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Boston Business Journal

Commercial market sees renewed optimism for 2011

The lease landscape
Premium content from Boston Business Journal - by Mary K. Pratt

Date: Friday, January 21, 2011, 6:00am EST

During the height of the recession, the occupancy rate for The Gutierrez Co. was down in the mid-80 percent range.

It was a respectable figure for suburban commercial property during a down economy, but what’s even more impressive is how far it has climbed in recent months. The Burlington-based real estate firm can now boast that 91 percent of its 3.6 million square feet is leased.

“In 2010, the beginning of the year for us and for most folks in the real estate and business market, there was a real question mark to how things would play out. There was a lot of uncertainty in the air,” said Doug Fainelli, vice president of operations at The Gutierrez Co. “But 2010 worked out to be a good year, with the second half and particularly the last quarter being stronger. We signed up some tenants — some were renewals with restructured leases and some were new tenants to the properties.”

That kind of activity has Fainelli optimistic about the prospects for 2011. He’s not alone.

Leaders in the commercial real estate industry said leasing activity for the upcoming year is expected to rebound. They said that businesses throughout Greater Boston are showing signs of confidence and are willing to sign on for longer leases as well as expansion space.

However, despite such positive signs, the market is not experiencing growth across all areas. Demand for desirable properties in strong geographic areas is indeed on the upswing, but it’s not yet reaching down into Class B properties or outlying regions.

“As we enter 2011, there’s a lot more optimism,” said John T. Kerrigan Jr., executive vice president at Grubb & Ellis Co. “In your stronger markets, there’s very solid absorption of space coupled with rising rental rates. These are stronger buildings in stronger locations. What’s driving that is that companies are re-hiring, they’re willing to sign longer-term leases and they’re willing to sign up for expansion space. They’re making the commitment, they’re stepping up.”

Statistics do indeed show an improving labor market. According to the U.S. Bureau of Labor Statistics, the national unemployment rate fell from 9.8 percent in November to 9.4 percent in December — the lowest rate in nearly two years — as the economy added more than 100,000 jobs.

“People do think we’ve reached some bottom stability, and people are making decisions to move ahead,” said Robert M. Carney, a partner in the real estate and business law departments at Sherin and Lodgen LLP. “And I think it will be a stronger year than the last two years.”

Carney said he saw activity picked up toward the end of last year and it has continued into this year.

“Tenant demand has been growing all last year,” said Peter Brown, leasing director at Campanelli Cos.

Case in point: Campanelli bought the 120,000-square-foot building at 300 Crown Colony Drive in Quincy in January 2010. It was 75 percent occupied at that point, but was 93 percent leased by year’s end.

“The tenants we talk to are renting space but also taking options to grow. We’re seeing a lot more of that — the combination of renting space and wanting to grow — than we had in the past two years,” Brown said, noting that absorption — a key indicator of the strength of the real estate market — was also slightly positive in 2010.

This activity has put some pressure on leasing terms, industry leaders said. Leasing rates in select buildings have actually ticked up. And large tenants — those requiring more than 200,000 square feet — are beginning to find that their pick of places in and around Boston is dwindling.

That doesn’t mean that the leasing market is back to full health. In fact, Kerrigan pointed out that building prices are so low that some businesses that traditionally leased space are finding that they can buy a building for roughly the same cost as leasing. New accounting rules have made that an even more attractive option for some businesses, which also see the move to building owner as a buffer against future leasing rate increases.

And demand for new space is still not strong enough to push new speculative development. In fact, there’s no expectation that leasing activity will recover enough this year or even next to prompt that kind of construction, although there some build-to-suit projects in the works.

It’s also important to note that while leasing activity is recovering in Boston and the markets immediately outside the city, the outlook for regions further out isn’t so good.

Brown pointed out that the vacancy rate remains as high as 30 percent in some markets around Interstate 495, which means landlords still must compete very aggressively in leasing incentives and rental rates.

“That will keep rents in check, as low as they’re going to be,” Brown said.

Still, the leasing outlook for 2011 remains positive.

“The demand will continue to grow in a modest way through 2011,” Brown said. “I don’t see any crazy unexpected growth. I see it growing modestly but growing positively and better absorption happening across the marketplace, and it will happen better in better markets and less aggressively in markets farther out.”

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