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Friday, February 20, 2009
Inside Real Estate
Time for tenants to rethink their real estate plans
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As we trudge ahead in the first quarter of 2009, it’s clear that the financial meltdown is still shaking up the commercial real estate market in our area. Virtually all industry sectors are absorbing the blow, and technology is no exception.
Uncertainty and anxiety continue to characterize the mood of the corporate community. This doesn’t come as a surprise, but it doesn’t diminish the pain. We are undergoing an inevitable market correction following the artificially inflated rents at the economy’s peak, and the markets with the biggest bubble, including metro Boston’s technology corridor, will likely take the biggest tumble.
Given this bleak scenario, why are so many Boston-area landlords outwardly still bullish about commercial real estate? They point to the latest market statistics that show relatively low vacancy and rents that remain stable. Statistics, they say, don’t lie. So, many landlords are trying to use selected numbers to their advantage.
For a more accurate reading, we need to look beyond the statistics and feel the pulse on the street. There, the prognosis is clear: It has definitely become a tenant’s market.
The reality is that today’s statistics are yesterday’s news, reflecting conditions that are at least six months old and not real-time conditions. Historically, commercial real estate has been a lagging indicator of economic activity. The process generally starts with job layoffs, often continues with office space reduction, and finally leads to disposition through subleasing, lease expiration or sale.
Here is where we stand:
• Asking rents in Boston and other large metro centers are actually down about 20 percent in the last quarter, and we expect they will decline as much as 20 percent in the next three quarters, with the compound effect of this correction being approximately 36 percent.
• More companies are shutting down and shedding more space, while limited new inventory is expected.
• In the next quarter, we expect vacancy rates to rise 2 percent to 3 percent downtown and in the suburbs in Class A and Class B buildings.
• VC funding for many companies is drying up, and that will result in more space hitting the market. Also, fewer startups will be funded, which means that Harvard University and MIT won’t be able to spin off new companies as they have in the past.
• Very little trading is expected with buildings for sale in the next few quarters, as financing will be hard to secure.
To be sure, the market will level off, there will be an eventual return to normalcy, and then the pendulum will shift back to landlords. Activity will likely pick up again by the first quarter of 2010, with companies adding staff to fill empty pockets of existing space before they expand. Again, the statistics will lag behind these changing dynamics.
Tips to Tenants
Given this environment of flux and volatility, what is our advice to companies while this remains a tenant’s market?
In general, we remind tenants that this recession has a silver lining: They now have leverage with landlords who are desperate to maintain their assets and retain creditworthy tenants. But even though landlords are more willing to accommodate tenants with concessions like free rent and better improvement allowances, they will continue to be stubborn for the short term. Accordingly, we would caution tenants to avoid major, knee-jerk actions.
Companies with leases approaching expiration should determine what assets they want to hold onto and what they might dispose. Companies with longer-term leases may want to consider plans to dispose space, particularly if they are downsizing. If this is the case, it would be prudent to work with a project manager to “restack” space and increase efficiencies. If you work with project managers who are part of a larger commercial real estate firm, your outsourced services will be more integrated.
In the months ahead, we see an opportunity to evaluate space options and lock in favorable rates. It’s also prudent to review long-term strategy and ensure that business plans are aligned with real estate plans. This is a time to be patient, strategic and even a little optimistic.
Joe Sciolla is managing principal of CresaPartners LLC in Boston, an international corporate real estate advisory firm. For more information, visit www.cresapartners.com.
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