, it may be time to face some cold, hard real estate facts.
A chat I had last week with Bill McCall, the elder statesman of the Boston office market, was sobering for a tower fan like me.
Now McCall, whose storied career in local development goes right back to the days of JFK, is not making any sweeping claims about the future of the city?s skyline.
Nor is McCall, sometimes seen as a market bear but who prefers to call himself a realist, taking shots at anybody?s tower plans.
But he made clear that the trends right now are not ones that even the most ardent boosters of new development can explain away.
Job Loss Is Key
Pulling out a chart from Moodys.com during an interview at his firm?s offices high up in the One Post Office Square tower, McCall points to the 30,000 jobs downtown Boston is slated to lose over the next few years before bottoming out in 2010 and 2011.
McCall, president of McCall & Almy, a high-powered tenant rep and advisory services firm that works with a number of health care institutions, among other clients, does a quick, back of the envelope calculation that leaves me reeling.
All those lost jobs could empty out as much as 6 million square feet of offices and corporate suites ? enough to fill four Hancock towers.
?I think you can make a case that people are going to be making money with fewer people, which is not good for real estate,? McCall said. ?We are looking at vacancy continuing to increase because we just see there are going to be continued layoffs.?
Of course, we will likely only see half that space hit the market, McCall notes.
And while that may sound like good news, it really isn?t.
Companies will sit on that other half, roughly 3 million, creating a new generation of ?shadow space,? a term that became popular during the 2001 downturn.
Back during the late 1990s tech boom, companies gobbled up office space like mad. But when the bust came a couple years later for a variety of reasons ? sometimes related to balance sheet accounting ? they often preferred to sit on empty space rather than putting it out to market.
When business picked up, many of these companies had no need to go out into the market to lease additional space ? they were sitting on enough empty conference rooms and cubicles to satisfy all their immediate needs.
McCall predicts the same phenomenon will work its dark magic all over again, putting a drag on any recovery in the market even after the bleeding has stopped.
Not that there won?t be enough available space out there for companies to pick and choose from, with McCall predicting the downtown vacancy rate will hit 15 percent, expanding the pool of empty office space to a staggering 9 million square feet.
To put that number in context, the Boston office market, over the past three decades, has absorbed, on average, 1 million square feet of empty or new space a year.
That doesn?t mean it will take 10 years to work through the space glut created by the downturn, since vacancy, even during the best of booms, never goes to zero, but you get the picture.
?Once hiring starts again, they are not picking up the phone and saying, ?Hey Bill, find me some new space, it?s time to grow,?? McCall said of the impact of the downtown office glut.
Who?s Going To Pre-Lease?
So how do all of these grand new tower plans being floated fit into this rather challenging office market?
McCall diplomatically left that question for me to ponder, so I will give it a crack.
Let?s just tally up Chiofaro?s proposed Greenway towers, Raymond?s own twin tower proposal near Government Center, as well as long-standing plans by a Texas developer to build a skyscraper over South Station.
The developers behind these grand plans are proposing to flood the market with more than 3 million square feet of high-priced office space over the next decade.
Yet, amid the worst recession in decades, these would-be tower developers are going to have to work nothing short of a series of unprecedented economic miracles in order to get their plans financed and built.
For starters, in order to nail down financing, all these would-be tower developers are going to have to pre-lease much of the space in their high-rises.
With millions of square feet of newly emptied office space coming on the market ? a lot of it at top addresses like the Hancock Tower or International Place ? that?s no small feat.
But these can?t be bargain deals, for to pay for all this expensive new construction, Chiofaro and other would-be tower developers will have nail down leases in the $70-$80 a square foot range.
Yet the few companies still in the market for space will have lots of other options to choose from, with suites at top towers now renting for much less in the $40-$50 a square foot range.
While new construction is grand, it?s not that enticing, especially if the alternative is a bargain deal for space in the Hancock.
?That?s not being a bear, these are just the facts,? McCall said. ?The facts are we are sitting with a very significant demand for high quality space in Boston that could be rented in the mid- to high-$40s.?
Built At The Right Time
But diehard tower boosters will argue there is just little if any new construction poised to come on the market.
After modest new high-rises at Fan Pier and Russia Wharf open up in the next year or two, there will be a dearth of new office space heading into the next decade.
And with the economy by then finally picking up, and companies back in growth mode, developers of new towers will hit the market just at the right time.
A spokeswoman Raymond Properties? proposed tower complex by Government Center noted the project will be rolled out over a decade. With the city?s existing towers now aging and with Boston typically gobbling up a million square feet of space a year, the new skyrise complex ?will be very well positioned to compete.?
But after hearing McCall?s analysis of the market, I am not so sure the rebound will be so quick and so painless.
