The Art of Timing
July 9, 2007
By William P. Barrack
With available space options in Boston?s office market diminishing rapidly, tenants and landlords are closely watching the progress of development projects in the pipeline and asking, ?Where are we going??
The answer for tenants will depend largely on how quickly Boston?s developers can deliver their projects to the market. With the nearest delivery at least two years away, supply constraints will allow landlords to remain bullish with their asking rents.
Average asking rents spiked by 9 percent in the fourth quarter of 2006. During this year?s second quarter, the premium tower market consistently recorded leases with rents in the $70s. This escalation shows no sign of abating.
The volume of investment sales transactions and subsequent changes in ownership have helped to drive rents upward as new owners seek to build value. The Massachusetts economy also remains strong. Approximately 5,000 jobs were added in the first quarter, well above the pace of 3,000 for that same period in 2006. Office-using sectors showed the largest increases during that period, with education and health services registering a 3 percent increase in job growth, and professional and business services posting a 2.6 percent gain.
We fully expect continued upward pressure on the market to produce consistent per-square-foot rents for premium space in the $80s by the end of the third quarter and in the $90s by the first quarter of 2008.
Which brings us back to the question: ?With so much rent growth, where will the tenants go?? Leases will be rolling for a number of large users in 2009-10, and from an historical perspective, only the first development projects delivered to market during these cycles are assured immediate success.
Boston?s top five office projects closest to development or already under way are: Two Financial Center, Fan Pier, Russia Wharf, 888 Boylston St. and One Franklin St. (the former Filene?s Building). These projects combined would deliver more than 2.1 million square feet of new office space to the market.
Two Financial Center is the first development to have broken ground. Originally proposed and permitted as a residential development, Lincoln Properties realized the economic potential of new office space in today?s market, and re-permitted the building for 215,000 square feet of office space. While the smallest of the five, the building?s estimated 2009 completion date could ensure its success.
Fan Pier developer Fallon Co. wants to break ground on the first building, an 18-story, 500,000-square-foot office tower, possibly by October. Fallon recently hired Turner Construction to manage the project for completion in 2009. Although there are no signed tenants yet, Fallon is marketing space with an aggressive ad campaign.
One Franklin St., one of the cornerstones in the plan to revitalize Downtown Crossing, will be anchored by an elite hotel chain, reportedly JW Marriott or Meridien Hotels. There will be 500,000 square feet of office space available and The Gale Co. has begun courting tenants. The company is hoping for a September groundbreaking and has signed at least one retail tenant: national fashion store Zara.
Boston?s 888 Boylston St. will be the newest addition to Boston Properties? Prudential Center complex. The site originally was approved for a 287,000-square-foot, 11-story office tower. Boston Properties since has applied to re-permit the project for an additional 8 stories, bringing its total size to more than 439,000 square feet. Completion is slated for 2010.
Russia Wharf, the historic 2.2-acre mixed-use redevelopment project in the Financial District, will deliver 500,000 square feet of office space, with views of Boston?s waterfront and direct access to the Rose Kennedy Greenway. The development site is complicated, and the preservation of the existing buildings? historic facades is under way.
As we?ve seen in the past, timing for such projects is essential and only the first few deliveries will reap the benefits of healthy ? not limitless ? tenant demand.
