MARKET HIGHLIGHT, MARCH/APRIL 2010

BOSTON OFFICE

Recent news: The rate of deterioration in Massachusetts’ economy has slowed considerably. The state’s education, health services, professional services, as well as information sectors have remained relatively stable despite strong recessionary pressures from the financial services sector.

Asking rates for office space continued to fall in 2009, but are leveling off. With vacancy rates climbing to 9.5 percent in the CBD and 16.5 percent in the suburbs, there is no shortage of supply, allowing tenants with solid financials to take advantage of tenant-favorable conditions. Significant transactions include Verizon’s 200,000-square-foot lease at 185 Franklin Street in Downtown Boston and 3Com Corporation’s 130,000-square-foot lease at 350 Campus Drive in Marlborough.

Submarket update: The industrial market continues to trudge along as average asking rates have dropped to an average of $6 per square foot NNN. Vacancy rates have hit their highest level since the first quarter of 2005. One significant transaction is Best Buy’s build-to-suit lease of a new distribution facility at 140 Depot Street in Bellingham, totaling 238,370 square feet.

The lack of liquidity continued to plague the investment market in 2009. A majority of investment sales have been limited to smaller deals that can be locally funded. The multifamily market remains relatively active; one of the largest deals in 2009 was the sale of a 90-unit multifamily portfolio in Arlington for $12 million. Cap rates have increased to 9 percent for office property sales.

The retail market has also felt the impact of the economic turmoil with the lower rental rates and significantly higher vacancy in the Downtown. Super H-Mart’s 51,000-square-foot lease at 3 Old Concord Road in Burlington is one of the few deals completed in 2009.

Predictions for the next year: Although the Boston market continues to slide, the rate of decline is showing significant signs of deceleration. If this trend of decelerating decline continues, we can anticipate the beginnings of a stabilizing market in 2010, with more sustainable growth trends returning in 2011.

— Michael DiGiano, executive vice president and principal with Boston-based NAI Hunneman.

Boston Industrial

Recent news: Several large transactions have taken place recently: pet supply retailer PetEdge signed a new 215,000-square-foot lease in Billerica, Dealer Tire took approximately 100,000 square feet in Mansfield, and Harvey Industries signed a new lease for 55,000 square feet in Southborough. A number of new prospects are also looking to capitalize on aggressive rental rates. These include Sonepar, in the market for 180,000 square feet; Horizon Beverage, in the market for 400,000 square feet; and New England Sheets and Horn Packaging, each in the market for 150,000 square feet. Major industrial users leaving the market include General Motors which will vacate 400,000 square feet in Norton and Adidas/Reebok which will vacate an additional 500,000 square feet in Lancaster and Stoughton.

Submarket update: Overall, the Metro South industrial market has been hit the hardest, recording its worst metrics in 10 years and posting a 22 percent availability rate at the close of 2009. The strong-performing Metro West Market, which saw nominal adjustments in vacancy rates, absorption and average asking rents, managed to capture several large transactions in 2009, including Genzyme, Verizon and FedEx Smart Post. The Metro North Market posted lower vacancy and lower tenant velocity.

Predictions for the next year: With a number of new leasing prospects in the market, rents are expected to bottom out in 2010 and will remain flat throughout the year. Users are being lured back into the market with aggressive sale prices and competitive offerings of distressed bank-owned assets. The majority of market activity will come from users between 50,000 and 100,000 square feet and several troubled assets will come to market with the expectation of closure by year’s end.

— Bob Gibson, executive vice president and partner with Boston-based CB Richard Ellis/New England

BOSTON MULTIFAMILY

Recent news: We saw only 11 sales of apartment properties over 80 units in Boston over the last 14 months. Cap rates ranged, for Class A properties, from 6.3 percent closer to Boston to 7 percent in some of the outer markets. Class B and C properties, being disposed of by REITs, sold for 7.5 percent off of Route 495 in Massachusetts to 8.3 percent in Rhode Island. There were no sales in New Hampshire. The largest sale was Dexter Park in Brookline, Massachusetts, for $129.5 million ($316,626 per unit). The lowest price-per-unit sales were Tanglewood Apartments in West Warwick, Rhode Island, and a Springfield, Massachusetts, portfolio. Tanglewood sold for $74,432 per unit (a total of $13.1 million), and the Springfield portfolio sold for $58,743 per unit. Most of the new developments are meeting or exceeding their lease-up expectations. Archstone  Avenier in Boston is reportedly at 70 percent occupancy with 23 units being leased per month.

Submarket update: Six out of nine submarkets experienced higher occupancies  as of December 2009.  In the last quarter of 2009, occupancy for the Greater Boston market (within or around Route 495) was slightly over 94 percent. Rents continued to decline, but at a slower rate. Boston faired the best with a 1percent increase in occupancy over the second quarter, with stable rents. The South Shore/Route 128 market, with its construction activity, is still declining with 92 percent occupancy. Avalon continues to build two projects in this market in Randolph/Canton and just completed Hingham Shipyard in 2009.

Predictions for the next year: In 2010, we will see some construction in the South Shore/Route 128 market, Metro West Market and possibly in Boston. The construction has gone from an average of 5,700 units per year, in 2005 through 2007 to less than 2,000 units in 2010. Most of the production will be in the South Shore/Route 128 market with The Hanover Companies having permits for 240 units, along with a Wood Partners property called Carriage House, both in Stoughton.

A new petition for repealing the permitting law called 40B, has received enough signatures to be brought to the voters in November. If this law is removed, it could be devastating for the developers and impede the production of rental housing. Rental housing has become relatively affordable through the production of working and luxury class housing, helping to make Massachusetts more affordable and, in turn, helping to draw more companies to Massachusetts.

In 2010, occupancies are going to be increasing in all markets, as we see growth in several job markets. Several professional job classifications experienced increases in 2009. Segments such as education (with about 4,000 new jobs) and healthcare services (with 11,000 new jobs) are poised for more growth in 2010. According to the Massachusetts Executive Office of Labor and Workforce Development, we shall also see most of the job growth in network systems and data analysis as well as computer analysis and software engineering. This should create increased demand for properties in Cambridge and around Route 128 and Route 495.

— Richard Robinson, principal with Boston-based Apartment Realty Advisors—New England

BOSTON RETAIL

Recent news: In general, vacancy rates have been on the increase over the past few years, especially in secondary retail markets. There have been a few success stories — such as the 675,000-square-foot Legacy Place lifestyle center at Routes 1 and 95 in Dedham. However, most new developments have struggled and have been delayed. Many regional and local tenants have not been able to survive. The new Target Center opened in October in Hanover, Massachusetts, and the additional 100,000 + square feet of retail space in the development has not been leased or built.

Many vacancies have been caused by the closings of chain stores such as Linens ’N Things, Comp USA, Mattress Discounters, and Office Depot. Rental rates for new leases are generally 20 to 25 percent less than they were 2 years ago. The new retailers entering the market are typically established retailers. However , the reduction in rates and the availability of prime locations has resulted in the expansion by credit-worthy retailers and local/regional tenants seeking to take advantage of newly created opportunities. For example Curry Ace Hardware, a local family-owned company based in Quincy recently secured a long-sought-after location, occupying the former La-Z-Boy store on Route 53 in Hanover. Town Fair Tire has continued its expansion plans with new stores in Braintree and Hanover. Firestone is aggressively seeking locations throughout New England. Companies such as Big Lots have entered the New England market, negotiating aggressive lease deals on vacant box stores in the 25,000- to 30,000-square-foot range. Cardi’s Furniture Super Stores has launched a smaller Mattress Store concept, leasing 5,000- to 7,000-square foot stores, and in some instances, leasing successful stores previously occupied by Mattress Discounters.

Predictions for the next year: There will be a slow absorption of vacant retail stores over the next 12 months. There will be much lateral movement among established retailers in successful markets, with many retailers seeking to relocate for better positioning in the marketplace. In addition, there will be many retailers not currently located in New England seeking to take advantage of the opportunities created by the closing of many stores and the reduced rental rates allowing for simultaneous multiple-store growth.

— Vincent Albanese, manager and principal with Braintree, Massachusetts-based Paramount Partners, LLC

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