The City's Market Sends Mixed Messages According to 3Q Report

BOSTON-The market is giving mixed messages, according to a recent report on market statistics for the third quarter of this year. While the report indicates that the overall vacancy rate, at 14.9%, and negative absorption, at 633,149 sf, indicate a slight increase and rental rates declined slightly, the velocity, or signed leases, remained steady throughout the quarter.

The report also emphasizes that the city is a segmented market with different dynamics for each submarket and asset class. Out of the city’s eight submarkets, the financial district and Back Bay experienced significant negative absorption of one million sf and 215,223 sf, respectively, but these numbers were offset by positive absorption in the South Boston Waterfront and Fenway/Kenmore submarkets of 328,011 and 298,368 sf, respectively.

Average asking rents for all types of properties, including sublease space, for the third quarter were $39.99 per sf, a decrease of 4.5% from last quarter’s rate of $41.86. These tenant-friendly market conditions have led many companies to evaluate their approach to real estate. Many tenants, according to the report, whose leases are up from 2004 to 2006 are acting early, in order to take advantage of the situation.

The report emphasizes that, on a positive note, the past year has seen an increase in velocity with over 2.25 million sf of recorded transactions and another 500,000 sf pending. Nearly a year ago, in the aftermath of September 11, velocity was practically non existent. But most of these transactions have been lease renewals.

On another positive note, the introduction of new sublease space leveled off in this quarter. There is currently 2.4 million sf of sublease space in the city, which is 200,000 sf less than there was in the middle of the year. It is in this market, the report notes, that tenants can get good deals but usually for short term without any improvement allowance, unless the tenant negotiates directly with the property owner.

About six million sf of new supply is either under construction or proposed through 2006. The projects under construction include 33 Arch St., 100 Cambridge St. and 1 Lincoln St. in the Financial District; and 131 Dartmouth St. in the Back Bay. It is tenant demand and financing that will determine the delivery of the proposed new developments.