BOSTON-The message to be read from the latest statistics on the city’s real estate market is difficult to decipher. While the market experienced positive absorption this quarter after nine consecutive quarters of negative absorption, according to a recently released mid year survey by Meredith & Grew, the vacancy rate is relatively unchanged and rental rates have declined slightly.

According to the survey, absorption decreased from negative 514,193 sf to 420,878 sf. This represents an increase in occupied space of over one million sf but the survey emphasizes that this is due to recent events–specifically the opening of One Lincoln and corporations pulling large blocks of sublease space off the market. “These are one-time events, and although they are positive signs, the result of these events was positive absorption that does not accurately reflect conditions in the market,” notes the report. If these events were removed from the statistics, absorption would remain at approximately negative 500,000 sf.

The vacancy rate of 16% is nearly equal to last quarter’s vacancy and up from 14.4% at the end of 2002. The report points out that the vacancy rate for tower space on floors 20 and above is only 6.2%, which indicates what it terms a “two-tiered market” with class A high-rise space experiencing different dynamics than the market as a whole. The vacancy rate for direct space increased slightly from 11.9% to 12.5%, caused primarily from changes in the sublease market.

The amount of available sublease space was reduced this quarter from approximately 2.3 million to approximately 1.9 million sf, caused by companies taking space off the market, short-term leases converting to direct space and by tenants continuing to capitalize on the economic advantages of sublease space, which while they are usually for shorter terms, are lower in rent.

The average asking rent declined by 4.28% from $37.82 per sf to $36.20 per sf. The survey notes that as rental rates decline, concessions are growing with average tenant improvement allowances at $40 to $60 per sf and the average number of months for free rent increasing from six to nine to take care of lease overlap issues.

Velocity is the one clearly positive story this quarter with the survey noting that there were nearly two million sf of recorded transactions and another 750,000 sf pending. The majority of tenants over 50,000 sf opted for relocations, while those tenants occupying 50,000 sf or less chose to renew at their current locations.

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