The first quarter saw a spike in asking rents throughout the market, a phenomenon especially prevalent in the Central Business District and inner suburbs. In addition to steadily shrinking vacancy, the jump in rents can be attributed to new out-of-area owners like Blackstone Group and Broadway Partners taking a leadership role in setting rates.
In properties recently acquired by these companies, such as the John Hancock Tower and One Post Office Square, availabilities are being marketed for upwards of $70 per square foot.
Moderate tenant activity in the first quarter resulted in an expansion of a half-million square feet in the Greater Boston office market. Vacancy dropped 30 basis points to 13.2 percent. The CBD posted a modest decline in absorption, but witnessed a significant increase in average rent.
In the suburbs, absorption was positive in virtually every submarket.
Portfolio sales generated top interest in the investment market in the first quarter, with Equity Office Property’s holdings going to Blackstone, BioMed Realty Trust acquiring Lyme Property’s lab portfolio and National Developments taking the Boston Wharf portfolio in the Fort Point Channel market from Berkeley Holdings.
In the suburbs, the Bay Colony Office Park generated a downtown price as Beacon Capital Partners sold it to Broadway Partners for $281 per square foot.
No bigger headlines emerged from the first quarter than the announcement of Blackstone’s acquisition of Equity Office properties. Equity’s holdings account for 11.5% of all rentable office property in the Central Business District, not to mention sizable holdings in Cambridge and the Route 128 submarkets.
While Equity maintained a reputation for holding rents stable, Blackstone has already shown a willingness to lead the market with aggressive rent increases, and will encourage other landlords to follow suit.
Another notable sale occurred with BioMed Realty Trust’s purchase of the Lyme Properties portfolio of lab properties. This sale included two new Cambridge developments at 301 Binney St. and 320 Bent St., totaling more than 600,000 square feet of space in the valuable East Cambridge market.
These two trading partners previously swapped the 700,000-square-foot Center for Life Science Boston site in November.
Energetic leasing activity in the CBD produced several notable deals in the Financial District and Back Bay tower properties. Occupied space downtown dipped slightly in the quarter, but should rebound quickly once tenants start filling the vacancies left by Gillette and Teradyne.
Suburban submarkets north and west of the city demonstrated strong growth, while the southern submarkets showed little activity but increased rents.
The Central Business District is anticipating the start of the first tower project in four years. New construction was dealt a setback as the law firm of Ropes & Gray committed to bringing its 400,000-square-foot office to the Prudential Tower in 2010. Many speculated that Ropes & Gray would serve as the anchor tenant developers are seeking to kick off construction.
The first quarter ended with mixed results for the Chicago office market. Overall vacancy dropped by 170 basis points from 19% in the first quarter of 2006 to 17.3% in the first quarter of this year.
Despite weaker performance in the North and Northwest suburban submarkets, the market posted a healthy overall net absorption of 546,000 square feet this quarter. This can be mainly attributed to the strong finish of the downtown market. Average gross asking rates jumped by $1.74 per square foot from last year for the Central Business District and remained level in the suburbs.
The Illinois unemployment rate for February was 4.9%, 10 basis points lower than a year earlier. The state led the nation in January with 19,100 new jobs added. Chicago placed first in Site Selection Magazine’s 2006 ranking for commercial and industrial capital investment, while Los Angeles and New York City didn’t make the top 10.
However, the Chicago Business Activity Index,a leading indicator for economic growth for the local economy,posted a negative 0.386 in January. This was the fourth consecutive negative monthly reading.
The two main reasons for this slump are the sluggish demand in the manufacturing sector and a general slowdown in the national economic performance. The Chicago economy is likely to remain weak throughout 2007, according to the University of Illinois, which publishes this index.
Despite soaring asking rents, strong absorption and a robust investment market, demand for space in Manhattan slowed in the first quarter of 2007, with only 8.9 million square feet of lease transactions completed.
The first quarter has typically been the most active during the current rising real estate market, averaging 11.2 million square feet of leases annually for the past three years.
Some tenants seem to have pulled back on leasing space in 2007 as a few factors have come into play this year.
One issue is price increases. Landlords have been able to raise asking rents and push the threshold higher due to space remaining tight throughout Manhattan. Average class A asking rents escalated $6.05 from last year to $75.98 per square foot in the first quarter. The high asking rents could be the cause for tenants’ hesitation to lease space at the same velocity as in previous years. Although transactions for high-end Midtown space continue to close at prices $150 per square foot and higher, those deals only account for a small portion of the market, and involve mostly hedge fund and capital investment market type tenants.
Unlike previous quarters where tenants often faced early recommendations to avoid “inevitable” price increases in the future, the current shortage of available space and high asking rents could have tenants re-evaluating their decisions based on the timeframe of their existing leases.
Those with leases expiring in the next 18 to 24 months may have to act sooner, but tenants looking at three to four years remaining on their lease can take a “wait and See” approach and monitor which direction the real estate market moves.
