Winter 2005 BOSTON GREATER
The Spaulding & Slye Colliers Report A semi-annual review and forecast of commercial real estate trends 2005 Spaulding & Slye Colliers offers Development, Leasing, Management, Investment Sales, Construction and Structured Finance to a diverse mix of clients throughout the nation and the world. 3
Greater Boston Market Overview 6 7 8 9 10 12 13 14 15 Retail Office Regional National Economy Boston Office Suburban R&D Suburban Office Cambridge Office Suburban Industrial winter 2005 Introduction 5 Table of Contents Table Investment Sales Law Firm Services Services Firm Law 18 Market Overviews Market Overviews Market Summaries Market Summaries 4 Market Definitions 19 Structured Finance Structured Finance 16 Residential Services Services Residential 17 Foreword: David McGarry, President Greater Boston Greater The Boston office market endured a bumpy ride in 2004, but gained some momentum heading into 2005.
Greater Boston Market Summaries
Market Overview Total Vacant Percent Available Percent 2004 Annual Supply Space Vacant Space Available Net Absorption Office Greater Boston 152,100,940 22,486,730 14.8% 34,516,948 22.7% 1,749,603 Boston 57,120,311 6,176,730 10.8% 10,231,218 17.9% -60,541 Financial District 34,068.721 3,975,039 11.7% 6,220,850 18.3% 601,635 Back Bay 12,917,763 912,731 7.1% 2,191,006 17.0% -465,088 Cambridge 15,844,213 2,430,325 15.3% 3,709,205 23.4% 436,912 Suburbs 79,136,416 13,879,675 17.5% 20,576,528 26.0% 1,373,232
R & D Greater Boston 49,361,380 11,104,359 22.5% 15,540,307 31.5% -222,596 Boston 2,706,140 176,887 6.5% 178,380 6.6% -31,899 Cambridge 1,106,616 287,492 26.0% 434,492 39.3% 20,263 Suburbs 45,548,624 10,639,980 23.4, 14,927,435 32.8% -210,960
Industrial Greater Boston 60,171,681 10,795,530 17.9% 13,756,533 22.9% -1,742,800 Cambridge 372,530 17,156 4.6% 17,156 4.6% 24,550 Suburbs 59,799,151 10,778,374 18.0% 13,739,377 23.0% -1,767,350 5
Greater Boston Market Overview In 2004, we saw the U.S. economy move towards a well-balanced recovery. For the first time For recovery. economy move towards a well-balanced In 2004, we saw the U.S. jobs The creation of 2.2 million new grew alongside each other. since 2001, jobs and output of 2001 and the best job employment growth since the recession the first annual marked sustained growth in the Alongside the creation of new jobs was the growth in five years. estimated annual rate of Product (GDP), which increased by an Gross Domestic nation’s 4.4%. which the turning point for the national office real estate market, As a result, 2004 marked square feet, nearly three times its level in saw its annual net absorption surge to 80 million with the Mid-Atlantic regional differences, to experience we continued 2003. However, We area lagging the national recovery. region leading the recovery and the New England these regional differences, we look forward anticipate this trend to continue in 2005. Despite The twin-set economy and our industry. to increasing positive momentum with the nation’s all but of inflation will challenge the market, trade and budget deficits and the threats economy. gain in the nation’s indicators point toward a modest but steady well along the recovery path, real estate has become a mainstream more markets With The relatively returns than the stock market. choice for investors, often realizing greater real (both debt and equity) as a source of recent development of the public capital market estate into one of the pillars of institutional estate investment capital has turned real has growth of the real estate capital markets investment. In conjunction with the enormous of information available to real estate investors. been an increase in the quality and depth the historically low level of risk and potential for These recent developments, combined with real estate a unique and attractive investment option. high return, continue to make bodes in the economy and real estate markets The outlook for a more widespread growth were successful in capitalizing on the many organization. We well for our matrix-based for our clients in 2004. our real estate expertise opportunities that came our way to exercise take a more broad-based growth outlook on the horizon in 2005, we will continue to With legal advantage of opportunities from a wide range of clients, including those in the sectors. But more and higher education services, life sciences, corporate, investor, we will continue to service our clients’ real estate needs. importantly, look forward to another successful year for both Spaulding & Slye Colliers and the clients We we serve. Foreword Conventional Wisdom Conventional 6
National Economy Jocelina O. Benzmiller, Vice President
2004: A Banner Year for the U.S. Economy U.S. Net Absorption and New Office Jobs The Labor Market Aligns with Output Growth 150 1,500 80 MSF 120 1,200 2004 was a banner year for the U.S. economy. The economy’s 672,000 steady forward movement during the latter half of 2003 through 90 900 New Office Jobs (’000) the first half of 2004 gained full steam by year’s end, as the 60 600 national economy enjoyed both employment and output growth 30 300 for the first time since 2001, pointing towards a more broad-based 0 0
national economic recovery. The creation of 2.2 million new jobs (MSF) Absorption Net -30 -300 in 2004 marked the first annual employment growth since the -60 -600 recession of 2001 and the best job growth performance in five -90 -900 years. As a result, the national unemployment rate fell to 5.1% at 97 98 99 00 01 02 03 04
year’s end, its lowest year-end level since 2000 and the lowest Net Absorption New Office Jobs monthly rate since December 2001. Alongside steady job creation was a healthy growth in output, with real gross domestic 102.7 in December. With high energy costs and the national product - the output of goods and services produced in the United inflation rate continuing to trend upward to 2.7% in 2004, the States - increasing at an estimated annual rate of 4.4%. Encouraged Federal Reserve Bank continued gradual interest rate hikes by the gains in the labor market, consumer spending continued to throughout 2004 in order to dampen the inflationary threat that feed the nation’s economic growth, as sales grew by 8%, its best often accompanies a surging economy. performance since 1999's 8.5% rate of growth. The expectations for a steady but modest upward movement of Fuelling job creation was the private service sector, which interest rates throughout the year - federal funds rate is forecasted accounted for 76% of the nation’s total new jobs. Perhaps the to approach 4% by the end of 2005 - will help keep inflationary most significant indicator for the commercial real estate market was threats at bay, and thus, protect from an overheated economy. the creation of 672,000 net new office jobs in the nation. Reflecting This monetary policy will go a long way in ensuring that both this influx of new jobs, the national office real estate market saw its consumers, who have been the engines of growth in this gradual net absorption surge to 80 million square feet in 2004, nearly three journey towards a full recovery, and businesses continue to invest times the 2003 annual level. With national net absorption posting (spend) in the economy, a critical factor in achieving continued its best performance in five years, the national office market employment and output growth in 2005. While other vacancy rate continued its downward trend to reach 15.4% at issues - existing trade and budgetary deficits and a weak dollar, year’s end. among others - will challenge public policy and the economy in Of significance in the economic landscape of 2004 was a more 2005, we expect the year ahead to continue the momentum built broad-based healthy economy across the country. Unlike the past in 2004. several years where growth was restricted to limited pockets of the We expect a steady and modest economic growth in 2005. country, a majority of the metropolitan areas across the nation Specifically, the expectation for some 2.1 to 2.5 million new jobs mirrored the upswing in the overall national economic environment and the continued downward movement of the unemployment in 2004. Eighty percent of the 274 metro areas in the U.S. posted rate towards 5%, will bring opportunities to the national office annual employment increases at year’s end, with the following five market - continued absorption gains especially in high office-using metro areas experiencing the largest over-the-year employment job markets. increase: Washington, DC, Phoenix-Mesa, Las Vegas, New York, and St. Louis areas.
Encouraged by sustained economic growth and the recovery of the labor market, consumers remained bullish on the state of the national economy, as the Consumer Confidence Index surged to 7
Regional Economy Ben Breslau, Vice President
Jobs Remain the Name of the Game The U.S. economic recovery is clearly underway, with three and a half years of positive GDP growth, 2.2 million jobs created, and business confidence, profits and capital spending all trending upward in 2004. Some encouraging signs surfaced regionally in 2004 as well, but several key obstacles still stand in the way of a sustained local expansion.
Regionally, job growth remains critically lacking. The country added enough jobs in January 2005 to officially surpass its previous peak employment level of 2000. Greater Boston, which shed approximately 180,000 jobs during the downturn from 2001 through 2003, remains 6% below its peak. In 2004, employment finally stabilized regionally, registering additional declines in key information and financial services sectors, but posting offsetting gains in the health services sector and in the professional and business services sector. While 2005 is expected to bring positive job growth, the rate of improvement will still lag the nation, and Greater Boston will not likely reach its former employment peak until 2008 or 2009. Greater Boston Economic Performance “Acquired” Taste for Boston 2003 2004 With much of Corporate America flush with cash, and looking for efficiencies and avenues Greater Boston for growth, M&A activity has skyrocketed. Boston has certainly felt the impact, as three prominent Boston-headquartered firms have been acquired in the last 18 months. Following Total Employment 2,422,200 2,437,200 B Manulife Financial’s acquisition of John Hancock and Bank of America’s purchase of Fleet Employment Change -2.3% 0.6% Boston Financial, consumer products giant Procter & Gamble announced its acquisition of B B Gillette in early 2005. Combined, these deals combined, total approximately $113 billion in Unemployment Rate 4.7% 3.5% value and involve some of the most prominent corporate names in Boston - John Hancock Massachusetts and Gillette have been headquartered in Boston for over 100 years each, and two of the region’s three major professional sports facilities are named after these recently acquired Venture Capital Funding $2.6 Billion $2.8 Billion B firms. Over a million square feet of downtown office space is currently available as a result IPO’s 0 8 of these deals. While Bank of America recently announced plans to move several divisions B from Charlotte to Boston to take advantage of the banking and investment acumen located Business Confidence Index 57.5 62 here, the inevitable consolidation of overlapping functions and the cost of living and wage B advantages of Toronto, Charlotte, and Cincinnati suggest additional losses are likely to follow.
Outlook For Boston Mixed The lack of job growth and the loss of major corporations weigh on the Boston economy. Additionally, potential closings of the Hanscom and Natick military bases due to the pending Recent Acquisitions Impact Boston BRAC initiative announcements could hurt Boston’s suburban defense and R&D sectors. Several positive trends still bode well for Boston, however. The major infrastructure improvements that have been underway in Boston, including the Big Dig and Rose Kennedy Greenway, are finally starting to take shape and will beautify the city and improve access. The renowned institutions of education, research, and medicine that dot the Boston landscape remain vibrant and active, and increased capital for innovation (including venture and IPO funds) should boost Boston’s technology and life sciences sector growth prospects. 8
100 Cambridge Street, Boston, MA Boston Office
“Acquisitions and corporate consolidations had a Absorption Flat but Encouraging The Boston office market endured a bumpy ride in 2004, but gained some negative impact on the Boston office market in momentum heading into 2005 after recording nearly 1.0 million square feet of positive net absorption in the fourth quarter. Bank of America’s decision to take back nearly 400,000 2004 and will continue to impact the market in square feet of direct available space at 100 Federal Street, and Boston Medical Center’s 2005. Overall market conditions will generally lease of 105,000 square feet at Copley Place largely contributed to the turn-around. Net absorption was flat for the year, but active requirements remained healthy at 4.3 million improve, as long as job growth meets or exceeds square feet. Tenants seeking 25,000 square feet or less continue to be the driving force to this recovery, accounting for 80% of the total number of active requirements. Leasing 2005 expectations, and the small to mid-size activity continues to be primarily LED-driven, with tenants maintaining the “flight to firms will be the driving force behind this recovery. quality” mentality to take advantage of auspicious market conditions.
We expect rents to begin to recover in premium Availability Peaked in 2004 Corporate consolidations continued in the second half of 2004, as nearly 1.6 million tower space and stabilize throughout the rest of square feet of new available space was added to the market in the third quarter alone, the market.” bringing the availability rate to a new record-high of 19.6%. By year-end, the availability rate dropped to 17.9%, slightly above the 16.6% recorded a year-ago. As a result of the -William P. Barrack, Principal significant amount of sublease space added to the market, large tenants seeking Class A space over 100,000 square feet currently have 15 options split between the high-rise and low-rise segments of the market. With the majority of active demand coming from small to mid-size tenants, landlords and sub-landlords have to be creative with large blocks of space that typically have floor plates ranging from 25,000 to 50,000 square feet. Average asking rents continued to trend downward in 2004 but at a much slower rate, ending the year at $33.15 per square foot gross. Within Class A properties, there continues to be a disparity of over $10.00 per square foot in pricing between high-rise and low-rise space. SIGNIFICANT TRANSACTIONS / 2004 Tenant/Address SF Development Will Be On Hold Two construction projects were completed during the second half of the year, totaling Digitas over 1.0 million square feet. 100 Cambridge Street, a 565,157 square-foot Class A office 33 Arch Street (New-Relocation) 201,409 building in the Financial District, was rehabbed and delivered nearly 80% leased. 601 Congress Street, a 460,000 square-foot Class A office building in the South Boston Wachovia Securities 200 Berkeley Street (Renewal) 195,301 Waterfront, was delivered 100% owner-occupied by Manulife Financial and therefore not included in our market statistics. Current rent levels and high availability will keep Choate Hall & Stewart speculative office development starts on hold through 2005 and 2006. Two International Place (New-Relocation) 155,324
Ernst & Young 200 Clarendon Street (Renewal) 146,000
American Student Assistance Boston Office Historical Net Absorption and Availability 100 Cambridge Street (New-Relocation) 138,879 3,000 20%
2,000 16% Availability Rate (%) 17.9% 1,000 12%
0 8%
Net Absorption (’000 SF) Absorption Net -1,000 4% -61,000 SF
-2,000 0%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Net Absorption Availability Rate 9
784 Memorial Drive, Cambridge, MA Cambridge Office
Positive Net Absorption for the 3rd Consecutive Year “Overall, we expect to see gradual improvement in The Cambridge office and lab market is showing signs of recovery, recording 214,000 square feet of positive net absorption during the fourth quarter for a total of nearly the Cambridge leasing market during 2005. Lab 440,000 square feet in 2004. This marked the third consecutive year of positive net absorption in Cambridge. Tenants that were new to the market fueled a significant development will likely continue, fueled by the still portion of the 2004 net absorption. Whole Foods Market, The Chickering Group, an burgeoning life science and health care industries AETNA Company, and Management Sciences for Health all relocated to Cambridge during the year. Offsetting this trend slightly were a few Cambridge tenants that left and lab tenants with specific needs.The Cambridge during the year, such as David L. Babson and Carter Burgess relocating to Boston and Charlestown, respectively. office market should continue to benefit from a
Availability Past the peak flight-to-quality mentality among tenants, but overall Office and lab availability both decreased in the last quarter and during last year to demand will be only moderate until the area's high 22.8% and 23.9%, respectively. While lab availability exceeds office availability, much of the space on the market is in shell condition only. Available existing lab space that is built tech and supporting professional services out is significantly harder to find. The year began with several large blocks of new sublease space coming from the market’s major biotech and pharmaceutical companies, companies catch the next wave and start hiring.” but the trend seems to have plateaued or even reversed slightly at year-end. Genzyme re-absorbed some space it had been marketing for sublease and also signed a large -Debra J. Gould, Principal renewal for 159,000 square feet at One Kendall Square. In addition, several new life science leases have been signed, including GenPath at 75 Sidney Street, Gene Logic at 38 Sidney Street, and Momenta Pharmaceuticals at 675 Kendall Street West. The influx of tenants from outside the market is also expected to continue. St. Elizabeth’s Hospital, which is currently in Brighton, is looking for approximately 100,000 square feet of lab space in Cambridge. SIGNIFICANT TRANSACTIONS / 2004 Cambridge Development Marches On Tenant/Address SF Cambridge is the last submarket in the region with significant commercial development in the pipeline, including build-to-suit lab projects for the Broad Institute at Broad Institute 7 Cambridge Center, Smithsonian Astrophysical Observatory at 35 Acorn Park, and a 7 Cambridge Center 220,000 potential build-to-suit for Schlumberger at One Hampshire Street. Lab build-to-suits have Smithsonian Astrophysical Observatory generally achieved a 10-15% premium over existing space in comparable tenant leases. 35 Acorn Park 81,500 Continued activity has left Cambridge with few remaining large commercial development sites. Acorn Park, 301 Binney Street, 750 Main Street, 650 Kendall Street East, and Management Sciences for Health, Inc NorthPoint are actively seeking lead tenants. Given the current level of availability, office 784 Memorial Drive 63,000 development will remain on hold in 2005. Art Technology Group 25 First Street 60,471
Chickering Group, an Aetna Company One Charles Park 56,054 10
311 Arsenal Street, Arsenal on the Charles, Watertown, MA Suburban Office
First Positive absorption in four years “The firmly established “tenant’s market” of the Tenants gained confidence in their business prospects during 2004, and several that past several years may weaken in some core had been in the market for up to two years finally fulfilled large requirements, yielding 1.4 million square feet of net absorption. Four core towns in two core submarkets along the submarkets in 2005 where prospects are turning Mass Pike were the primary beneficiaries of these occupancy gains. Companies absorbed brighter, and even moderate rent increases could over 905,000 square feet in the 128/Mass Pike submarket, much of it in the fourth quarter. Waltham and Watertown accounted for nearly the entire amount, recording arise in premium buildings along Central Route 629,800 square feet and 245,300 square feet of net absorption, respectively. Some of the 128. Overall, however, job growth projections growth came from within this market, including expansions by Athena Health, Oasis
for the office sector remain anemic for 2005. Semiconductor, R/D Tech Instruments, AstraZeneca and Oscient Pharmaceuticals. The 495/Mass Pike submarket accounted for 584,600 square feet of net absorption, These projections are in line with active tenant primarily concentrated in Marlborough and Westborough. The other five submarkets did requirements, which together point to continued not fare as well, but select accessible towns such as Burlington and Medford did post good absorption levels for the year. slow recovery for 2005 and rental rates
stabilizing at best for most markets.” Availability Turns The Corner During the past 12 months, overall availability decreased by 2.4 percentage points -Tamie R.Thompson, Principal to 26.0%, and high quality large blocks of space became increasingly difficult to find. Some have been leased and absorbed and landlords have subdivided others to meet smaller tenant needs. Corporations looking to consolidate divisions into one or two facilities and control their destiny by owning rather than leasing, also purchased a number of vacant properties this year. Boston Scientific bought the former Lucent complex in Marlborough, Bose purchased the HP building in Stow, and Dunkin Donuts and Equiserve both bought ROUTE 128 MARKETS SIGNIFICANT TRANSACTIONS / 2004 and relocated to vacant speculative buildings in Canton. Sublease vacancy continued to trend downward from leasing activity, from sublandlords pulling space back off the Tenant/Address SF market for renewed growth plans, and from sublease space reverting back to landlord
IBM control. The latter trend will continue over the next two years since many transactions Kiln Brook Office Park signed in 1999 and 2000 currently on the sublease market have 5 to 7 year terms that Lexington (Renewal) 205,910 will soon expire. Clearly, the suburbs have turned the corner and are now well positioned CitiStreet to continue along a slow but steady recovery mode. 1 Heritage Drive Quincy (Relocation) 168,000
First Marblehead Corporation Suburban Office One Cabot Road Historical Net Absorption and Availability Medford (Relocation) 136,496 10,000 35% Athena Health 26% 8,000 30% 311 Arsenal Street 6,000 Availability Rate (%) Watertown (Relocation) 133,000 25% 4,000 1,373,000 SF 20% Symantec 2,000 15% 275 Second Avenue 0 Waltham (Relocation) 105,236 10% 2,000 Net Absorption (’000 SF) Absorption Net Reed Elsevier -4,000 5% 225 Wyman Street -6,000 0% Waltham (Relocation) 90,000 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Net Absorption Availability Rate 11
200 Staples Drive, Framingham, MA
Still waiting for demand surge ROUTE 495 MARKETS Business confidence improved and layoffs announcements became less frequent SIGNIFICANT TRANSACTIONS / 2004 during 2004, but much of the leasing throughout Greater Boston was from transactions Tenant/Address SF less than 30,000 square feet in size. These small to medium-size tenants remain more active and growth-oriented and still have a multitude of cost-effective opportunities to CYTYC Corporation 3 Network Drive grow and upgrade throughout the marketplace. While small tenants cumulatively Marlborough (New - Additional Facility) 216,218 contribute to occupancy increases, large requirements have the most impact on Amerifee Corporation reducing availability. Most large tenants in the market are exhibiting “flight-to-quality” and 200 Staples Drive are lease-expiration driven. Unfortunately, there currently are only 16 active suburban Framingham (Relocation) 168,000 tenant space requirements greater than 50,000 square feet. Overall active demand totals Advanced Micro Devices 4.0 million square feet, down from 4.7 million square feet a year ago as several large 90 Central Street Boxborough (Relocation) 58,195 requirements were filled during 2004. The largest industry segment of demand by far is computer software, which has 38 active requirements totaling over 750,000 square feet. Carlin, Charron, & Rosen LLP 1400 Computer Drive While availability has been whittled down, 20.6 million square feet of space remained Westborough (Relocation) 47,442 available for lease at year-end, and the resulting supply-to-demand ratio at five to one still Emulex Corporation presents a challenge. 580 Main Street Bolton (Renewal) 40,000 Rental rates bottoming Significant remaining suburban availability pushed average asking rents lower by about $1.00 during 2004 to $18.48 per square foot gross. In submarkets and locations where availability is still high, especially in peripheral areas, landlords will continue to aggressively compete for tenants and offer significant incentives to gain and maintain occupancy. Other submarkets, such as 128/Mass Pike, which has the lowest availability at 22.3%, should begin to see rent stabilization. In Waltham’s premier properties, often leading indicators of market recovery, the “flight-to-quality” trend has impacted vacancy levels positively and therefore reduced tenant leverage to drive the terms of a leasing transaction. Quoted rents in Class A space in Waltham range from $22 to $32 per square foot gross. Quoted rents may actually inch upward in high-occupancy trophy buildings and tenants seeking this space will have to adjust their pricing expectations. In other markets and in locations where availability is still high, proposals will remain competitive to secure tenants.
Availability Rate by Submarket 12
1000/1200 Technology Park Drive, Billerica, MA Suburban R&D
“The R&D market is in a holding pattern, and we Occupancy In Holding Pattern The momentum that shifted in the last quarter of 2003 continued through the first expect relatively flat conditions to prevail in the half of 2004, with nearly 600,000 square feet of positive net absorption coming from near term given slow regional job growth. several large transactions, including GE Panametrics, Straumman Co., and New England Regional Gift Center. However, these gains were more than offset by 800,000 square Available space has been relatively constant, feet of occupancy declines in the second half of the year that again pushed absorption negative by 200,000 square feet for the year. The good news is that this level was currently nearly 15.0 million square feet, but with markedly less negative than the previous years, and largely the result of the 400,000 several requirements satisfied earlier in 2004, square feet of space added to the market from Hewlett-Packard in Shrewsbury. Excluding this single building, net absorption would have been positive for the first time since 2000. active demand dropped to 1.2 million square feet Availability At Record Level at year-end.The available supply-to-demand ratio Availability peaked at 32.8% at year-end, reflecting a total of 14.9 million square feet of R&D space that is available for lease. Vacancy has also reached a record-high of 23.4%, is up to 12-to-1, a troubling sign for the market's as terms on sublease space expired. Some tenants have also been opportunistic buyers, recovery. In a market that is treading water, taking advantage of $45-$70 per square foot range pricing for high quality R&D buildings. Several companies have vacated leased buildings and purchased smaller buildings at 60% tenants will still be in control until companies of replacement cost, pushing vacancy upward in the process. Of the seven suburban submarkets, five have availabilities above 30% and the other two are in the low to accelerate their hiring and bring availability well mid-20% range. The lowest availability at 21.4% is in the North market, which benefited below its current high.” from leasing of high-quality plug-and-play sublease space at affordable rates. After declining 10% to 15% in 2003, average asking rents for R&D space increased slightly in Philip DeSimone, Senior VicePresident 2004 and range from approximately $7.00 to $10.00 per square foot NNN. With availability at record levels, the increase is not from improved market conditions and higher demand, but rather from a shift from lower sublease asking rents to direct rates quoted directly from landlords.
New construction on hold A total of 142,400 square feet of R&D projects were delivered in 2004. An 84,000 square-foot building at 10 Industrial Avenue in Chelmsford was delivered with 75,000 SIGNIFICANT TRANSACTIONS / 2004 square feet preleased to the Department of Veteran Affairs. A speculative 58,400 Tenant/Address SF square-foot rehab project at 213 Burlington Road in Bedford was completed and is available for lease. Future R&D speculative construction will be on hold until availability is GE Panametrics significantly reduced. 1100 Technology Park Drive Billerica (Relocation) 153,713 Straumman Company 100 Minuteman Road Suburban R&D Andover (Relocation) 150,000 Historical Net Absorption and Availability New England Regional Gift Center 3,000 35% 1000/1200 Technology Park Drive 2,000 30% 32.8% Billerica (Relocation) 139,180 1,000 Availability Rate (%) 25% 0 Kronos 20% 300 Billerica Road -1,000 15% Chelmsford (Renewal) 110,882 -2,000 -211,000 SF 10% -3,000 Cadence Design Systems (’000 SF) Absorption Net 270 Billerica Road -4,00 5% Chelmsford (Renewal) 101,600 -5,000 0% Advanced Specialty Metals 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
9 Technology Park Drive Net Absorption Availability Rate Westford (Sublease) 100,000 13
55 Lyman Street, Northborough, MA Suburban Industrial
Industrial Demand Slides Downward Industrial occupancy levels suffered for the fourth consecutive year, with 1.8 million “The region’s aging inventory has been square feet of negative absorption posted in 2004, the largest decline during this downturn. Companies continued to shed space or relocate to modern facilities. During painfully exposed as tenants exit older, often 2004, five of seven submarkets posted occupancy declines, led by the South, 495/North, functionally obsolete facilities. Inadequate ceiling and Northwest with 908,800 square feet, 558,100 square feet, and 491,000 square feet of negative net absorption, respectively. Verizon, Analogic and Maxwell Shoe, were heights, limited loading capacity, lack of parking, and among those who vacated large blocks of space in the second half of the year. poor highway access are challenges not easily Availability and vacancy at record levels Overall availability increased to 23.0%, 3.8 percentage points higher than 12 months solved. Many of these property owners must wait ago. Of the 13.7 million square feet of available space, sublease space was virtually for more desirable product to be absorbed or unchanged at 2.5 million square feet, but vacant space increased by 2.3 million square feet pushing vacancy to 18.0%, up from 14.3% last year. Rents have dropped by 12.7% over continue to entertain a sales strategy to avoid four years since their peak at $6.71 per square foot NNN in 2000, but they declined only slightly to $5.95 per square foot in 2004. Well-located modern warehouse space prolonged downtime. Modern, high quality generally ranges from $4.50 to $6.25 per square foot NNN, with manufacturing space in speculative buildings should continue to enjoy the $6.25 to $8.00 per square foot NNN range. Lack of demand will keep rents from increasing, except in the few available high quality and well-located modern buildings. relative success. Rents in all classes of existing
New development is specialized industrial properties should represent excellent Two industrial buildings under construction for 2005 delivery are a 132,000 values in the next six to 12 months.” square-foot facility at 55 Lyman Street in Northborough and a 210,000 square-foot building at 190 Mechanic Street in Bellingham Business Center, with a 78,000 square-foot -William D. Bailey, Principal lease commitment to 99 Restaurant and Pubs. Three companies in the market earlier in the year with large build-to-suit requirements selected sites - BJ's Wholesale Club will build 700,000 square feet in Uxbridge, General Motors will relocate to 400,000 square feet in Norton, and Dunkin Donuts will move to 268,000 square feet in Bellingham. While these transactions will have limited impact on existing availability, they underscore the trend toward locating large specialized facilities in southern Route 495 markets and SIGNIFICANT TRANSACTIONS / 2004 beyond, where land is abundant and can be developed cost effectively. Smaller companies continue to find that attractive interest rates make purchasing their buildings Tenant/Address SF preferable to leasing. Owners anxious to generate activity at their buildings have welcomed these sales as viable exit strategies instead of carrying vacant buildings for Rolf C. Hagen months or even years. 305 Forbes Boulevard Mansfield (Relocation) 302,032 Mediline 50 Hampden Road Mansfield (Relocation) 204,151 McKesson Medical-Surgical 55 Lyman Street Northborough (Relocation) 128,586 Royal Laundry 30 Innerbelt Road Somerville (Relocation) 114,500 Instron Corporation 825 University Avenue Norwood (Relocation) 108,855 Converge 4 Technology Drive Peabody (Relocation) 84,000 14
Boston Wharf, Boston, MA Investment Sales Office Market “While interest rate trepidation continues among Record-Setting Year investors, most clearly remain optimistic about As we predicted in our mid-year Report, 2004 rewrote the record books for office sales long-term prospects for Boston. Little distress in the activity in Greater Boston as a new high watermark in volume for downtown Boston was set. Regionally, $3.5 billion of office transactions closed during the year, totaling 17.1 marketplace on behalf of owners and the flood of million square feet of real estate changing hands. More than doubling 2002 and 2003 capital that continues to seek a home in this region levels, last year’s sales volume eclipsed Greater Boston’s previous high of $3.2 billion and 16.3 million square feet set in 2000. With core urban assets remaining atop investor will ensure that the competitive environment for target lists, downtown Boston experienced the most robust activity, recording 32 transactions during 2004 totaling $2.2 billion and 7.2 million square feet. investment sales and robust activity will continue in
Boston in 2005.” Competitive atmosphere Real estate allocations are at an all-time high, and expanding capital flows have resulted -Scott J. Jamieson, Senior Vice President in vibrant competition for deals and higher pricing and lower yields for purchasers. Many potential sellers remain unwilling participants due to the lack of reinvestment options. Despite limited improvement in underlying market conditions, the abundance of capital in search of real estate and the lack of available product for sale continue to result in investors aggressively underwriting assets and pushing assumptions, in many instances, to SIGNIFICANT TRANSACTIONS / 2004 SIGNIFICANT TRANSACTIONS / 2005 levels that exceed market rates. This has forced cap rates down to the 6% to 7% range Location Size Sale Price $/SF with un-leveraged internal rates of return in the 8% to 9% range for core multi-tenant downtown office buildings and only slightly above that for well leased and located One Lincoln Street 1,045,000 $705,400,000 $675 suburban properties. Creative and savvy local investors have found that competition has Boston compressed returns further down the opportunity and risk spectrum as well. One Beacon Street 1,017,168 $340,000,000 $334 Boston Active Players 245 Summer Street 904,192 $302,000,000 $334 Investor profiles remained deep and broad during 2004, with pension funds, institutional Boston investors, public and private REITS, private investors, and local players teamed with Wall One and 101 Main Street 665,000 $175,000,000 $263 Street money, serving as active buyers in Boston. Some of 2004’s largest transactions Cambridge went to investors new to the Boston marketplace. New buyers tended to circle Boston Wharf Portfolio 380,950 $92,000,000 $242 fully-leased credit deals, including Pennsylvania-based REIT American Financial Realty (Thomson Financial) Trust, which set a new price per square foot record for downtown Boston by Boston purchasing State Street Corporation’s new headquarters at One Lincoln Street for over Boston Wharf Portfolio 2 700,000 $97,000,000 $139 $675 per square foot in early 2004. HDG Mansur Capital, an international investment Boston advisory firm, also entered the Boston marketplace with a splash, acquiring a portion of the Boston Wharf portfolio in the South Boston Waterfront that is fully leased by Thomson Financial. Wells Real Estate Investment Trust, which acquired 1200 Crown Colony in Quincy in 2001 and 90 Central Street in Boxborough in 2002, had an active year again in 2004. Wells purchased 1414 Massachusetts Avenue and One Brattle Square in Harvard Square, both fully leased, for in excess of $500 and $700 per square foot respectively. They also acquired 9 Technology Drive in Westborough. Corporate and institutional tenants such as Suffolk University, Liberty Mutual, and Boston Scientific also flexed some purchase power in 2004, taking advantage of the low interest rate environment to buy facilities and control longer term occupancy costs. 15
CVS Portfolio
Retail Market “Unusual market conditions have pushed demand
REITs Keep Market Hot and prices for retail property even higher in 2004, Driven by low interest rates and the inflow of REIT capital, retail properties have been with opportune owners using creative deal the hottest product type for investors in New England in 2004 and early 2005. Shopping center owners have been taking advantage of this demand by “pruning” their portfolio structures to capitalize on today’s cap rates and selling select retail properties at pricing that is at an all-time high. And assuming that without waiting to fully stabilize their properties. the 10-year treasury rate does not rise above 5% in the next year and the nation can sustain its healthy growth in retail sales, we expect the trend to continue in 2005. With the market for investment property awash
with inexpensive equity and debt capital, we expect Creative Deal Structures Emerge demand for retail to remain strong in 2005.” The appeal of retail centers has allowed for creative deal structures, such as enabling sellers to sell their shopping center at today's all-time low cap rates, while continuing to -James M. Koury, Senior Vice President create additional value from the property after the closing date. This is referred to as an 'earn out' deal structure. Earn outs generated today are much more advantageous for sellers than in years past. Once a buyer finishes their due diligence period and their deposit is firm, in lieu of the typical 30-day closing period the seller is often given up to 2004 SALES STATISTICS FOR six months to complete additional leasing and/or development prior to closing. MULTI-TENANTED NEW ENGLAND Coincidently, this also extends the seller's time frame to identify 1031 candidates. STRIP CENTERS > 50,000 SF*
Number of Shopping Centers Sold 27 After the closing, the seller then has up to eighteen months to finish any additional development or leasing. But what makes today’s earn outs so much more appealing to Number of Transactions 21 sellers, is that there is little or no stipulation on who a developer can lease the space to Square Footage Sold 3.6 million square feet after the closing. Also, the cap rate used to value the additional post closing income is the same cap rate used for the initial closing! Therefore, this structure allows an owner to lock Capital Invested $560 million in today's current low cap rate for a total of up to two years while finishing their Average Price per Square Foot $157.44 psf development. Also, if the deal is structured properly, the seller may also be able to have a separate 1031 “clock” for the post closing earn out payment! It's an incredible * Excludes enclosed malls and single-tenant sales. opportunity for a developer to lock in their exit pricing and mitigate cap rate risk. We have recently sold several major retail deals with this exact structure. SIGNIFICANT TRANSACTIONS / 2004 Address Size Sale Price $/SF CVS Sale-Leaseback Providence Place Mall 1,300,000 $510,000,000 $392 Major retailers are also taking advantage of market conditions to remove some real estate Providence, RI (3/04) from their books and generate quick cash flow, generally referred to as a sale-leaseback. Woonsocket, Rhode Island-based pharmacy giant CVS recently completed the Shaw's Portfolio 390,986 $119,800,000 $305 Various Locations (11/04) sale-leaseback of 163 of the company’s single-tenant properties to affiliates of Staubach Capital Partners, a group specializing in the quick turnaround of small, triple-net retail Burlington Square Mall 86,290 $26,000,000 $301 Burlington, MA (1/05) properties to investors looking for 1031 Exchange opportunities. The pharmacies, locat- ed in 22 states, were all owned or ground-leased properties and sold for $519 million. Shops at the Pond 102,000 $26,500,000 $265 Marlborough, MA (1/04)
Franklin Village 321,800 $73,000,000 $227 Franklin, MA (11/04)
Warwick Center 160,000 $30,800,000 $192 Warwick, RI (2/04) 16
Structured Finance
“High levels of transaction activity will continue throughout 2005. Many of the “sacred Stashing Cash According to crenewspage.com, total CMBS loan production volume for 2004 reached cows” of investor due diligence, such as recourse, approximately $130 billion, significantly exceeding the prior year’s production levels. balloon balances, cash-out financing, bankruptcy Further, recent industry reports of production for the first quarter of 2005, combined with an exceptionally deep pipeline of pending transactions and the expected surge in and carve outs are chipped away as terms and rollover refinancing from the mid-1990’s, leads to an easy conclusion that 2005 will top 2004 in terms of production. conditions continue to improve for capital consumers. Historical “relationships” will be Despite the anemic savings rates of domestic households, the foreign household savings rates combined with domestic and international institutions more than make challenged as markets become increasingly aware up for the US-based deficit. Demand from these worldwide investors awash in capital and seeking what the markets price as relative value in commercial real estate of the shift in the perception of risk. We anticipate continues to increase demand for real estate product. The dilemma is finding a a continued flattening and shift upward in the yield suitable place to stash the cash. curve as short term rates climb three or four times This sea of liquidity continues to result in ever tighter credit spreads which now appear priced for perfection. Investor flexibility on historically “non-negotiable” terms and during 2005 and the US 10-year treasury yield conditions continue to increase and loan-to-appraised value pushes upward while climbs closer to 5%.” spreads remain unchanged. It can’t continue indefinitely; or are we in a new paradigm of underwriting standards and valuation of commercial real estate? -Martin O. Kamm, Principal Historical Default Risk A few months ago, we wrote about the declining evidence of default -- despite a recession and the resulting deteriorating real estate fundamentals. These default rates remain historically low, and we expect them to continue at very low levels. While we think there will be a marginal increase in default rates, we don’t believe this will occur for a number of years barring an exogenous shock to the system (which isn’t priced into the markets). Further, liquidity in the sector has decreased capitalization rates, dramatically driving up a larger and larger cushion for owners as values increase. Owners choose correctly to work out their debt service coverage issues with fresh capital, and, if unable, sell the asset to one of many well capitalized buyers.
Domestic CMBS Total Volume: 2004-2005 Is the Pricing Perfect? We are in a time and place where pricing appears to be appropriate and risk doesn’t $100 $93.78 seem to be priced into transactions. The shift upwards in LIBOR and falling $80 longer-term rates has served to flatten the yield curve. Term and future uncertainties $60 - economic, demographic or external - don’t seem to be incorporated into the price.
$40 In summary, you can borrow more and for a longer term without more than a
$6.64 marginal increase in the cost of capital. These factors create the demand side of the $20 record financing levels previously discussed. $0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Commercial Real Estate Direct 2004 2005 ($bln) ($bln) 17
Folio, 80 Broad Street, Boston, MA Residential Services “With mortgage rates increasing, the supply spigot still open for now, and warning signs of an
overheated condo market - such as high levels of Market Conditions speculative investors in the buyer pool and high levels of Boston remains one of the hottest housing markets in the country. Massachusetts’ condominium sales volume has posted year-to-year gains for 20 consecutive months. often adjustable rate leverage - the rate of price Nearly 20,000 condominiums were traded in 2004, a 27% annual increase and an all-time appreciation experienced over the past few years is likely volume record. The median sales price for condominiums in Massachusetts increased by 15% during 2004. In Greater Boston, housing appreciation has been in the 10-15% range to cool. However, the future of the market remains bright for five consecutive years. Average condo prices in Boston’s premier Back Bay for well-located projects, particularly those targeting the neighborhood hit $653 per square foot in 2004, with new high-end product reaching the over 55 “empty nesters” or the younger “echo boomer” $1000-$1500 per square foot range. In Cambridge, average price per square foot increased to $476 in 2004. However, the new Regatta Riverview conversion project has markets.” pushed the Cambridge condo market to unchartered territory, with units selling for as -Robert M. Dickey, Principal much as $700-$900 per square foot.
Capital availability, both equity and debt, for condominium development has increased BOSTON/CAMBRIDGE supply in major urban areas. Eager to deploy capital, investors have found new REPRESENTATIVE CONDOMINIUM PROJECTS investment opportunities in residential condominium development. Abundant capital supply and competition for deals has compressed expected equity returns. The same is New Construction true among first mortgage lenders, and importantly for developers, first mortgage debt at Project Name Neighborhood Total Condo 65-70% of total project costs is available on a non-recourse basis and without the litmus Units test of presales. While, significant presales or recourse repayment guarantees were the NorthPoint East Cambridge 329 norm a few years ago, developers in strong markets can now access attractive financing without them. One Charles Street South Back Bay 231
Conversions to Condos Continue Gateway Terrace South End 133
Approximately 1,800 new condominium units have been delivered over the past two Residences at the years, and another 2,400 units are under construction or conversion in Boston and Intercontinental Waterfront 130
Cambridge, with many projects experiencing significant presale activity. Currently, in Folio Boston Financial District 96 excess of one million square feet of office buildings are either being converted or planned for conversion to condominiums. Many of these projects are older Class C buildings in Bowdoin Place Government Center 75 emerging markets or downtown close to the Rose Kennedy Greenway, but some 44 Prince Street North End 57 prominent Class B office buildings, such as 360 Newbury Street in the Back Bay, have Conversions been tagged for condos as well. The 125,000 square-foot former home to the Virgin Records Megastore was sold in 2004 and has begun a conversion process to 54 luxury Project Name Neighborhood Total Condo condominiums, with average per square foot price at $850 during presales. Three other Units former apartment buildings in Cambridge totaling 906 units are being converted to Regatta Riverview East Cambridge 435 condominiums on a unit-by-unit basis. Additional supply from large mixed-use Parris Landing in the development sites such as NorthPoint in Cambridge, which breaks ground in March on Navy Yard Charlestown 367 329 condo units, and Russia Wharf, Fan Pier, and Columbus Center in Boston, fill out the development pipeline. The Glass Factory Condominiums East Cambridge 104
Harrison Commons South End 60
360 Newbury Street Back Bay 54 18
Law Firm Services Thomas E. Doughty, Principal and Director, Law Firm Services
More Law Firms Contemplate Early landlord benefits as well from the enhanced value that a longer Renewals in Rising Markets lease affords, and by removing the risk of downtime and As urban markets continue to recover from the retrofit costs that are incurred when a tenant relocates. Even dot.com-based crash of several years ago, more law firms are if the landlord is not willing to reduce the rent, most are weighing the benefits of negotiating extensions, or in some agreeable to a “flatter” rent structure that limits the rate of cases, altogether new leases at their current locations. future increases in exchange for the additional term. Depending upon the individual firm’s circumstances, this may Another key benefit of the early recast is the opportunity to be a prudent method of long-term cost containment. secure additional rights to space in the building. The
A number of factors have combined to precipitate a surge in importance to any growing firm of maintaining rights to get real estate values in urban centers across the country. While additional space when needed cannot be overstated. Most opinions vary as to the key catalyst, the sustained availability of firms in urban markets face new fit-out cost in excess of $100 inexpensive capital, and the willingness of investors to accept per square foot, and assuming that the existing building lower yields has pushed both domestic and overseas investors continues to meet the firm’s criteria for continued tenancy, in downtown office markets into fierce competition, with office every effort should be made to acquire the expansion space buildings selling for progressively lower cap rates. As record that will allow the firm to continue to use the benefits of an prices have been achieved, more investors have sought to lock earlier installation that is already paid for. Many landlords will in profits by putting more properties on the market, all leading be forthcoming in providing that expansion space in return for to a circular feeding frenzy. Layer on top of this a rebounding an extended lease commitment, particularly from a credit economy and accompanying increases in demand for office tenant. This strategy can also have a collateral benefit. Law space, and it is not unrealistic to project continued upward firms tend to congregate in particular buildings, and if one firm pressure on rental rates for some time to come. has encumbered significant amounts of space in an elevator bank or building, its competitor firms may be forced to leave In the face of such scenarios, many law firms are opting to the building by reason of not having enough expansion space approach their landlords to offer to recast their leases well in of their own. advance of the natural expiration or renewal dates. Naturally, any such approach, presupposes that the firm’s leasehold is in There are risks inherent in early renegotiations and extended a building that is acceptable, and that there is sufficient space term commitments, but nearly all of these can and should be to accommodate the firm long-term. dealt with at the outset. The key risk is simply that the firm is taking on additional financial liability. If business fortunes Assuming these threshold qualifications exist, an early change, the lease is an ongoing liability, like any other financial renegotiation may allow the firm to reduce, or at least “flatten commitment. While this liability can be mitigated through out”, its rental obligation, and to secure additional option rights subleasing, any firm is advised to have a well-formulated to accommodate future growth. If the firm is paying rent at a long-term strategy for its business operations before moving level that is over market, with a lease expiration date that is ahead to implement an early lease recast. However, if the firm fairly imminent, many landlords are willing to reduce those has a solid plan for its future growth, a proactive approach to rates prior to lease expiration in return for an extended restructuring and improving its lease can pay large dividends in commitment. The benefit to the tenant is obvious, but the the form of cost containment and growth opportunities. 19
Market Definitions
Office Buildings Quality office buildings not including medical buildings, office condominium space, and 100% owner-occupied buildings. Rents are quoted gross, net of electricity. Downtown Building Classifications Class A Buildings over 18 stories in height and buildings greater than 150,000 square feet constructed after 1980. Class B Buildings less than 150,000 square feet built after 1980, and buildings completely renovated after 1980 where the combination of size, location, floor plate, amenities, and quality of renovation position the building competitively in the “B” market. Class C All other buildings. R&D Buildings One to three story buildings for flexible space use ranging from office to light industrial, not including 100% owner-occupied buildings. Rents are quoted triple net. Industrial Buildings One to two story buildings for warehouse, manufacturing, or distribution use, not including 100% owner-occupied buildings. Rents are quoted triple net. Total Supply The entire area which is being leased, comprised of both “usable” space and an allocated portion of the common area. Vacant Space Direct existing space being actively marketed for immediate occupancy as of the survey date, not including sublease space. Available Space Existing space which is being actively marketed for immediate or future occupancy, including both direct and sublease space. Occupancy Total supply minus available space. Net Absorption The net increase or decrease in occupied space in existing buildings between quarterly survey dates. www.spauldingandslye.com
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