BOSTON-The recession is supposed to be nearing its end, but someone forgot to tell the office market here which continues to experience declining rents and relatively high vacancies, according to Spaulding & Slye Colliers fourth quarter market report.

The report indicates that the availability rate in Boston is at 17.4%, down slightly from 18.4% in the second quarter of 2003. William P. Barrack, principal at Spaulding & Slye Colliers, tells that those numbers will most likely not go down much more over the next year. In fact Barrack anticipates that availability rates will probably remain where they are through 2004. Until companies start adding jobs, he notes, those rates are not going to experience real change.

Barrack points out that large financial institutions can’t be relied upon to pull the market out of its doldrums, as they did a number of years ago. Those firms are no longer growing–it is the smaller to medium sized companies that are going to drive the recovery. Five of the largest leases done in the last year put space on the market, including PriceWaterhouseCoopers which took 332,000 sf at 125 High St., coming out of over 400,000 sf and Thomson Financial which renewed its lease in Fort Point Channel, but downsized by 100,000 sf.

The city continues to experience tremendous velocity, but Barrack says that the deals being done demonstrate tenants taking advantage of the current market. “We didn’t see a flight to quality in ’03,” says Barrack. “We saw a stampede to quality and that trend will continue in ’04.”

Barrack emphasizes that the recent large mergers–between John Hancock and Manulife as well as Fleet with Bank of America–are probably going to impact the city’s market. Both Fleet and Hancock maintain their headquarters in Boston and are two of the five largest tenants in the city. “After a merger you can always count on more space coming to the market,” he says. Similarly, the massive outflows in the mutual fund industry will ultimately impact the market. “These companies do not need more space,” he says.

The good news, stresses Barrack, is that the city’s market is more diversified than it was 12 years ago but because the smaller companies need to fill in the gap left by the larger firms it will be a longer slower climb to a healthier market. The issue of “shadow space”–extra space leased by companies that can sometime be up to 5% to 10% of their office–will also contribute to the length of time it will take for the market to recover. Not surprisingly, rents will probably remain flat over the next year. According to Spaulding & Slye’s report the city’s average asking rent is at $35 per sf.

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