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BOSTON-When it comes to the Boston office leasing market, there is no place to go but up–but there is also very little up to go to. Class A inventory continued to erode in 2007, according to year-end data provided by Jones Lang LaSalle that shows a minuscule amount of tower space remaining in Boston’s Financial District and core markets such as the Back Bay.

The scant 3.8% vacancy rate for class A product is sending rents into the stratosphere, finishing 2007 at an average asking rate of $67.23 per sf—a whopping 50% spike for the year. The overall asking rent jumped to $54.80 per sf for Boston’s 58.1 million sf office market, a 47% hike for that figure.

“It was a good year,” says JLL managing director William Barrack, a Boston leasing specialist who had anticipated absorption for 2007 would run in the 750,000-sf to 800,000-sf range versus the 991,000-sf achieved. A combination of reduced class A inventory and price sensitivity led to an especially solid result in Boston’s class B sector. The stock of 20.6 million sf accounted for 72% of the net positive absorption registered in the city last year, boosting the class B average asking rent to $40.11 per sf after posting a mid-year mark of $34.47 per sf. The brisk leasing put the class B vacancy rate at 8.5% by year’s end after reaching 11.0% at mid-year. “That will be the value play going forward,” predicts Barrack, who adds that small-sized tenants accounted for most of the leasing in 2007, with the average deal just 7,000 sf.

Boston’s overall vacancy rate fell to 7.1% in 2007. The fourth quarter net absorption tailed off to 163,000 sf, but Barrack says there are more tenants in the market presently than there have been in 24 months. That bodes well for 2008, he says, although the veteran broker stresses that the outcome will determine largely on how long the credit crunch lingers. “The key is sustainability, and that cuts to the heart of how strong the confidence in the economy is,” he says. “The next six months will be very important.”

The Back Bay, one of Boston’s strongest performers in recent years, was the only submarket among six in Boston to register negative absorption in the final quarter. The minus-27,000 sf was incongruous to recent activity there, as the submarket of 12.8 million sf had positive absorption for the year of 355,000 sf, and retains the lowest vacancy at 3.6%. It is the latter statistic that slowed leasing there, according to Barrack, with options limited. “I think it will continue to gain in popularity,” says Barrack, whose firm puts the average asking rate for the Back Bay at $65.04 per sf, even eclipsing the Financial District’s average of $59.36 per sf.

The Financial District had the strongest year and finish, posting 154,000 sf of net absorption in the fourth quarter and 435,000 sf for the year. The smallest submarket, Charlestown, has the only vacancy in double digits at 15.1% for 1.9 million sf, followed by 9.6% for North Station and an 8.6% mark in the emerging Seaport District. That submarket had a solid 2007, says Barrack, with rents rising appreciably to achieved deals in the $40 per sf range.

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