Skittish Boston Market Persists in 2Q

BOSTON-According to second quarter market statistics released by Meredith & Grew, the city’s real estate market has remained stagnant during the first half of this year. The report indicates that “despite news of an economic recovery, uncertainty continues to persist” in the Boston market.

From the first quarter to the second quarter, the vacancy rate increased moderately from 12.3% to 13.4% as available space increased from 6,493,490 sf to 7,130,733 sf. Net absorption is negative 432,937 sf year-to-date, compared to negative 353,110 sf after the first quarter.

The report highlights the financial district and Back Bay because of those areas’ significant negative absorption–of 554,262 and 273,267 sf respectively. But that negative absorption is offset by positive absorption seen in the peripheral markets, such as Kenmore/Fenway which experienced 212,629 sf of net absorption and the South Boston Waterfront, which gained 260,531 sf of net absorption.

Not surprisingly, the report notes that rents continued to slip this quarter, as the weighted average asking rate declined by 3.4% from $43.43 to $41.96 for the combined class A and class B markets. Rates for first class space dropped by 3.5%, from $47.65 to $45.96. Limited demand along with increased vacancy are deemed the culprits as they continued to put pressure on rents, causing them to drop to pre-2000 levels. But the report points out that some “quality” buildings are holding on to higher rents and are still leasing at levels above the rest of the market.

Sluggish conditions aside, the demand for space is driven largely by lease expirations and a flight to value. Approximately 1.5 million sf of transactions have been signed this year with over 300,000 sf pending, according to the report.

It is the large amount of available sublease space that continues to be a dominant story in this real estate market. There are currently 2,643,914 sf of sublease space available but that amount has decreased from the end of last quarter by 5.2% when 2,789,360 sf was available. While tenants can get some good deals with sublease space, the lease term and tenant improvements in those transactions tend to be less flexible.

There is currently nine million sf of new supply either under construction or proposed through 2006. The bulk of this space is scheduled for delivery after 2003, which the report notes, should coincide with a return in demand, something that it says is essential for new developments to break ground.