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BOSTON-Many view it as a mere setback, but the runaway train that was the city’s office market last year came to a screeching halt in the first quarter, at least according to data compiled by industry watchers. DTZ FHO Partners reports an alarming negative net absorption exceeding 400,000 sf in Boston, and nearly all of the reviews indicate a sluggish beginning for the market.

“People are just being more cautious,” relays CB Richard Ellis broker David Fitzgerald. CBRE’s Q1 data was less severe than DTZ FHO’s, posting slight positive net absorption of 41,000 sf. Still, there was minus-147,000 sf of absorption in Boston’s Financial District, and Fitzgerald acknowledges a chilling of demand that he backdates to the fourth quarter of 2007. Leasing is a lagging indicator, says Fitzgerald, and he maintains Boston could finally feel the impact of the national economic malaise.

After a record run-up of rents last year, recessionary drumbeats are impacting Boston in two ways, the veteran broker explains. Not only are businesses less likely to expand in a difficult climate, tenants are holding out for better terms. “There’s no urgency because they know there’s no one behind them.”

Cushman & Wakefield has negative 19,000 sf absorption in its Boston survey of 58.8 million sf, including minus 4,200 sf in the Financial District and a dip of 99,000 sf in the Back Bay. That comes as no surprise to Rick Cleveland, director of research services at C&W, citing the same reasons as Fitzgerald, but he offers other figures bolstering a view that the slowdown is only temporary, including results showing a lack of supply. The vacancy rate for most reports show Boston in single figures, including 5.8% in the CBRE report, a 6.1% mark in the C&W survey and 8.8% for Jones Lang LaSalle. Class A space is especially tight, as evidenced by C&W’s estimate of just 4.1% vacant for that block of 34.9 million sf.

“We feel good,” Cleveland says of the Boston outlook. “Tenants did pause during the first quarter, but demand is solid and we expect things to pick up later in the year.” Cleveland notes that the start of 2007 was even worse at minus 55,000 sf, but the city rebounded and ended on the plus side by more than 900,000 sf. Tenant requirements in the market are actually up, adds Cleveland, from three million sf last April to 4.5 million sf today. Rent escalations of close to 40% in 2007 did ease in the opening quarter and has apparently hit a plateau, says Cleveland, but he warns tenants who hold out for better terms could be lacking options within a very short period.

Data wise, the harshest assessment of Boston is in the DTZ FHO Partners report, which tracks 57 million sf in nine submarkets. Six of those posted negative net absorption, including a drop of 217,000 sf in the Back Bay and a plunge of 252,000 sf in the Financial District, each contributing to the total of minus 411,000 sf. That makes for one of the biggest declines in quarterly absorption in years, relays DTZ FHO in its market review. The report puts Boston’s vacancy rate at 11.4%, highest among the surveys reviewed. Both the Back Bay at 10.9% and the Financial District at 13.7% are in double figures. Comparatively, JLL has a Back Bay vacancy of just 4% and 6.9% in the Financial District, while C&W puts those districts at 3.3% and 5.7% respectively.

Efforts to discuss the report with DTZ FHO Partners were unsuccessful. Cleveland is holding judgment on the area until mid-year, and Fitzgerald says the sublease element that dogged landlords in the 2001 recession is limited going forward. Still, each accedes that Boston’s leasing sector stalled in the opening quarter. “Demand was flat,” says Fitzgerald. “When tenants anticipate conditions are moving in their favor, the market will drift, and it will continue to drift until that changes.”

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