Boston's Office Sector Gets
A Boost as Employment Rises

Boston's office-leasing sector is on the mend, though it is unclear when or whether Beantown will ever command the sizzling rents that helped make the region a darling of the nation's commercial real-estate markets.

The Boston metropolitan area, home to some 5.6 million people and the engine of New England's economy, bled jobs beginning in 2001 following a wave of corporate consolidation and the technology industry's downturn. It regained its footing last year, though employment growth of 1% in June from the year-earlier month was still below the national rate of 1.4%, according to the Bureau of Labor Statistics.

The office tower at 33 Arch Street, completed in 2004 during a slump in the Boston market, is now about 75% leased.

The growth has been enough to trigger demand for space from financial-service companies and law firms and breathe life back into the moribund office market, brokers say. Last year, tenants leased a net 4.7 million square feet of office space, about three times the absorption rate of 2004, according to Property & Portfolio Research Inc., a Boston-based research firm. That pace, though it slowed slightly in the first quarter, pulled down metro-wide vacancy rates to 20.6% in the first quarter after they had soared to a high of 23.2% in the third quarter of 2004 from the low single-digits in 2000. Average rental rates for the region have been climbing since early last year, PPR says.

It is unclear what impact, if any, renewed turmoil over the city's Big Dig project could have on the downtown real-estate market. The $14.6 billion project was designed to solve traffic congestion and improve the aesthetics of downtown Boston by burying the former elevated highway system and building a series of parks. Last month a portion of the tunnel ceiling collapsed, killing a passenger in a car, causing traffic snarls and contributing to the resignation, effective Aug. 15, of Matthew Amorello, chairman of the Massachusetts Turnpike Authority, which is overseeing the project.

The project's goals should still be realized as long as the incident remains isolated and the city's transportation system returns to normal, says Peter Flynn, coordinator for Northeastern University's real-estate program in Boston. But he adds, "If another series of events happen, I guess all bets are off."

So far the office market's recovery appears unaffected. Boston's financial district, east Cambridge -- which includes the area around the Massachusetts Institute of Technology -- and such suburbs as Waltham, in the tech-heavy area near Route 128, are among the healthiest, while some submarkets north and west of the city along Interstate 495 are recovering more slowly, says Ben Breslau, vice president and director of research for Jones Lang LaSalle in Boston.

William P. Barrack, a director at Jones Lang LaSalle who specializes in office leasing, says many landlords in downtown Boston's high-profile buildings are raising rents as leases expire.

"It's not as frothy as it once was or as we'd like it to be, but the precipitous fall that we've had is over," says Dean Stratouly, president of Congress Group Inc. The Boston-based developer still smarts from the memory of delivering a new 33-story office tower at 33 Arch Street into what he recalls as the "horrible" market of 2004. Congress Group itself was initially the only tenant. That building, in the heart of the financial district near the Old South Meeting House, where colonial protesters gathered before the Boston Tea Party revolt, is now about 75% leased to tenants including the Securities and Exchange Commission and Digitas Inc.

The turnaround already has prompted new suburban office development and downtown projects are also in the wings. Chicago-based Equity Office Properties Trust Inc. recently received zoning approval for a mixed-use, 31-story tower called Russia Wharf at Congress Street and Atlantic Avenue that would include about a half million square feet of office space, 200 residential units and some retail space. Richard Kincaid, chief executive of EOP, says the company is looking hard at the market but would like rents to get a little stronger before proceeding. "It's close," Mr. Kincaid says. The company declines to specify a rental rate that would prompt the project to move forward, noting that there are also other factors being considered.

The improving job picture has had a less dramatic impact on Boston's warehouse, retail and apartment sectors. Though declining, warehouse vacancies in the first quarter were the third-highest of the 54 major U.S. markets surveyed by PPR after Memphis and Raleigh. The already-strong retail market saw further improvement, while apartment demand appears to be rising as fears of a weakening housing market are encouraging some would-be buyers to rent instead, PPR says.

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