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BOSTON-A mid-year corporate real estate forecast put out by CRESA Partners predicts that rents in the area will drop slightly and then stay flat through next year. Joseph Sciolla, managing director of the firm in Boston tells GlobeSt.com that the suburbs will see more erosion in the market than the city.

“The real estate market typically lags two quarters behind the economy,” says Sciolla, “The major economic indicators are now more discouraging than we had anticipated.”

Sciolla points out that the Greater Boston suburban market is driven mainly by high tech users, which have born the brunt of the recession more than the financial services industry, which populates the downtown area. Sciolla sees rents dropping five to seven percent by this time next year in the suburbs while downtown will experience a three to five percent drop.

But Sciolla notes that rents now are where the market should have been if the 1999 to 2000 dot com boom was taken out. “We’ve seen a 40% erosion already,” notes Sciolla, “but rents were artificially high. But further erosion now puts the market a little below where it should be.”

Downtown rent for Class A office space is now at $50 to $60 per sf for direct space while sublease space is going for $25 to 35 pre sf. “Tenants should be renegotiating their leases now,” emphasizes Sciolla. He also recommends restacking which involves taking existing space and reconfiguring it to accommodate more people. “You can get more people in the same space and either give back the extra space or sublet it.”

The one market recovering at a faster rate, according the forecast, is Cambridge, largely as a result of landlords converting space for growing biotech companies. Otherwise, activity is “sporadic, with increased interest but not many deals,” says Sciolla.

Demand and velocity are 30% less now than they were a year ago, he adds, in part because of the two years of over-supply dating back to pre-dotcom absorption rates. “It will continue to be a tenant’s market,” says Sciolla, “and as tenants’ advisors, we see many opportunities for savvy companies.”

Sciolla believes that vacancy rates will continue to rise by one to two percentage points, which, while not a significant amount, will continue to put a downward pressure on rents. “Until vacancy rates start to come down there is no pressure on rental rates to go up,” he points out. “One to two points the compass in the wrong direction from a landlord’s perspective. This will be a tenant’s market well into 2003.

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