December 29, 2003
Banker & Tradesman
Excess Space the Final Frontier in 2003

In the past 12 months, the commercial real estate market has fallen victim to climbing vacancy rates, eroding rents, scads of sublease offerings and an unknown amount of shadow space looming over any projected recovery. Despite those negative fundamentals, industry watchers say the investment sales market in the Boston area remains robust [see related story, Page 10]. Some brokers say it’s the worst market for landlords they’ve seen in years. Others are optimistic that 2004 will bring stabilization, positive space absorption and even industry growth.

Experts have told their peers to “seize the moment” and “stick to the basics” in the midst of the market slump that offers little hope of a quick recovery. Another mantra being bandied about in the field is “survive ‘til ’05,” a tenet that puts into perspective the difficulties of the year past and the subdued expectations for the year to come. It’s been a tough few years for Massachusetts – layoffs at companies such as Polaroid, Fidelity and Nortel Networks have cost the state 130,000 jobs since 2000. What’s the good news? Some say that the job market has stabilized, and some companies are even beginning to add a small number of new employees, which ultimately could increase demand for office space.

The past year also witnessed a few major business shakeups that commercial real estate players are watching closely. The $10 billion merger of Manulife Financial Corp. and John Hancock Financial services, which occurred shortly before the FleetBoston Financial and Bank of America merger, left questions about how the deals will affect the Boston office market. It’s still unclear if, or how much, space will be shed. The mutual fund industry had a shakeup of its own – earlier this month, the state U.S. attorney’s office launched a probe into alleged trading abuses within the industry, including the Boston office of Prudential Securities. The combined effect on the commercial market may not be known until well into 2004.

“We got caught off guard with the two big mergers and the mutual fund problems,” said William P. Barrack, principal of the Boston office of Spaulding & Slye Colliers. “We don’t want the clouds in the sky to form the perfect storm, if you know what I mean.”

But despite such developments, Barrack is optimistic. “The [rental] rates clearly aren’t trending where owners would like to see them but there are deals being done, and they’re big deals.”

Large Boston lease transactions topping the list for 2003 included Thomson Financial, which renewed its 380,000-square-foot lease until 2014 at 22 Thomson Place in the Fort Point Channel neighborhood; law firm Goodwin Procter’s 360,000-square-foot renewal in Exchange Place at 53 State St.; law firm Nixon Peabody’s move to 100 Summer St. for 167,000 square feet; and accounting giant PricewaterhouseCooper’s 291,000-square-foot lease deal at 125 High St.

For the first time in two years, the central business district in Boston registered 185,000 square feet of positive absorption by year-end, according to the Boston office of Cushman & Wakefield.

“That’s something that I think signals a reversal of the past two years,” said Jay Driscoll, senior director of the Boston office of Cushman & Wakefield.

The Back Bay office market also showed significant signs of improvement during the fourth quarter of 2003, with overall vacancy rates declining to 10.74 percent from 12.06 percent in the third quarter. The Back Bay Class A office market rebounded during the fourth quarter after experiencing increasing vacancy rates since the end of last year. The overall vacancy rate decreased to 11.29 percent after hitting a two-year high of 13.16 percent in the third quarter of 2003, according to the Boston office of Richards Barry Joyce & Partners.

“Psychologically we saw a lot of businesses say, ‘we’re not going to stand on the sidelines forever, despite a bumpy economy we have to go ahead and run our business the best we can.’ In 2003 we saw a major commitment to the lease side and the sell side,” RBJ President Robert B. Richards said. “ ... There are positive signs that not everyone is stuck in neutral or even reverse.”

While reduced rental rates for office space may have made landlords cringe in 2003, the tenant-favoring market produced a “flight to quality” in which several companies upgraded by signing leases in better or newer facilities for a cost comparable to their previous lease in more modest surroundings. Even nonprofits got in on the deal, taking the opportunity to move out of the suburbs and into the city, often gaining additional space, amenities and proximity to public transportation.

Positively Absorbing
The Interstate 495 North market experienced a dramatic increase in activity and commitment, Richards said. ZOLL Medical signed a 155,000-square-foot lease at 269 Mill Road in Chelmsford and SynQor signed a 120,000 square foot deal at 155 Swanson Road in Boxborough.

Raytheon Co.’s lease for 440,000 square feet of space at 225 and 235 Presidential Way near the intersection of Interstate 93 and Route 128 in Woburn topped the list of the largest transactions in a deal credited with decreasing office vacancy from 35 percent to 31 percent in the suburban area.

“The [Route] 128 and [Interstate] 495 markets have been struggling with increases in vacancies all year,” said John Lavender, director of research for Richards Barry Joyce & Partners. “The fourth quarter experienced a turnaround with some big leases. We did see some softening with the vacancy rate at 27 percent but positive absorption of 80,000 square feet was something that’s extremely encouraging.”

The I-495 office market remained stable in 2003 with vacancy rates at around 25 percent. For the fourth quarter the overall vacancy decreased slightly to 24.95 percent, according to Richards Barry Joyce & Partners. The I-495 North market made positive gains during the fourth quarter while the I-495 South market stabilized with the overall vacancy rate standing at 15.88 percent, a slight increase from 15.26 percent in the second quarter of 2003.

‘Buyer’s Market’
In his annual year-end “Bings and Bongs,” Chairman George J. Fantini Jr. of the Boston office of Fantini & Gorga/iCap Realty Advisors offered some advice for holiday season based on trends that developed in 2003. A bong? Developers carrying high-priced suburban office land. “Avoid these office parties this holiday season. In this slumped suburban office market, they’ll be serving bread and water at their parties,” he wrote.

Due to high vacancy rates, it will likely be a long time before anyone develops a new building in the suburbs, Fantini said.

“The office market in the suburbs is in pretty disastrous shape,” he said. “Certainly people are hoping that it’s bottomed out but the jury is not in yet. The impact will be pretty nasty on owners ... Anyone who went off to develop land there is stuck with it.”

The suburbs also were home to a new phenomenon in 2003 – a tremendous range of asking rents for buildings that contain similar amenities and are often in the same neighborhood. Fantini said that a first-class space in Waltham may be marketed at $12 per square foot while another, right across the street or around the block, similar space is priced at $24 per square foot or more.

While it’s been a grim year for the overall Greater Boston commercial real estate market, some forecasters project that most of the markets at least bottomed out and in many cases exhibited signs of recovery by year-end. That was not the case in Cambridge, which the Boston office of CRESA Partners says has yet to hit rock bottom.

There are isolated examples of increased activity, said CRESA Partners principal Christopher Crooks, such as the Chickering Group’s recent lease of 55,000 square feet at One Charles Park. However, most office transactions are in the 5,000- to 10,000-square-foot range, and many are lease renewals and restructures rather than tenants new to the market.

A few larger deals materialized in the biotech market in the 40,000- to 50,000-square-foot range. Rent for lab space, a Cambridge mainstay, is averaging in the low $40 range, while lab vacancy is tracking at 18 percent. While most start-up companies tend to flock to Cambridge to be near the Massachusetts Institute of Technology, the city’s medical and research centers and universities, other well-established firms are gravitating to Route 128, according to Crooks.

“For life science companies in the market with [space] requirements this year, it appeared that for every transaction they signed in Cambridge, they signed another in Watertown or along Route 128.”

CRESA Partners reports that 2.8 million square feet of direct office and lab space is available in the Cambridge market, with an additional 1.3 million square feet in sublease space available.

“It remains a buyer’s market, so we encourage tenants to use their leverage with landlords in renegotiating their leases,” Crooks said.

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November 3, 2003 Part 2 of 2
Banker & Tradesman
Vacancy Rates Seen Shrinking in Suburbs

[Editor’s note: This is the second of a two-part series examining the high vacancy rates in the Massachusetts office market. Last week, Part One focused on the Boston leasing market, while this article looks at the suburban markets.]

While Boston’s central business district struggles with climbing vacancy rates, a trend some experts predict will worsen and linger into 2004, things are looking up in the Boston suburbs, according to some industry watchers.

Some third-quarter numbers show a reduction in vacancy rates within a variety of suburban markets, a situation some industry watchers say may translate into positive net absorption along the Interstate 495 and Route 128 West corridors during the fourth quarter.

“This would be the first time in two years or more,” said Robert Richards, president of Richards Barry Joyce & Partners in Boston.

According to Richards Barry Joyce’s third-quarter market report, direct vacancy rates in the Interstate 495 market dropped from 14.16 percent to 12.62 percent while overall vacancy decreased from 26 percent to 24.02 percent.

Richards credits a string of significant deals just now hitting the suburban market with the upswing that separates it, at least in terms of current momentum, from the current situation in the Hub. Zoll Medical in Chelmsford, with a 155,000-square-foot lease, and SynQor, with a 102,000-square-foot lease in Boxborough, represent two of the recent deals that have made a difference.

While downtown Boston landlords are expected to face climbing vacancy rates into 2004 and the Cambridge market remains stagnant, the I-495 and Route 128 markets are the brightest spots for growth.

“It’s the best news we have,” Richards said.

While some industry watchers peg the third-quarter vacancy rates for Boston’s central business district at around 13.7 percent, the same numbers in the suburbs range from 13.6 percent in the inner suburbs – Charlestown, Watertown, Allston/Brighton and Quincy – to 29.8 percent in the I-495 corridor. But while the downtown vacancy rates are expected to worsen, vacancy rates in the suburbs should decrease, experts say.

Some industry watchers attribute the difference, at least partially, to an increase in downtown construction vs. very little activity in the suburbs.

The suburban market, enclosed by Route 128 and I-495, became a booming hub for technology companies in the 1990s but when the bubble burst in 2000 and dozens of firms crumbled or drastically downsized, vacancy rates that once dipped below 5 percent suddenly jumped above 30 percent. While that rate continues to shrink, some industry watchers are hesitant to say that the suburbs are on their way to a full recovery.

“It’s still volatile and there’s still a chance for more bad news,” said Michael Frisoli, a partner with Richards Barry Joyce. “There are still a fair amount of companies that are still struggling in this market.”

Long Road Ahead
Brendan Carroll, research manager at the Boston office of Grubb & Ellis, predicts that the submarkets will experience a drop in vacancy over the next few quarters as an uptick in the economy translates into new jobs and expanding companies. But, Carroll warns, there’s a long road ahead – 12 million square feet of absorption must take place before the suburbs reach the 10 percent vacancy rate that would signal the market has fully recovered and reached equilibrium.

Barbara Elia, senior vice president at the Boston office of the Trammell Crow Co., said that most of the lease activity in the suburbs was generated by lease expirations.

Some of the recent suburban deals include two lease renewals totaling almost 40,000 square feet at Wellesley Office Park in Wellesley. The eight-building, Class A complex is owned, leased and managed by Equity Office. Merrill Lynch renewed its lease for 26,631 square feet and Northwestern Mutual Life renewed its lease for 12,470 square feet.

New Boston Fund also sold a three-story office building in Stoneham to Everest Partners for $6.25 million. The 50,648-square-foot Class A building sits on almost two acres of land off of Interstate 93.

Despite the activity in the suburbs, Robert Kasvinsky of the Boston office of Spaulding & Slye said that most of the recent deals have been lease renewals and few transactions represented new tenants and actual growth. As a result, landlords are pursuing a small pool of tenants and suburban asking rents for office space decreased by $2.40 per square, falling to levels not seen since 1997, he said in his third-quarter eReport. Kasvinsky warns that availability may increase slightly at the end of the year, when two uncommitted speculative buildings totaling 371,000 square feet will enter the market in the fourth quarter, especially if hiring remains at low levels.

“Realistically, our problem is the enormous 36 million square feet of office space available at the end of the third quarter,” Kasvinsky said about the Greater Boston office market as a whole. “We’ll need an unforeseen surge in office employment to produce nearly 11 million square feet more in net absorption to achieve an equilibrium availability rate of 13 percent, when rental rents could begin to rise. While this may occur sooner in some Boston submarkets, in Cambridge or perhaps Route 128/Mass. Pike, overall we still have a long way to go to narrow that gap.”

Here’s a quick look at the other submarkets, according to Kasvinsky’s report:

• The Cambridge market experienced positive absorption with companies moving into new lab buildings. According to Kasvinsky, 1.02 million square feet of space in new and rehabilitated buildings has been completed and is now 91 percent occupied.

• Availability in the industrial market increased 2.5 percent to 18.6 percent, but Kasvinsky says that the combination of new space and slugglish activity due to lack of job growth means that the availability rate will increase. In the meantime, rental rates will continue to slide.

• Availability in the research and development market was steady at 33.9 percent and has remained in the low 30s over the past four quarters, according to Kasvinsky.

“Statiscally, third-quarter office data improved somewhat for Boston and Cambridge but not the suburbs, as a result we will probably bounce along the bottom over the near term,” he said.

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November 26, 2003
Lab leases raise hopes
Boston Herald

A flurry of recent lab deals may signal that the hard-hit drug development and biotech real estate sector may have hit bottom after two years of bloodletting, a new report suggests.

A trio of lab deals in Cambridge and Lexington have soaked up 120,000 square feet in a market awash with half-empty biotech and drug research centers, Hub commercial real estate firm Richards Barry Joyce & Partners reports.

Meanwhile, an array of similarly sized deals for lab space in Cambridge and the suburbs is pending, notes Bob Richards, president of Richards Barry. The upturn breaks a long drought in lab space deals that has sent vacancy rates spiraling in the once-hot field.

Yet the biotech and drug lab market isn't out of the woods, with more cutbacks - and space reductions - by major biotech and pharma players offsetting recent lease deals. But industry observers say the vacancy rate for labs appears to have stabilized at about 18 percent.

``For the first time in a year you can point to three sizable commitments in the life-sciences market,'' Richards said. ``We would imagine there would be two to three significant additional deals in the next three months.''

The numbers tell the story.

Growth in biotech and drug companies drove the lab vacancy rate to the low single-digits by late 2001.

But over the past two years, the amount of vacant lab space soared more than 40 percent. The lab vacancy rate in Cambridge leaped to 18.3 percent by Sept. 30, up from 2.1 percent in the summer of 2001.

Lab rents, in turn, have plunged more than 20 percent from their 2001 peak of close to $60 a square foot, Richards Barry reports.

But that may be as bad as it gets, with the lab market stabilizing over the next year, the firm suggests.

Idenix Pharmaceuticals Inc., which leased 40,000 square feet at 60 Hampshire St., and Alnylam Pharmaceuticals Inc., which is moving into another 40,000 square feet at 300 Third St., gave a boost to the beleaguered Cambridge lab market, Richards Barry's study reports. Meanwhile, in Lexington, Critical Therapeutics Inc. took another 40,000 square at 60 Westview St., helping put a dent in a suburban lab vacancy rate of 18.4 percent.

But major industry players such as Millennium, Vertex and Transkaryotic Therapies have dumped big blocks of space onto the market in recent months, offsetting those leases.

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October 30, 2003
Biggest office lease of year is signed
The Boston Globe

Law firm renews pact at Exchange Place

By Thomas C. Palmer Jr., Globe Staff, 10/30/2003

The law firm Goodwin Procter LLP is renewing 360,000 square feet of space in Exchange Place at 53 State St., completing the largest Boston office lease signed this year.

''It's the biggest deal this year, hands down,'' said Michael J. Joyce, a partner at Richards Barry Joyce & Partners, which represented Brookfield Properties Inc., the New York developer that owns 53 State St. and 75 State St.

The second-largest leasing deal signed in Boston this year was with PricewaterhouseCoopers, which took 291,000 square feet in March at 125 High St.

The Goodwin Procter renewal comes at a time when rents are as low as they have been in a decade, vast amounts of space are available, and tenants are nervously considering whether they should wait for prices to fall more or lock in space now.

Said David I. Begelfer, CEO of the National Association of Industrial and Office Properties' Massachusetts chapter: ''Those companies that either need to renew or start to think about expanding realize this is probably the optimal time to negotiate a lease.''

The third-quarter report from real estate firm Grubb & Ellis Co. showed prime office space in Boston with a vacancy rate of about 14 percent. The average asking price for annual rents is $43.42 per square, down $1.24 from the previous quarter.

''This downturn is the opportunity -- the silver lining -- for tenants to tie in long-term occupancy at probably the best levels they've been at for at least the last five years,'' Begelfer said.

One real estate executive, who asked not to be identified, said Goodwin Procter was paying slightly more than $45 per square foot in the new deal, marginally more than before.

The current Goodwin Procter lease expires in 2006. The new one is a 10-year lease through 2016. The firm is taking the second floor and all of floors 15 through 27, keeping roughly the same footprint in the 40-story building at State and Congress streets. ''It shows a commitment to the building,'' said Joyce. ''They had a lot of options.''

Choate Hall & Stewart, a law firm located above Goodwin Procter at 53 State St., is also in the market for a renewal. Needing about 150,000 square feet, Choate Hall is considering staying or moving to the new 33 Arch St., International Place, or One Post Office Square, according to Joyce.

Brookfield Properties, traded on the New York and Toronto stock exchanges, has 47 commercial properties, with 46 million square feet, in North America. Brookfield spokeswoman Melissa Coley said that both 53 State St., with 1.1 million square feet, and 75 State St., with 767,000 square feet, are now 95 percent leased in a market that is seeing double-digit vacancy rates even downtown.

Goodwin Procter, represented in the transaction by real estate consultants McCall & Almy, has about 500 attorneys in offices in Boston, New York, New Jersey, and Washington, D.C.

Thomas C. Palmer Jr. can be reached at tpalmer@globe.com.

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Banker & Tradesman
Rise in Hub Vacancy Rates Signals Tough Year Ahead
October 27, 2003

Office Occupancy, Lease Rates Slip in Third Quarter; Shadow Space, New Construction Add to Uncertainty

[Editor’s note: This is the first of a two-part series examining the high vacancy rates in the Massachusetts office market. Part One focuses on the Boston leasing market, while Part Two, which will appear in next week’s issue of Banker & Tradesman, will look at the suburban markets.]

Boston commercial real estate researchers are predicting the start of yet another grim year in 2004 as more than 3 million square feet of newly constructed office space is set to come on line and large, unknown chunks of so-called shadow space – square footage that is leased but currently going unused – still threaten to flood the market. At least one more quarter must pass before the early signals of an improving economy begin to slowly translate into positive absorption of space and stabilized lease rates, experts say.

“It will be a similar dose of what we saw last year,” said Brendan L. Carroll, research analyst at the Boston office of Grubb & Ellis.

In Boston’s central business district, tenants left behind 431,000 square feet of office space in the third quarter of 2003, resulting in a 13.7 percent vacancy rate and a $1.24 drop in Class A lease rates to $43.42, according to Carroll’s third-quarter report.

But Carroll predicts that things will get worse before they get better – in the first two quarters of 2004, the 400,000-square-foot Manulife building now under construction in the Seaport district will join roster of facilities with available space, and at least another 708,000 square feet of new space planned in the Financial District also will be added. Carroll expects that the central business district’s vacancy rate will climb up to 16.7 percent.

“All of these projects are adding inventory but the need for space will remain flat,” he said.

Barbara Elia, senior vice president at the Boston office of the Trammell Crow Co., agrees with Carroll’s projections. While her numbers vary slightly, she said that her research treads in the same direction.

“The [Boston central business district] vacancy rate will go up more before it goes down and could easily rise to 17 percent,” she said. “But I think you have to take it with a grain of salt because, at the same time, there’s leasing activity. It could lead to an uptick.”

That’s exactly what happened in the 1980s and then again in the early 1990s. According to Cushman & Wakefield’s Boston Central Business District Office Market Trends report, the overall vacancy rate in 1980 dropped to 1.4 percent. That number climbed five years later and peaked in 1991 with a record 19.2 percent, only to drop once again throughout the late 1990s, when it hovered at about 5 percent. Last year, overall vacancy rates began climbing once again and in the first quarter of 2003 peaked at 15 percent. According to Cushman & Wakefield’s research, overall downtown vacancy has since dropped and remained steady in the second and third quarters at 14.3 percent.

“We’re getting to the bottom but we’re not there yet,” said Thomas L. Collins, senior managing director of Cushman & Wakefield. “We just added 33 Arch St. [to the space available on the Boston office market] ... and there are still companies who have more space than they need.”

Collins also said that the market has experienced more leasing activity either from tenants forced to action by lease expirations or tenants with one or two years left on their agreements seeking good deals in a market favorable to space users.

“I’m optimistic; I think most people are,” Collins said. “The economy is showing signs of a comeback. For real estate to see a really big boost we need job growth. There’s been a little bit but we need sustainable job growth, which some people expect in the first, second and third quarters of next year.”

But Carroll said that, even with job growth, a potentially large amount of shadow space could dampen company expansions. With Greater Boston’s loss of 40,000 jobs, Carroll said that unused space across the area could total as much as 12 million square feet, based on the old rule that each employee typically requires about 300 square feet of office space in which to work.

The question that remains for industry watchers and researchers is: How soon will companies be ready to expand?

Chasing Away Shadows
While vacancy rates again increased in the third quarter, Carroll said that the explosion in sublease availability, linked to the high-tech downturn, has almost disappeared. While subleased space may offer tenants discounts of up to 75 percent, such pacts often lack flexibility for the subtenant and may impose risks that can make them undesirable, according to Carroll’s report.

Space available for sublease represents 3.1 percent of total inventory in Boston, an 8.6 percent decline from the previous quarter, according to Carroll.

There’s another bright side – while the market has sunk close to the bottom, William P. Barrack, principal of Spaulding & Slye Colliers in Boston, said that the third quarter of 2003 was the first time in two-and-a-half years that the market registered positive absorption.

“I don’t think there will be any surprises for the central business district or the suburbs next year,” he said.

In a market overview to the CCIM, Robert Richards, president of Richards Barry Joyce & Partners, compiled a list of “What’s Lukewarm and What’s Not ...” Making the “Lukewarm” list in the Boston office market were lender involvement in transactions, big tenants looking to take advantage of cheaper rates and investment sales of Class B office buildings. What’s not quite so warm? According to Richards, short-term sublease space and tenant interest in Class B and C space and peripheral markets.

The interesting thing about the third-quarter numbers, Richards said, is that while direct and overall vacancy rates are up in the Financial District and Back Bay, the amount of space expected to become available in the next year decreased.

“That’s a good trend,” he said. “It appears that the worst is behind us.”

But, Richards said, current demand is driven by lease expirations, not company expansions or relocations.

“In downtown [Boston], you’re going to see some significant transactions over the next couple of quarters with users looking to lock and stabilize their real estate costs,” Richards said. “These blend-and-extend tenants are looking at consolidating [from multiple locations] and extending with their landlords.”

More lenders will also get involved as market rates slip below debt coverage and landlords need the cooperation of their lenders in securing new tenants.

For the near term, however, the Boston office market is likely to remain a bumpy ride for property owners. According to Carroll, even with flat or modest positive absorption of space, increasing vacancy rates will continue to put pressure on asking lease rates.

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September 8, 2003
RBJ&P Leasing Agent For 99 Summer in Hub
Banker & Tradesman

New Owner Tabs Richards Barry Joyce & Partners; Vacancies Low at 271,980-Square-Foot Office Tower

The owners of 99 Summer St. have chosen Richards Barry Joyce & Partners of Boston as the exclusive leasing agent for the Class A office tower in the heart of Boston’s Financial District.

The announcement comes two months after Glenborough Realty Trust of San Mateo, Calif., bought the building for $68 million from Paradigm Properties and the Carlyle Group.

The office tower holds 271,980 square feet of rentable space and is only 3 percent vacant. Michael Joyce, a partner at Richards Barry Joyce, said that while some leases will expire in 2004, a majority of tenants have already renewed. However, he said that there is 30,000 square feet of space that may become vacant in the near term and that Richards Barry Joyce is actively showing the building to prospective tenants.

Rents will likely range in the $30s per square foot, according to Joyce.

Joyce, along with Richards Barry Joyce Associate Thomas Ashe, will lead the marketing efforts for 99 Summer St.

“It’s exciting,” Joyce said. “It’s good to see a new owner in Boston, because it’s [the commercial investment market] been dominated by other [real estate investment trusts].”

The building, with a granite facade and well-known red pyramidal roof, is the first downtown Boston property for Glenborough, which holds 1.2 million square feet of space in Canton, Lexington, Marlborough, Westborough, Westford and Weymouth.

John Conley, director of leasing for Glenborough, said that Richards Barry Joyce was chosen as the exclusive agent for its first Boston property from among a short list of competitors. Conley said the four commercial real estate firms that made the list all had called Glenborough with inquiries about becoming the building’s leasing agent. Glenborough didn’t solicit any other firms.

“If others weren’t interested enough to call then we figured that they weren’t interested enough to lease the space,” Conley said.

In the end, Richards Barry Joyce was chosen over Cushman & Wakefield, Lincoln Properties and Spaulding & Slye Colliers, which handled the leasing chores under the previous ownership group.

“We felt that whoever we hired would do a pretty good job but at the end of the day, it came down to the fact that we felt very strongly about Michael Joyce,” Conley said. “We’ve done a majority of our work outside Boston with Richards Barry Joyce.”

Richards Barry Joyce has leased at least 50 percent to 60 percent of Glenborough’s Massachusetts portfolio over the past five years. Out of its 1.2 million square feet of space outside Boston, Richards Barry Joyce leased 500,000 square feet.

While Joyce and Ashe will be faced with a slow commercial real estate market presently skewed in favor of tenants, Joyce said he’s optimistic that his team will be successful in filling any vacancies that may arise at 99 Summer St.

He said that he expects the building will attract financial, law and professional service firms, all of which are likely candidates to be seeking a Financial District address.

“With One Lincoln St. next door, that shifts a lot of people down into the area,” he said.

Joyce said that the building’s amenities will also help its popularity. Aesthetically, 99 Summer St. features all the aspects of Class A office space, including a five-story atrium lobby with marble finishes, cascading office levels, plantings and skylights, wood-framed doors, glass vs. sheetrock in some offices and nine-foot ceilings.

“All the little things were done well,” Joyce said. “That’s an asset to re-leasing space.”

The building also has parking, a salon, restaurants and a coffee shop. It’s also within walking distance to Downtown Crossing, Post Office Square, Boston Common and the Boston Waterfront.

To the Core
Glenborough purchased 99 Summer St. on July 22, using the 1031 Exchange tax program, which allows a company to sell one property and roll the tax-deferred profits into another purchase. The Summer Street building fit perfectly for Glenborough because it was selling a Denver property for about the same price, $68 million. Glenborough had also purchased another property from one of 99 Summer St.’s previous owners, the Carlyle Group.

Glenborough is looking to further expand its downtown Boston presence. Conley said that, over the next three to five years, the trust will be selling its properties in non-core markets and expanding holdings in seven of its premium markets, including Boston.

Glenborough is focusing on multi-tenant, Class A properties in the $25 million to $75 million range. Conley said that one of the attractive assets of 99 Summer St. was that it had 40 tenants, meaning that one vacancy wouldn’t put a damper on the entire building’s revenue.

“A lot of it will depend on our ability to find buyers for these other buildings,” Conley said of future investments in the Hub. “There’s no set timetable.”

But Conley said that Glenborough is definitely keeping its eyes open for opportunities.

Glenborough’s national portfolio features 67 properties with a total of 11 million square feet of space. The company’s core markets include Washington, D.C., Southern California, New Jersey, Boston, Northern California, Chicago and Denver.

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August 11, 2003
Synqor growth lease among recent largest
Boston Business Journal

BOXBOROUGH -- In one of the largest suburban leases in some time representing pure growth, Synqor Inc. has signed a 10-year lease that doubles the amount of space the electronics-manufacturing company currently occupies.

The company, which is currently operating in a total of 50,000 square feet in two buildings in Hudson and one in Marlborough, has leased 102,619 square feet of office, research and development space at 155 Swanson Road in Boxborough.

The rent is in the single digits, triple net, which means Synqor pays the building's taxes, maintenance and utilities, said John Lashar, a partner at Richards Barry Joyce & Partners LLC, the Boston-based firm that brokered the deal.

Synqor had been searching for space the last two years, said Lashar, who brokered the deal with Brian McKenzie, also a partner at Richards Barry Joyce.

Waiting saved the firm a significant amount of money, given that Synqor was finding asking rates in the $12.50- to $15.50-a-square-foot range, triple net, Lashar said.

"It was really a game of patience," he said. "We kept feeling the market was going to deteriorate, which would produce more opportunities and better economics, both of which happened."

Newton-based National Development bought 155 and 159 Swanson Road in January from Setra Systems Inc., which leased back the entire 102,619 square feet at 159 Swanson Road. Having Setra in place allowed National Development to offer aggressive rental rates to Synqor, said Jerome A. Kyllingstad, vice president and director of acquisitions for National Development.

"The leaseback mitigated a lot of the market risk," Kyllingstad said. "It was an attractive rate to provide an incentive to take the whole building."

Synqor will begin moving into the building in November after more than $1 million in tenant improvement work is done. The company will end up using about 30 percent of the space as offices and the rest for research and development. The space also allows for some growth in the two-story brick building.

The deal is probably the largest direct lease done in the Interstate 495 West or North markets in the last couple of years, Lashar said. There are some tenants seeking large blocks of office space in the I-495 market, he said, but it's too early to tell if any of those will translate into transactions.

"It remains to be seen what lands and what doesn't land, but the activity is certainly a lot better than it was a year ago," Lashar said.

Philip DeSimone, vice president at Spaulding and Slye LLC, a Boston-based real estate firm, said the larger tenants searching for space in the I-495 market, however, still have significant time remaining on their existing leases.

"It's not like they have leases expiring in three months," he said. "They're taking their time, they're going out into the market early."

Asking office rents have been all over the board, ranging from the low teens per square foot to the low $20-a-square-foot range.

"That's a big spread," DeSimone said.

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August 1 , 2003
SCP Re-Ups for 38,979 SF
GlobeSt.com

HOPKINTON, MA-SCP Pool Corp. signs a lease for 38,979 sf at 12 Parkwood Dr. located in Elmwood Park. The company, a wholesale distributor of swimming pool supplies and related equipment, renewed its lease for five years and uses the space as its service center. Lease rates for this deal were not available, but average asking rents for flex space in Hopkinton are about $9 per sf.

John Lashar, Brian McKenzie and Michael Frisoli, partners at Richards Barry Joyce & Partners working with David Wamester and Lori Cronin, represented property owner Boston Capital Institutional Advisors in the transaction, while CB Richard Ellis represented SCP Pool. The lease is for a single story of flex/warehouse space. This building is one of four that BCIA owns in the park.

Lashar emphasizes that the "higher-end image" and immediate highway access of Elmwood Park was appealing to the tenant. "It is clear," he notes, "that economics were only a small part of the equation to remain at the park."

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July 03, 2003
Goulston & Storrs Re-ups for 99,749-SF Building
GlobeSt.com

BOSTON-Goulston & Storrs has signed a ten-year lease renewal for the entire 99,749 sf building at 400 Atlantic Ave. John P. Barry and Michael J. Joyce, principals at Richards Barry Joyce & Partners represented property owner Atlantic Avenue Limited Partnership in the transaction, while Andy Hoar, managing co-partner at C.B. Richard Ellis/Whittier Partners, represented Goulston & Storrs. Lease rates for this deal were not available, but asking rents in this area according to Codman Co.'s most recent statistics are about $42 per sf.

Robert S. Gatof, president and COO at Northland Investment Corp., a partner of Atlantic Avenue, says that Boston is a key market for Northland, a privately held real estate investment, management and development company that owns more than 13 million sf of real estate, with major concentrations in New England and along the southern tier of the US.

Douglas M. Husid, co-managing director at Goulston & Storrs, notes that the firm had many market alternatives to choose from, but chose to stay because they were pleased with the facilities and management at the building. "400 Atlantic Ave., with its Class A amenities, waterfront location and unique architecture has become part of the firm's culture.”

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June 30, 2003
Cambridge Office, Lab Market Slips Through First Half of Year
Bankers & Tradesman

The Cambridge office and laboratory markets have both witnessed a sluggish first half of 2003, with vacancy rates in both markets on the increase. This environment is not expected to improve in the near-term for either market, though the laboratory market will do so sooner than the office market.

While the Cambridge office market can expect a fairly long recovery period, the strength and appeal of the Cambridge laboratory market will bring it back to the sub-5 percent vacancy rates the city has historically enjoyed.

At the mid-point of the year, the 13 million-square-foot Cambridge office market continues to experience escalating vacancy, reduced activity levels and declining rental rates. Given the economic environment, activity has been, at best, spotty in 2003. Many tenants are taking longer to make decisions and consequently transaction volume has slowed.

There are some bright spots, however; Cambridge has emerged as a price alternative to Greater Boston with some of the lowest priced sublease space in the market. The tenant activity, traditionally driven by the high-tech companies that prefer an urban environment, is now more diversified and includes firms based outside of Cambridge that are looking for cost-effective office space solutions.

Overall vacancy in the Cambridge market as of mid-year 2003 is 16.9 percent compared to 12.7 percent at year end 2002. Direct vacancy accounts for 11.5 percent and sublet vacancy accounts for 5.5 percent of the mid-year vacancy.

The availability rate in Cambridge has also increased, from 16.9 percent at the end of 2002 to 24.3 percent, in the first half of the year. The 7.2 million-square-foot East Cambridge submarket currently has a vacancy rate of 18.8 percent and an availability rate of 26.9 percent. The 3.5 million-square-foot mid-Cambridge office market has a vacancy rate of 9.5 percent and an availability rate of 14 percent. And the 2.2 million-square-foot West Cambridge market has a vacancy rate of 22.5 percent and an availability rate of 32 percent. All submarkets have experienced negative net absorption in 2003.

While leasing activity has picked up in the first half of 2003, the decision-making process is taking much longer and many of the tenants considering their options have yet to make a commitment. Richards Barry Joyce is currently tracking more than 500,000 square feet of office requirements. Many of those groups are looking for 5,000 to 10,000 square feet, and their options are somewhat more limited than the “larger” requirements of 15,000 to 30,000 square feet, who have a multitude of choices.

In this type of market, all tenants are demanding aggressive rental rates and significant concession packages, such as free rent, phased-in occupancies, large tenant improvement allowances, and assumption of lease obligations in other buildings. As a result, tenants with lease expirations in 2003 and 2004 are out early looking to trade up to better quality, more efficient space.

The prime Class A buildings continue to be the most active and the owners of those buildings have been forced to compete with the aggressively priced subleases. Many potential sublessors, such as CSG Systems, Sapient, ATG, ZDNet, have recently aggressively lowered their asking rents. As a result, asking rents range widely from $9 per square foot to the upper $20s per square foot depending on the strength of sublessor, quality of the building, and the length of available term.

The Cambridge office market is continuing to correct and can expect a long recovery period due to the vast availability of space and shallow demand. Cambridge will continue to struggle with high vacancy and limited velocity for the second half of 2003. The expected absorption of the sublease space in Cambridge would be an encouraging sign as it would help stabilize the overall vacancy rate and rental rates by the end of 2004.

Cambridge has long been considered the premier laboratory market in Massachusetts due to the presence of MIT and Harvard University. Biotechnology companies have traditionally been drawn to Cambridge because of its reputation as a research and discovery hub. Companies cite the urban environment, accessibility to former MIT and Harvard professors, and the established clusters of biotechnology companies with their desire to locate in Cambridge.

The commercial laboratory market in Cambridge is comprised of 4.9 million square feet of existing laboratory buildings. An additional 1.2 million square feet is currently being constructed or converted to laboratory space. The overall vacancy rate for existing laboratory space is currently 12.9 percent. Direct vacancy is 8.8 percent and sublet vacancy is 3.6 percent. The vacancy rate for laboratory space in Cambridge has increased significantly in the past six months.

Vacancy has increased due to a pickup in the sublease market as well as the completion of some new laboratory projects. Rents for prime, direct laboratory space currently range in the $40s, triple net, with $80 to $100 per-square-foot tenant improvement allowances. Sublease space commands much less due to the increased inventory ranging in the upper $20s to mid-$40s per-square-foot, triple net, on an as-is basis.

The current increase in vacancy can be directly linked to the health and condition of the economy and the capital markets. Many biotechnology firms have struggled in the past few quarters and have begun to sublease existing space.

The demand side of the Cambridge laboratory market has improved in the first six months of 2003, because many new firms received an influx of venture funding in the past few months. Richards Barry Joyce & Partners is currently tracking more than 400,000 square feet of new laboratory demand.

There have been very few transactions recently, but this will hopefully change as the companies currently evaluating their options commit to buildings. We expect in the short-term that the downward pressure on the laboratory rental rates will continue and additional opportunities, both direct and sublet, will become available.

In the long-term the Cambridge laboratory market will return to its historical vacancy level of less than 5 percent. The Cambridge market has proven to be one of the premier laboratory markets in the country and appeals to both fledgling firms as well as established biotechnology giants.

The success of this market will continue to be driven by the consistent emergence of innovative science evolving from the major universities and medical research facilities in the Cambridge market.

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June 30, 2003
Despite Several Major Leases, Markets Plagued by Vacancies
Bankers & Tradesman

The atmosphere for commercial real estate did appear to improve slightly during the first six months of 2003, but mid-year figures released by Richards Barry Joyce & Partners indicate that the industry still faces a long road to recovery. While several significant office and biotech leases have been inked of late, RBJ&P’s overview nonetheless revealed an increase in vacancies in most markets, and continued problems for the struggling office sector, including an alarming 2.4 million square feet of negative absorption in the suburbs.

“We’re all looking for positive signs, but it’s hard to identify what’s real and what’s not with respect to activity and true growth,” RBJ&P principal John Barry told Banker & Tradesman last week. “It has been a good six months ... but there are still a lot of [obstacles] to work through.”

Focusing on the downtown market, Barry said he is seeing increased numbers of tenants exploring the market, but added that many are companies with lease expirations running out to 2007 or 2008. Whereas such firms would normally launch their search within 12 to 24 months of the expiration date, Barry said the dour climate has forward-thinking bargain hunters combing the market for desperate landlords.

“It’s hard to be a perfect market-timer,” said Barry, explaining that some landlords will be more motivated than others to accommodate a long-range requirement. Most of the deals which were completed in the first half of 2003 appeared to involve short-term needs, such as Bain & Co. committing to 131 Dartmouth St. for 115,000 square feet.

RBJ&P itself represented Northland Investment Co. in its renewal of Goulston & Storrs to 100,000 square feet at 400 Atlantic Ave. The well-known law firm had done an extensive market search before deciding to stay put, although it did also lease a substantial portion of space at Rowes Wharf, located adjacent to 400 Atlantic Ave.

Even with the Bain & Goulston deals, Boston still saw 771,000 square feet of negative absorption in the first half of the year. On the plus side, that number trickled to less than 50,000 square feet in the red during the second quarter. RBJ&P places the Boston office vacancy rate at 10.4 percent and the availability rate at 17.4 percent. The biggest hope now is that the erosion is finally nearing an end, said Barry, expressing a sense that Boston’s office market is now hitting the bottom of the cycle.

‘Land of Opportunity’
Across the river in Cambridge, biotech leasing fared better than the office sector, which continued to falter after Cambridge had begun the decade as one of the country’s top markets. From virtually no space three years ago, the Cambridge office vacancy rate is now an alarming 16.9 percent, while the availability rate has soared to 24.2 percent. There has been 287,000 square feet of negative absorption to date in Cambridge this year, according to RBJ&P, the bulk of which has occurred in the second quarter.

“It feels like the market is trying to turn around and correct itself, but that is not being borne out in the numbers yet,” said RBJ&P President Robert B. Richards Jr., a specialist on the Cambridge market. “Right now, it looks like the recovery is not going to come that quickly.”

As bad as Cambridge has been, however, the worst pain at present continues to lie in suburban Boston, where RBJ&P estimates that direct vacancy has ballooned to 22.7 percent and the availability rate to an astounding 29.1 percent. That compares to 17.8 percent vacancy and 26.8 percent availability levels after the first quarter of 2003.

Among the major trends going forward for suburban Boston, according to RBJ&P, will be an upswing by corporations to acquire buildings, as well as an increase in tenant concessions by landlords. Motivated building owners will court tenants with lease expirations 12 to 18 months out longer than normal, RBJ&P is forecasting, while rent corrections also should lead tenants to consummate lease agreements after being on the sidelines for much of the past year.

In Cambridge, Richards said sublessors are continuing to drive the market, with short-term space available for as little as $9 per square foot. “Cambridge is a land of opportunity right now,” said Richards, a situation that could prompt suburban office and laboratory users to consider a reverse migration back into the city.

For all of the recent problems in the office and life sciences markets, RBJ&P itself has had a solid six months, said Richards. Along with the Goulston & Storrs assignment, RBJ&P handled the largest Cambridge deal of the year in the renewal of Tiax at the Bulfinch Cos. Cambridge Discovery Park, as well as the largest lease in the Interstate 495 North corridor. In the latter instance, RBJ&P principals John Wilson and Brian McKenzie brokered a 155,000-square-foot sublease in Chelmsford by Zoll Medical.

RBJ&P also last week celebrated its second anniversary in business. Even with the market problems during the past 24 months, the company had a strong 2002 and is already three-quarters of the way in matching its revenues of last year, Richards said.

“It has been a fantastic six months for us,” Richards said. “The market is down, but we’re clearly happy with the activity and we have a lot of interesting things in the pipeline for the rest of the year.”

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Jun 11, 2003
Communications Test Design Renews for 37,200 SF
GlobeSt.com

WESTBOROUGH, MA-Communications Test Design Inc. signed a lease renewal agreement with Glenborough Realty Trust Inc. for 37,200 sf in the Flanders Industrial Park at 133 Flanders Rd. Lease rates for this deal were not released, but according to Trammel Crow Co. average asking rents for office space in Westborough as of this past April is $20 per sf, down slightly from $21 per sf in January. The area's overall available space has gone up in that time period, from 26% in January to 29% in April.

John Lashar and Brian McKenzie, partners at Richards Barry Joyce & Partners, structured the lease. John Conley, director of leasing for Glenborough, represented Glenborough Realty Trust.

Jim Boisvert, branch manager for CTDI, which provides service solutions to the telecommunications industry, notes that the park is a "great location" for the company's New England regional operations, mainly due to its centrality. The company is an anchor tenant in the park, which is located near Routes 495 and 9. Boisvert adds that the new lease enabled CTDI to reconfigure and improve its space, reduce its expenses and maintain the flexibility it needs for growth.

"We structured the lease to enable CTDI to take advantage of the real estate market and improve its facility with extensive renovations," says Lashar. "The final deal structure enabled CTDI to stay in their current location with no disruption to their business, while also providing a win for Glenborough."

Lease rates for this deal were not released, but according to Trammel Crow Co. average asking rents for office space in Westborough as of this past April is $20 per sf, down slightly from $21 per sf in January. The area's overall available space has gone up in that time period, from 26% in January to 29% in April.

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June 6, 2003
Smaller brokerages must tout service, expertise to survive
Consolidation and expansion changes map of commercial industry
Boston Business Journal

National real estate firms seem to be getting big attention these days, as mergers and acquisitions move more of the big players into the Boston market.

But the small firm of Richards Barry Joyce & Partners LLC is the one making a big splash.

Among other successes, the Boston-based company recently beat out nine other firms for the contract to handle One Beacon Insurance Group's national portfolio of 1.5 million square feet.

RBJ's single-office operation certainly didn't hinder its ability to compete.

"The chaos, uncertainty and turmoil in the larger, more established firms have created opportunities for some of the newer groups like us to gain market share," said firm president Bob Richards. Richards started the firm in 2001 after he departed from Trammell Crowe Co. with three of the firm's other top brokers in tow. The firm also signed on partners from CB Richard Ellis/Whittier Partners and Insignia ESG Inc.

Similar to a number of other professional sectors, the real estate industry has seen a fair amount of consolidation and expansion. The resulting larger brokerage houses don't intimidate smaller firms, though. Commercial real estate agents, real estate experts and industry leaders all agreed that local independent firms remain an important part of the market. However, they say, these smaller firms must differentiate themselves from larger companies by delivering more personalized service, becoming recognized experts in their market and developing specialties.

"Like politics, real estate is local," said John Rattigan, a partner at Palmer & Dodge LLP in Boston and chairman of the law firm's real estate department. "Sophisticated owners understand that, and sophisticated owners will seek out the brokers with the best local knowledge." And that broker may or may not be in the large national firm.

That's not to suggest that national firms don't have some appeal.

"Everybody's feeling pressure because of the downturn in the economy, and commission revenue is way down because transaction revenue is way down. So brokers have done one primary thing, and that's to look for an edge," Rattigan said. "Many of the brokers are looking for an edge by associating with a national firm. But with all the changes this year with brokers moving from one house to another, it's too early to tell if a broker who moved to a national firm will have an edge."

Rattigan pointed to areas where a national firm might have a competitive advantage. For example, a sales brokerage firm with offices in multiple cities might retain current clients looking to buy prime real estate in markets in those cities.

But smaller, independent firms don't find that they're at any disadvantage.

"(Real estate) is a local business, and what matters most is market expertise and relationships. I think you can provide that in a regional company as well as in a national one," said Lisa Campoli, who in early April left the national firm Insignia/ESG Inc. to become executive vice president of Meredith & Grew Inc. of Boston. "I think the ultimate question is, Can you service the customer? And I think you can through either platform."

Campoli said there's room in the marketplace for national players, midsize regional companies and small boutique firms. "Our clients want choice," she said.

But she also acknowledged that smaller firms do have advantages over their national colleagues -- in particular, the attention that can be paid to clients. Corporate commitment to an account is important, she said, and senior-level attention is more often found at smaller real estate companies.

Stephen I. Burr, a commercial real estate lawyer and managing shareholder of the Boston office of Miami-based law firm Greenberg Traurig LLP, agreed that small firms can thrive despite the growing numbers of national real estate companies.

"You will find high-quality smaller brokerage operations in cities like Boston that have a significant amount of commercial real estate in the market," he said.

They often compete by focusing their services, he said. First, they decide whether to specialize in representing tenants or property owners. Then they focus on specific markets, such as research and development space in Cambridge or biotech facilities along Interstate 495.

"People who do it well, but who prefer to be in a smaller office, will still do well," Burr said.

"But the brokerage firms that are going to have problems and who probably won't survive are the ones that are medium-size firms that are really committed to just one market who try to perform a broad range of services to a broad range of clients."

Those firms are under the most pressure and will either become part of national firms or just break up, he said.

Others, though, don't see that path predetermined. Campoli said she believes as the market evolves, sophisticated firms of all sizes can do well.

"You'll see the creation of newer boutique firms, you'll see firms get purchased and you'll see spinoffs," she said. "Consolidation is a trend, but it's better to think of it as ebb and flow rather than an eventuality."

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May 2, 2003
Richards Barry Joyce wins national contract
Boston Business Journal

Boston-based Richards Barry Joyce & Partners LLC recently won a national competition among 10 firms for the right to handle Boston-based One Beacon Insurance Group's national portfolio of 1.5 million square feet.

A contract of national scope could be a big boost for RBJ, particularly at a time when some of the largest national and local players just keep getting bigger. Company president Bob Richards said his firm won despite lacking a national presence or affiliation.

"I can't think of an assignment we would have rather won," Richards said. "It's very significant for us."

Richards described it as "a very active" portfolio, with many of the properties in Maine, Massachusetts, New Hampshire and New Jersey, and others scattered about California, Connecticut, New York, Oklahoma, Pennsylvania and Texas.

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April 28, 2003
Accounting Rules Tighten Around Expanding Vacant Market Space
Banker & Tradesman

In today’s economic climate, financial leaders across America have much to consider when right-sizing their real estate portfolios. One critical factor is the ever changing rules related to accounting for real estate dispositions.

Basic financial choices and their consequences need to be continually reviewed: Are their leases operating leases or capital leases? Do they currently own the buildings they’re in? Are they looking for reduced expenses on the P&L or a near-term reduction in cash burn?

Knowing whether they should sublease, terminate or even abandon space, directly relates to knowing how these actions are affected by current accounting guidance and how that guidance effects their financial reporting.

In recent years, Generally Accepted Accounting Principles have come to play an increasingly important role in corporate real estate strategy. As FAS 13, Accounting for Leases, came into focus with relation to lease terminations and dispositions, various accounting rules and regulations appeared. This led to the latest guidance on lease accounting for space dispositions titled FAS 146 or Accounting for the Costs Associated with Exit or Disposal Activities.

The impact of accounting changes involving vacant space in the Massachusetts market can be profound. According to Richards Barry Joyce & Partners, overall office vacancy in Eastern Massachusetts reached 15 percent in the first quarter of 2003. Nearly 28 percent – over 7 million square feet – of this vacant space is sublease space. These numbers do not include “shadow” space, defined as excess space within a corporate portfolio that is either being held for future use or no longer needed, but not put on the market for sublease.

A fourth quarter 2002 survey of real estate managers by CoreNet Global stated that nearly 30 percent of respondents believed that 10 to 30 percent of their portfolios consisted of shadow space. Applying that ratio to the overall Eastern Massachusetts market would result in an additional 5 million to 30 million square feet of vacant space in an already saturated market.

In another alarming statistic, 56 percent of respondents from the same CoreNet survey indicate they are planning to decrease the amount of office space kept in their portfolios.

Over the past two years, skyrocketing vacancy rates translated into big write-offs in corporate America. In 2001, Merrill Lynch took nearly $300 million in facilities-related charges, while Sun Microsystems wrote off more than $350 million and Inktomi $75 million in 2002. While these and many companies took restructuring charges at a time when accounting rules were less stringent and so called “one-time events” were in vogue throughout corporate America, others avoided charges by taking a liberal interpretation of the then current accounting guidance.

The EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit, also gave guidance to executives by declaring that charges related to exit or disposal activities did not need to be taken until a commitment to an exit plan had been made. With the release of FAS 146, being effective Dec. 31, 2002, those companies who formerly avoided charges are now asked to reevaluate and to "recognize and measure" costs at fair value on the earlier of a lease termination or a "cease-use” date. To calculate the write-off for a block of vacant space, take the present value of the remaining lease liability and deduct the present value of the likely sublease income from a theoretical sublease done at current market rates.

In Practice
Even with more stringent guidance in place, many of those in corporate finance and public accounting have found that these new rules have some leeway in their interpretation. Companies have been known to leave a handful of employees at largely vacant locations to make it appear as if the space is currently being used.

While others claim that the likelihood that they may reoccupy vacant space prevents them from taking a charge. This “shadow” space is not put on the market for sublease due to a fear that current standards require such space to be written off once it is marketed. In fact some large suburban Massachusetts tenants have so much shadow space, they can control market pricing by deciding how much or how little of their vacancy to put on the market. It is hard to imagine the difficulty any such company would encounter in calculating a write-off when fair market rates might be severely reduced should they put all of their shadow space on the market.

In light of recent accounting scandals throughout corporate America, a consistent liberal interpretation of accounting rules has become worrisome to those who fear a tightening or a reigning in of these rules by organizations such as the Financial Accounting Standards Board and the SEC. Putting a limit on how management currently construes FAS 146 could have a material effect on many companies’ quarterly and annual financial filings. In Eastern Massachusetts alone, potential write-offs for unused space could total more than $1 billion. New accounting guidance forcing those write-offs to the forefront would cause numerous struggling companies to miss already reduced earnings guidance and send recently recovering stock prices back on a downward spiral.

After more then two years of corporate restructuring, it’s possible that many companies may have missed a window where one-time charges were accepted by Wall Street with little to no effect on shareholder value. If this window closes, those spaces now appearing to be available for sublease may not be available at all. These corporations would no longer be able to take a disposition-related charge without serious financial ramifications to shareholders.

Some larger corporations will choose to avoid facilities-related restructurings rather than take a one-time hit that would cause them to miss earnings. They would be making a conscious decision to maintain higher than necessary ongoing facility costs, a choice that current accounting guidance apparently does not prevent them from making.

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April 18, 2003
Connecticut Firm to Buy Financial District Building
Bankers & Tradesman

Cornerstone Purchasing Hub’s 3 Post Office Square; Archon Atlantic’s Price Could Be as High as $35M

Demonstrating long-range confidence in the Hub’s battered economy, a Connecticut real estate firm has agreed to buy Boston’s 3 Post Office Square, a well-located office building situated in the heart of the city’s Financial District. According to industry sources, Cornerstone Real Estate Advisors is purchasing the structure from Archon Atlantic, with price estimates ranging between $31 million and $35 million.

Catherine F. Daume, a Spaulding & Slye Colliers principal who is brokering the transaction with colleague Michael G. Smith, declined to discuss details of the deal. Daume did, however, confirm that a buyer has been selected. “The money is hard, and we’re inching our way to the end line,” Daume told Banker & Tradesman last week. Calls to Cornerstone and Archon Atlantic officials were not returned by press deadline, but several sources insisted the advisory firm is the suitor for the building.

Daume said there was considerable interest in 3 Post Office Square – a pair of office buildings totaling 140,000 square feet that were renovated into Class A property space several years ago by Wellsford Properties Trust – indicating that investors have not been deterred by the city’s recent troubles in leasing office space. Spaulding & Slye recently reported that Boston suffered its ninth straight quarter of negative net absorption of office space in the first three months of 2003, while Richards Barry Joyce & Partners estimates that Boston’s overall office vacancy rate is now at 11.1 percent. The Financial District is slightly better, posting a 10.5 percent vacancy rate for the quarter, but that number is up substantially from when the office market peaked in mid-2000.

Although conditions have worsened dramatically of late, landlord Michael Grill of Fairlane Properties insists Boston has not reached a crisis stage by any means. “The market is still pretty strong downtown,” Grill said. “Rents are starting to hold up, which [suggests] there won’t be price declines anywhere near what we saw in the early 1990s.”

‘Time to Sell’

Grill also is upbeat about the prospect that his own company has placed its three Financial District office properties on the market for sale. Daume and Spaulding & Slye broker Scott J. Jamieson have been retained by Fairlane to sell the package, which has an overall asking price of $26 million. Totaling 134,000 square feet, the buildings are 15 and 33 Broad St. and the nearby 112 Water St.

“We just felt it was time,” said Grill, whose firm purchased 112 Water St. in July 1997, followed by 33 Broad St. in October of that year and 15 Broad St. in May 1999. Fairlane has conducted an aggressive renovation and leasing program at the buildings under its stewardship, and has also helped enliven Broad Street with the addition of new retail space such as a Banknorth branch.

Investors “want stabilized rent rolls in the Financial District, so we thought it would be a good time to sell,” said Grill, explaining that the leasing strategy focused on old-line companies and professional practitioners rather than pursuing the bevy of high-tech tenants who briefly dominated the Boston office scene in the late 1990s and early 2000.

Daume said she is optimistic about the prospects for selling the package, although she added that the buildings can be sold separately as well. Foreign buyers, pension funds and even local opportunity investors are all likely candidates for the buildings, said Daume, who cited their location and the tenant roster as top drawing cards.

“I feel very confident,” Daume said of the new marketing campaign, which began in earnest last week. “They are solid assets, well-positioned for the market, and Michael has done a great job with them.”

A former Boston Redevelopment Authority official who also owns 98 North Washington St. in the North Station submarket, Grill said the disposition plan does not mean he is getting out of real estate investment. “We’ll be back in the market buying properties where we can add value,” he said, including seeking out potential opportunities in the suburbs. The key, he said, is to ensure that any risk undertaken can be managed sufficiently to ride out the current downturn, with most observers anticipating that the suburbs will be hard-pressed to recover anytime before late in 2004.

As for 3 Post Office Square, some sources expressed surprise that Archon Atlantic was apparently able to garner a price north of $200 per square foot given that the building does have substantial vacancy. Originally renovated by W/P Commercial before it merged with the Archon Group, 3 Post Office Square had convinced several high-tech tenants to lease space in the building until the investor group became skittish about over-committing to that sector. Spaulding & Slye subsequently pursued more traditional tenants, but the effort ran head on into the market downturn that has gripped the city during the past 18 months.

“It was probably the right strategy [to eschew the high-tech industry], but the market just didn’t hold up long enough for the strategy to work,” said one Boston leasing broker familiar with W/P’s program. “It’s an excellent building that just had very poor timing.”

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April 18, 2003
Boston-Area Flex Properties Starting to Lose Some Muscle
Bankers & Tradesman

It proved a resilient product type initially, but Greater Boston’s research-and-development sector has seemingly hit a wall in recent months, with so-called flex buildings experiencing a sharp increase in vacancies and the need for such product uncertain over the near term.

“It’s a tough market right now,” Richards Barry Joyce & Partners Research Director Katie Kelly acknowledged last week. “There just hasn’t been a lot of activity out there, and it doesn’t look like it’s going to get better anytime soon.”

RBJ&P currently lists 25.3 million square feet of the 183 million-square-foot suburban real estate market as flex product, compared to 91.4 million square feet of office space and 58.1 million square feet of industrial supply. While it may contain the least amount of space of the top three suburban product types, flex buildings sport the highest vacancy at present, with RBJ&P estimating the first quarter 2003 vacancy for that market at 19.3 percent, and an availability rate of 30.4 percent. That compares to vacancy/availability rates of 17.8 percent and 26.8 percent for office space and 12.9 percent and 16.4 percent for industrial buildings.

‘A Gray Area’
Kelly said the biggest obstacle facing flex buildings has been a lack of demand among users, rather than an oversupply of inventory. Dependent upon the high-technology industry for most of their business in the late 1990s, flex buildings had begun to attract attention among life sciences companies until that market also began to experience a slowdown late last year. Properties that are especially vulnerable to the downturn are second-generation buildings in off locations, said Kelly, who is nonetheless bullish that the flex market will recover quickly once the economy rebounds.

One issue that has always made it difficult to track flex space is the vague concept of what an R&D building entails. Broker Mark Stevens explained that such buildings straddle the office and industrial markets, often depending on such physical characteristics as ceiling height, the number of floors and the amount of office space built out. Unlike a warehouse/distribution building, which today are being constructed with ceilings as high as 30 feet, Stevens said the typical R&D property is usually one or two stories tall, with ceilings 16 feet or less. A warehouse building usually has an office component of no more than 10 percent or 20 percent, compared to 30 percent or 40 percent office build-out for an R&D structure.

“It can be kind of a gray area,” said Stevens. “But flexibility is important.” In some instances, he said, there might be tailboard loading docks, as well as an area for light manufacturing or assembly. Windows are an element that also can separate an R&D building from an industrial property. In any event, Stevens agreed that flex space has entered a difficult stretch, especially in technology-heavy areas such as Route 3 and Route 495 North and West. “It’s been hit really hard,” he said.

According to RBJ&P, the hardest-hit market for flex space has been Route 128 West, which currently has an availability rate of 45.8 percent. Route 495 North is at 35.5 percent, while Route 495 West has an availability level of 38.3 percent.

Spaulding & Slye Colliers is reporting similar trends, estimating that the availability rate for flex space in suburban Boston is now at 30.9 percent overall, up from 22.8 percent after the first quarter of 2002. The flex market had negative absorption of 4.9 million square feet last year, and has started off in the red in 2003 as well, with a first-quarter negative absorption of 199,000 square feet. Average per-square-foot rental rates have receded by nearly a dollar, from $14.35 last year to $13.39 at the end of the first quarter of 2003, according to Spaulding & Slye.

As a result, few owners are testing the investment waters for flex buildings, said James M. Belli, a principal with The Codman Co. “It’s very difficult to get financing right now, and that is making owners sensitive about putting anything on the market,” he said. Codman is helping some flex building owners evaluate what they might garner in a sale, Belli said, but thus far, it appears many are willing to sit on the sidelines.

“There is product out there for sale, but I don’t think there are a lot of buyers focused on that market,” Stevens added. “It’s kind of tough to price it right now.”

Codman Co. principal Thomas Powers is presently helping the owner of an industrial building in Canton determine whether the 80,000-square-foot structure can be repositioned as an R&D use. “We’ll take any and all comers,” Powers said last week, explaining the current owner only has a need for a portion of the two-story facility. One issue is whether to add windows to the building at 780 Dedham St. to attract a higher-end user, Powers said, while the property’s limited parking also has to be addressed.

As for existing product, one of the largest flex sales currently taking place is the Archon Group’s disposition of four R&D properties in Marlborough and Hopkinton. Gary J. Lemire of CB Richard Ellis/Whittier Partners is brokering the 350,000-square-foot portfolio, which has already found a buyer in a New York company and is in the final stages of closing. As Belli suggested, Lemire said there are only a few flex buildings on the trading block, helping garner interest in those properties that are being offered for sale. The portfolio includes 257 and 259 Cedar Hill St. in Marlborough and 25 and 45 South St. in Hopkinton. Lemire declined to discuss the buyer or the sales price until the deal is finalized.

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April 7, 2003
Office Market ‘Troubling’ in First Quarter
Bankers & Tradesman

It’s still chill.

Mimicking the frigid, drippy spring foisting itself upon the Bay State this year, Greater Boston’s office sector saw little indication of a warm-up in the first quarter of 2003, with industry observers reporting that the few deals of note were chilled by continued corporate downsizing and eroding market fundamentals.

“We haven’t had a tremendous leap of improvement,” Richards Barry Joyce & Partners Research Director Katie Kelley said last week. “There has been an increase in activity, but transactions are taking a long time to get finalized.”

RBJ&P and Spaulding & Slye Colliers both posted slight increases in Boston’s office vacancy rates compared with the end of 2002, while Trammell Crow Co. reported that some suburban vacancy rates are now above 45 percent. Between office and flex properties, Greater Boston’s suburbs have 35 million square feet of vacant space at present, according to Trammell Crow Co. principal Brian T. Hines. “That’s a rather troubling number,” Hines said.

Teaming up with colleague Michael Dalton, Hines brokered one of the few significant leases of the first quarter, representing Zoll Medical in its sublease of 160,000 square feet in Chelmsford from Tellabs. Along with a 65,000-square-foot sublease by Siemens at the adjacent Mill Road property, the late-quarter Zoll agreement filled a major sublease hole left by Tellabs, but Kelley said it did little to heal the problems facing the Interstate 495 North market where Chelmsford is located.

“We don’t see that market improving significantly in the near term,” concurred RBJ&P President Robert B. Richards Jr., whose firm represented Tellabs in both negotiations. Fringe markets are suffering from a flight to quality, as well as a flight to value, said Richards, with Boston and East Cambridge likely to see the greatest benefit from that trend.

Notwithstanding the lingering Cisco Systems sublease space waiting to bloat the I-495 North inventory further, the flood of sublease offerings hitting the streets has begun to slow, said Kelley, although Richards added that several life sciences companies are bringing research space out to the market, reducing the likelihood that life sciences will help fill the void from office users, as had been the case in recent months. BioTransplant is subleasing space in Charlestown, while TKT is said to be placing 50,000 square feet up for sublease at 195 Albancy St. in Cambridge and 25,000 square feet at 141 Portland St.

Cambridge overall went backward a bit in the first quarter, with the year-end vacancy rate of 12.6 percent rising to 14 percent, but that was still better than the 15.8 percent posted at the end of the first quarter of 2002. “The market is sputtering along,” Richards said of Cambridge, with the only major six-figure deal of the quarter occurring at Discovery Park in the city’s Alewife district. In that agreement, Tiax took 125,000 square feet. Despite that, as well as a 30,000-square-foot lease brokered by Cushman & Wakefield at 100 CambridgePark Drive, Alewife’s vacancy rate rose from 16.7 percent to 18.2 percent during the past three months.

‘Reverse’ Curse
The Boston office market suffered another tepid quarter, with Spaulding & Slye reporting the vacancy rate rose since year-end 2002 from 9.2 percent to 10.6 percent. More alarmingly, the Hub had another 746,000 square feet of negative absorption for the quarter, dampening the impact of several large leases that were inked such as Lexington Insurance at 100 Summer St. and PricewaterhouseCoopers into nearly 300,000 square feet at 125 High St.

“It’s like getting kicked in the gut again,” Spaulding & Slye principal William Barrack said of the dour figures. “We are continuing in that streak of the longest period of negative net absorption [nine quarters] that we have ever had in Boston, at least in my 20 years.”

The addition of two big blocks of sublease space at Two International Place and 225 Franklin St. were the biggest reasons for the dour Hub outcome, said Barrack, who also expressed concern about the woes of major space drivers such as Fidelity Investments, Fleet Bank and Fidelity Investments. “The five largest users in the tower market continue to downsize, and that’s not good,” said Barrack.

There have been some successes, including Bain & Co’s. lease as anchor tenant at 131 Dartmouth St. in Boston’s Back Bay, and a deal that will have Goulston & Storrs remain at 400 Atlantic Ave. Indeed, Codman Co. principal Robert B. Cleary Jr. said landlords are becoming increasingly aggressive in pursuing existing tenants, striking deals that dampen any fiscal benefits of relocation. While such deals may be good for current landlords, Cleary noted that will mean less volume of firms with space requirements searching for new quarters, keeping the future recovery in check. Another problem, Cleary said, is the lack of growth included in new leases, with players such as PricewaterhouseCoopers actually cutting back on their future needs.

“It’s a tough time in the market and a tough time in the industry,” said Cleary. While stressing there has been a bump up in activity, he said most of it has been for small-end players needing 5,000 to 10,000 square feet. With rents continuing to fall, Cleary said the big question at present is, “Where’s the bottom?”

Even with vacancy rates in core markets such as Waltham still above 30 percent, Hines said he believes the office market is finally beginning to hit the low ledge, with the overall suburban vacancy rate rising just over 1 percent, from 27.4 percent to 28.5 percent. “We’re still in reverse, but I think we are getting close to being in neutral,” Hines said. “It is hard not to be concerned with what’s going on, and the anxiety is still abundant, but we are hopefully seeing some lights at the end of the tunnel.”

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March 31, 2003
Brokers Take Heart in Zoll Medical Lease
Bankers & Tradesman

In a transaction that helps wrap up the first quarter of 2003 with a sorely needed bang, Zoll Medical has agreed to sublease 160,000 square feet of office space at 269 Mill Road in Chelmsford. The long-term agreement is expected to breathe a bit of life into a suburban Boston market that has been decimated by the downturn in the high-tech industry.

“The deal has been signed,” acknowledged Richards Barry Joyce & Partners President Robert B. Richards Jr. when contacted by Banker & Tra