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Nation Office Market

Nation Office Market

SPECIAL REPORT: Commercial Real Estate

Tenants that put off moves in 2001 are coming off the sidelines. But while the activity is a sign of recovery, it has yet to translate into positive net absorption. As the economy improves, expect the real estate market to lag by six to nine months.

The vacancy rate for Boston’s central business district was unchanged in the first quarter at 11%. The vacancy rate in downtown increased 0.7% to 11% but was offset by the vacancy rate in the Back Bay decreasing by 2.6% to 10.7%.

At the end of the first quarter, 2.7 million square feet of sublease space was available in the central business district.

Deals abound with Fidelity, Gillette, State Street Bank, Sovereign Bank and Verizon subleasing large blocks of space.

Speculative construction has ground to a halt. When 1 Lincoln St. is delivered a year from now, 250,000 square feet will be available for sublease by State Street Bank. While proposals are rumored to be out, no leases have been signed at 131 Dartmouth and 33 Arch and 131 Dartmouth, set for delivery in January and early 2004, respectively. Independence Wharf at 470 Atlantic Ave. was rehabilitated by Modern Continental and delivered in August. After only leasing three of the 13 floors, Modern Continental now is seeking a buyer.

In the central business district, rents are at 1999 levels. Class A yearly rents have declined $2 to $4 per square foot in the first quarter and are in the $46 to $50 range. Since the start of 2001, rents are down 20% to 40%.

The suburban Boston market saw negative absorption of 374,100 square feet in the quarter, but that’s mild compared to the past five quarters, which averaged negative 1.1 million square feet.

The vacancy rate in the suburban market increased 1.6% to 19% in the quarter. A considerable portion of the increasing vacancy rate was concentrated along Route 495. About 8.4 million square feet of suburban sublease space,9.4% of the total inventory,is available. EMC placed 450,000 square feet on the market in the quarter. Yearly rents are tracking the availability of space and declined 5% to 10% in the quarter to the low $30s for class A space and mid $20s for class B space.

Vacancy in the Central 128 market crept above 21% in the first quarter as sublease space returned to the market. Waltham and Lexington’s vacancy rate ended the first quarter at 24%. Buildings that once achieved effective rates in the mid $60s are now offering space in the low $30s.

The Cambridge market ended the first quarter with a vacancy rate of 18.6%. East Cambridge is one of the hardest hit markets with a vacancy rate of 25%. While Cambridge continues to reel from the technology downturn, biotechnology demand is strong. Due to a lack of fully built out lab space office buildings with suitable infrastructure are trying to convert to lab and biotech space. A large block of space came off the market with MIT’s buyout of Akamai at Technology Square. MIT decided to use the space for its own use.

Atlanta: The market is seeing its highest vacancy rate in 10 years. Landlords are lowering rates, offering incentives Charlotte: Office market continues its slow recovery, as vacancy rates begin to crest and sublease space slowly begins to be absorbed. An anticipated slowdown in new office deliveries will help the market recover as the economy turns around. Downtown, the continued strong performance of the banks bodes well for the future, although the shallowness of the downtown market concerns many building owners Chicago: The office market remains soft with most deals being relatively small. Sublease space still outpacing demand. Developers remain nervous as preleasing slows Cincinnati: Still a tenant’s market with landlords offering incentives to keep current tenants. Downtown supply and demand remains static, though vacancy could increase in 2003 if financial services firms move large blocks of space to the suburbs Cleveland: While construction is drying out, several projects were completed this quarter. Increases in free rent have been on the rise Detroit: Stable unemployment and healthier auto sales are small but positive recovery signs Kansas City: Vacancy increased sharply by 330 basis points in the first quarter, due to Sprint’s move to new campus in South Johnson County. Vacancy set to increase before recovering late in the year Miami: Seeing higher vacancies, more sublease space. Suburbs hit hardest with 19.3% vacancy. Overbuilding remains a serious concern throughout the market, particularly in the suburbs, which are projected to add 1 million square feet by year’s end Minneapolis: Sublease space jumped roughly 25% during the quarter. More than half of the added vacancy is the result of new sublease listings. Layoffs continue to mount St. Louis: The office market is anticipating slow growth through year’s end. Segments of the market have been growing and are capitalizing on office deals. Sublease space is creating a new twist that hasn’t been seen for years. Long Island: Remarkable resilience, absorption increasing. Stable rents, limited new construction and a healthy economic outlook have awakened interest New Jersey: Northern, central office availability rate was nearing 20%, compared to 17.5% at year-end 2001. About 1.3 million square feet of sublease space was added to the office market in the first quarter New York: Manhattan is showing signs that it is close to a turn around. Vacancy increases have slowed. Rents have dropped the smallest of margins in the past six months. Available space continues to flood the market Philadelphia: Large blocks of sublease space are coming on the market Pittsburgh: Lots of tenants shopping, but slow to sign deals. Sublease space proved formidable contender. Rates have remained flat, dropped slightly. Landlords are using concessions to lure the stagnant tenant base and retain existing tenants. Tampa Bay: Vacancy continues to climb, up to 16.9% from 16% in fourth quarter. New construction has stalled and plans for an office park downtown has been cancelled Washington, D.C.: Market stabilization may be under way.

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