Office rents reach dizzying heights
$100-a-square-foot deals could be taste of what's to come as demand tightens
By Thomas C. Palmer Jr., Globe Staff | February 22, 2008
For the first time in almost a decade, office rents in downtown Boston have moved above the eye-popping $100-a-square-foot mark.
So far just a few well-heeled companies have agreed to pay three-digit rates for their offices, involving relatively small amounts of space on the upper floors of some of Boston's trophy towers. Executives in the real estate industry predict that, with demand for high-quality space exceeding the available supply, more companies will pay up for such offices.
"You will see more deals done above $100 a foot," said James R. Brady, director at the real estate firm Cushman & Wakefield of Massachusetts Inc. "It's not going to be the norm, but it's going in that direction."
The $100 price is the peak for a tight Boston office market where rents have been rising rapidly. Owners of several top-quality towers are now asking for annual rents in the range of $80-$95 a square foot; the average asking price in class A buildings now is about $67 a square foot - up from a low of $38 in 2003, when there were vacant floors galore.
The last time rents tipped above $100 a square foot was in 2000, according to the real estate firm Jones Lang LaSalle, and involved just a few leases that were signed right before the office real estate market started a steep decline. Jones Lang LaSalle represents the Blackstone Group, the largest office landlord in the city, at two of its buildings.
Even amid warning signs the economy is at risk of sliding into recession, local real estate executives said demand for office space in Boston right now is so strong that already-low vacancy rates are dropping - and rents are rising correspondingly.
"The fundamentals of supply and demand are such that really good space is scarce," said Ted Oatis, a principal of Chiofaro Company, developers of the International Place.
The last new office to open in Boston was in 2004. Although there are a number of buildings under construction or well-along in development, including projects at Fan Pier, Russia Wharf, and Two Financial Center in the Leather District, local real estate brokers expect space at these locations to be absorbed quickly.
Among the companies that have signed leases for $100 a square foot or more is Barclays Global Investors, which added about 2,900 square feet of space to its Boston offices on the 44th floor of One International Place.
Also at One Post Office Square, Saracen Energy Partners LP, a Houston-based investment firm, signed a lease for about 3,300 square feet on the 38th floor, at an average price of $100 per foot. And Four Winds Capital Management paid a little over $100 a square foot for about 1,500 feet of additional space last year at 60 State St.
The companies either declined to comment or could not be reached for comment. Indeed, few others in downtown Boston's business and real estate communities would talk publicly about busting the $100 rent threshold. Landlords who are getting it don't want to be seen as bragging, and tenants - never inclined to talk about how much their paying in downtown rents - are especially reluctant to acknowledge they're paying top dollar.
Several real estate brokers said the tenants who paid the $100 price needed to renew leases or add more space but didn't want to go to the expense and trouble of moving. Just outfitting new office space from scratch can cost $120 per square foot for a financial firm, and even more for some white-shoe law firms, according to a recent study.
Local executives agree that the higher rents can be attributed in large part to "the Blackstone effect." That's a reference to the Blackstone Group, which bought the nation's largest commercial real estate portfolio about a year ago from Equity Office Properties Trust. The deal included the Boston buildings One Post Office Square and 60 State St. among about a dozen downtown.
"They came in and they raised rents overnight 20 percent," said Mark Roopenian, director of leasing for Chiofaro Co., which co-owns and manages the two International Place towers. "God bless them."
That had the effect of showing other landlords what prices the market would bear.
"When Blackstone took over, there was a decisive change in the tone of the market," said Oatis, Roopenian's colleague at Chiofaro. "They've got to be credited for being aggressive in their leasing efforts."
Oatis and Roopenian refused to comment on whether their firm has rented space at International Place for more than $100 a square foot. The building is one of the city's premier office locations and commands among the highest rents.
Andrew J. Maher, managing director at the Blackstone-owned Equity Office, said he and his colleagues have been amused by the "Blackstone effect" term.
"It seems to be a term coined from some of the brokers as a negative phrase," he said.
"Our strategy is to take some very well-located buildings," Maher said, "and invest some substantial money in them," including at least $50 million into four downtown towers. "We're finding tenants are willing to pay up for those spaces because of the quality of life and the recruiting tool it provides for them."
The rent spike also comes as the investment market for commercial properties has slowed, part of the fallout from the subprime mortgage crisis that has led to a shortage of lending for real estate in general.
David A. Martel, executive director of Cushman & Wakefield, acknowledged that the Boston rental market appears at odds with other economic trends.
There's a lot of bad news in the economy, and it's hard to ignore it," Martel said. But he said many firms in downtown Boston are financially healthy and are seeking additional space. "When you look at the requirements in the marketplace, out of the 16 top companies, 13 are growing," Martel said.
Thomas C. Palmer Jr. can be reached at
tpalmer@globe.com.
