The office market here has seen 1.1 million square feet of negative absorption in Q1 of 2009, pushing vacancy up 1%. Class A asking lease rates dropped $0.59 to $38.75 per square foot, according to Richards Barry Joyce & Partners.

The CBD has seen a higher rate drop as asking lease rates fell 13% to $53.22 per square foot, as sublease availability jumped up 88% over two quarters in the Financial District, Back Bay and Seaport District. Much of that has come from downsizing law firms which contributed to 122% increase in class A sublease space coming onto the market in the Financial District over the last three quarters. Sublease jumped 98%, while direct available space upticked 34% over two quarters in Cambridge, as well.

The rate drops, however, are not necessarily affecting class B landlords in the CBD, according to Brendan Carroll, director of research for RBJ. "In the Central Business District, there's been such a wide delta between class A and class B asking lease rates for such a long time...it's almost two different markets," he explains. "We've seen a 20% decline in class A asking lease rates in the Financial District," however class B rates only decreased 1.3% starting this last quarter.

Carroll points out there's a 53% difference in price between class A space and class B in the Financial District, so the class A rates don't seem to be adding pressure to class B rates just yet. Also, landlords' reaction to the downturn, Carroll points out, has helped steady rates and keep vacancy lower than previous downturns, as landlords read the writing on the wall.

However, the lack of downward pressure on class B rates does not necessarily hold true for the submarkets. For example, in the 495 West submarket, there has been very little increase on the class B side. With class A properties holding relatively steady in price, "class B properties [are] getting increasingly aggressive for deals," he tells GlobeSt.com. The conundrum, for class B landlords, is to raise the incentive so class A tenants will look at the class B as a viable cost-saving option, while watching class A rents drop.

The most dramatic area to experience this pressure is in the 495 North submarket, according to Carroll. At the peak the difference between class A and class B space was 27% with class B asking lease rates only topping out at $17.22 per square foot. To maintain the price margin, class B landlords have been forced to lower rates to $16.37, "which is actually--if you adjust for the price of inflation--is the lowest class B asking lease rate in the submarket, so they're already at record low rent for class B properties," Carroll tells GlobeSt.com, but adds that this dynamic is not playing out in the more central markets of Boston.

Much of the buffer in price, generally across the Greater Boston market, is due to the limited construction pipeline. The CBD is looking at 1.4 million square feet on its way, while Cambridge is benefiting from an empty pipeline. Comparatively to the last downturn after the tech-bust, Boston is poised well for the future. "When things were getting bad at the end of [2008], there was 2.6 million square feet of construction in the pipeline," Carroll puts it into perspective. "When things were getting bad back in the Q4 of 2000--on the eve of the tech-bust--there was nine million square feet under construction." The new product, he explains, put a lot of downward pressure on lease rates of older product, but the pieces are not in place for serious deterioration this time around.

And despite rising available sublease space, it is still within the a 10% to 20% range which will not put significant pressure on direct availability asking rates, according to Carroll. Sublease space negatively affected rates after the tech-bust as it skyrocketed to 56% of the available space in East Cambridge, but sitting at roughly 16% now, it doesn't look to be as strong of a factor. RBJ notes that it is likely more sublease will come onto the market as companies downsize, but it will be from more established companies which are trimming their office needs, as opposed to younger companies failing and vacating space, as in 2001.

Instant Insights /

Report: Buttressing the Office Market

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