fho partners 3q 2010 market report

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B O S T O NT H I R D Q U A R T E R 2 0 1 0MARKET

ECONOMYAccording to a September report released by the National Bureau of Economic Research (NBER), the recession that began in the fourth quarter of 2007 offi cially ended in the second quarter of 2009. Based on economic indicators such as gross domestic product (GDP), gross domestic income (GDI), wholesale/retail sales and industrial production, NBER defi ned the recession’s end as the period at which the economy reached its trough – not a return to pre-recessionary levels. However, it should be noted that according to the NBER report, employment did not bottom out until six months later, in December 2009. This has lead to what analysts refer to as a “jobless recovery” and is the main reason improvement remains lethargic. At 8.8%, Massachusetts posted a lower unemployment rate than the national rate of 9.6%, and the lowest since August 2009, according to a September report from the Bureau of Labor Statistics. As we saw at mid-year, this dip is partly due to discouraged workers dropping out of the work force or settling for part-time employment. Nationwide, private sector employment grew by 64,000 positions in September. However, the gain was off set by a loss of 159,000 positions in the government sector as the last of the Census workers completed their tenure. Given that the economy must create 150,000 jobs per month just to keep unemployment levels static, we expect recovery and a resulting demand for offi ce space to remain sluggish through at least the fi rst half of 2011.

High unemployment coupled with stagnant consumer spending, depressed home values and elevated rates of foreclosure mean that growth will likely remain weak for the foreseeable future. Although eco-nomic indicators are not improving as drastically as in previous recessions, it is unlikely that the economy will slide back into another downturn.

MARKET SUMMARYIn the fi rst three quarters of 2010, greater Boston posted negative absorption of 12,216 square feet – a signifi cant improvement over 12 months ago when absorption totaled negative 5.7 million square feet. While pockets of leasing activity are keeping the market afl oat, we have yet to see a consistent return to pre-recessionary levels.

With an overall availability rate of 22.7%, greater Boston is still enduring the eff ects of the market contrac-tion. Availability rates have decreased nominally across nearly all markets, indicating an improvement is in sight although it may not be as soon as we had anticipated. Overall asking rents in the region are down year-over-year, but appear to be fl attening since the end of the second quarter.

OUTLOOKAs mid-term elections approach, bringing with them uncertainty surrounding fi scal policy, regulations, taxes and healthcare costs, many companies are still reluctant to begin hiring and spending in earnest. Until businesses begin to see discernable signs of recovery, it is unlikely that Boston’s commercial sector will see a sustained uptick in leasing activity.

While a signifi cant upturn is not likely until mid-to-late 2011, the space that has fl ooded the market for the past two years is slowly beginning to be re-absorbed. Insulated by a non-existent construction pipeline, we expect the region’s recovery will be driven by a lack of supply, rather than a spike in demand.

M A R K E T W A T C H l T H I R D Q U A R T E R 2 0 1 0

Executive Overview

Q3 2009 Q3 2010

DJIA 9509.28 10829.68

US Unemployment (August) 9.7% 9.6%

MA Unemployment (August) 8.8% 8.8%

US Employment (August) 139,433,000 139,250,000

MA Employment (August) 3,167,102 3,171,545

Overall Market Statistics YTD 2010 Summary

The State of the Economy by the Numbers

Unemployment Rate

Greater Boston Market Snapshot

Asking Rent Vacancy Absorption

Boston

Cambridge

Suburbs

Sources: Dow Jones, Bureau of Labor & Statistics

6%

8%

10%

12%

Aug.2010

July2010

June2010

May2010

April2010

March2010

Feb.2010

Jan.2010

Dec.2009

Nov.2009

Oct.2009

Sept.2009

Aug.2009

July2009

June2009

May2009

April 2009

March2009

United StatesMassachusetts

Q3 2009 Q3 2010

Overall Availability 21.6% 22.7%

Average Rent (Offi ce) $32.08 psf $29.79 psf

Net Absorption YTD 2010 (5,685,889) sf (12,216) sf

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Boston Market OverviewThe Boston offi ce market continued to stabilize throughout the third quarter of 2010. While it is unlikely we will see the abrupt improvement we have seen after past reces-sions, it appears we have entered an offi cial period of recovery. While market-making deals are still scarce, an amalgamation of smaller deals in the 30,000 to 50,000 square-foot range has contributed to an uptick in leasing activity.

At (485,248) square feet (sf), net absorption in downtown Boston remains nega-tive year-to-date. However, this is a marked improvement over Q3 2009 when absorption totaled (1.81) million square feet. The Financial District continues to post the most signifi cant loss of net occupancy with absorption totaling (462,146) sf. But, like the overall CBD, this is much less severe than twelve months ago when absorption totaled (1.1) million square feet.

At 18.7%, overall availability in Boston is down 20 basis points (bps) quarter-over-quarter, but still up from both Q3 2009 (16.4%) and year-end 2009 (16.9%). This is the fi rst decline in availability since Q2 2009. Availability in the Financial District is still elevated (up 2.2 percentage points in the past 12 months), but declined 40 bps to 21.0% quarter-over-quarter.

We are still experiencing “fl ight to quality” as evidenced by an increase of 3.2 percentage points in Class B availability in the past 12 months (19.3% in Q3 2010) compared to an increase of 1.9 percentage points in Class A buildings (17.9% in Q3 2010) during the same period.

At $39.75 psf, overall asking rents are down 7.2% year-over-year. Overall asking rents in Back Bay are down 9.1% in the past 12 months ($41.84 at Q3 2010). Class A rents have declined 7.0% in the past 12 months while B and C have declined 5.3% and 3.1%, respectively. At $43.04 psf, overall asking rents in the Financial District remained fl at quarter-over-quarter, but are still down 6.2% year-over-year. While overall asking rents in the CBD are down year-over-year, it is worth noting that in the past two quarters, there has been a signifi cant spike in Back Bay’s Class A rents, both asking and achieved.

The Back Bay submarket posted signifi cant positive absorption year-to-date. This is largely due to Bain Capital’s 208,000 sf lease at the Hancock Tower in the second quarter. However, there appears to be a sustained uptick in leasing activ-ity – especially for tenants in the 15,000 to 30,000 square foot range moving into Class A buildings.

Boston Overall Availability vs. Average Asking Rent by Class

Inventory 59,750,735 sf

Availability Rate 18.7%

Net Absorption YTD 2010 (485,248) sf

Average Asking Rent $39.75 psf

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

2008 2009 Q32010

20072006200520042003200220012000

Class A RentClass B Rent

Class A AvailabilityClass B Availability

Market Highlights

100,000

1,100,000

2,100,000

3,100,000

4,100,000

5,100,000

6,100,000

7,100,000

8,100,000

9,100,000

10,100,000

Square Feet

2008 2009 Q32010

20072006200520042003200220012000

Sublease Direct

Boston Direct Available vs. Sublease Available

Market Perspective

Availablility vs. Asking Rent

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

$15.00

$19.50

$24.00

$28.50

$33.00

$37.50

$42.00

$46.50

$51.00

$55.50

$60.00

Washingto

n D.C.

Seattle

San Francisco

Philadelphia

Manhattan

Los Angeles

Houston

Denver

Dallas

Chicago

Boston

Atlanta

Availability (%) Asking Rent

Availability

Asking Rent


Cambridge Market OverviewBecause Cambridge entered the recession from a position of strength (being some-what insulated due to demand from high tech and life science companies) fundamen-tals remained comparatively healthy through the third quarter. Large offi ce deals in East Cambridge contributed to the continued health of the Cambridge offi ce market. In the lab sector, a dearth of high-quality lab space is keeping asking rents from experiencing the deterioration seen elsewhere in the greater Boston area.

OFFICE MARKET The Cambridge offi ce market closed Q3 2010 with a 15.2% availability rate. This

represents a decline of 1.6 percentage points quarter-over-quarter and was large-ly driven by Microsoft’s commitment to 113,000 sf at One Cambridge Center and Hubspot taking 37,000 SF at 25 First Street.

Overall asking rents for offi ce space averaged $35.65 psf. While they have re-mained fl at quarter-over-quarter, average asking offi ce rents have declined 7.2% in the past 12 months.

The offi ce market posted positive absorption of 338,229 sf year-to-date – a notable increase over the (393,731) sf reported at Q3 2009.

LAB MARKET In the lab market, availability also declined to 16.3%. This represents a

1.2 percentage point decline quarter-over-quarter and a 30 bp decline in the past 12 months.

At $49.26 psf NNN, asking rents for lab space are up 2.0% quarter-over-quarter, but are still down 3.7% year-over-year.

The Cambridge Lab market posted positive absorption through the fi rst three quarters of the year, totaling 37,790 sf year-to-date. This marks a slight improve-ment over Q3 2009 when lab absorption totaled positive 11,089 sf.

Sanofi -Aventis committed to over 100,000 square feet at 640 Memorial Drive. This is the largest lab deal executed year-to-date.

Cambridge Overall Availability vs. Average Asking Rent

Offi ceInventory 10,046,144 sf


Net Absorption YTD 2010 338,229 sf


LabInventory 7,751,645 sf



Average Asking Rent $49.26 psf NNN

Market Highlights

Cambridge Direct Available vs. Sublease Available

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

$55.00

$60.00

2008 2009 Q32010

2007200620052004

Overall Office RentOverall Lab Rent

Overall Office AvailabilityOverall Lab Availability

0

200,000

400,000

600,000

800,000

1000,000

1200,000

1400,000

1600,000

1800,000

Square Feet

2008 2009 Q32010

2007200620052004

Direct OfficeDirect Lab

Sublease OfficeSublease Lab

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Lab Inventory vs. Availability by Submarket

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000

Boston

128 Central

495 Central

Inner Suburbs

Cambridge

SubletDirectOccupied (SF)

Market Perspective

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Suburban Market OverviewFor the second consecutive quarter, the overall suburban market is displaying a stark contrast between the offi ce and R&D sectors. While the offi ce market posted positive absorption, the R&D market is still feeling the eff ects of contracted demand. Sub-markets along the 128 corridor were the most active, buoyed by larger deals such as Dassault Systèmes committing to 320,000 sf at 175 and 185 Wyman Street in Waltham. Despite elevated availability, the suburban market has not been exposed to a fl ood of newly constructed space or the glut of sublease availabilities that weighed down the region in the recession of 2001 to 2003. As a result, we anticipate that recovery will be driven by fi nite supply, rather than a spike in demand.

The suburban offi ce market posted positive net absorption of 577,365 sf year-to-date. This is a considerable improvement over 12 months ago when YTD ab-sorption totaled (1.35) msf. While still negative, overall suburban R&D absorption totaled (480,352) sf YTD. This is also a signifi cant improvement over 12 months ago when R&D absorption stood at (2.12) msf.

Overall availability in the offi ce market remained virtually unchanged quarter-over-quarter – increasing by only 30 bps to 23.3%. In the past year, availability has increased by a full percentage point from 22.3%.

At 28.9%, R&D availability declined a full percentage point quarter-over-quarter but is still up a full percentage point year-over year (27.8% at Q3 2009).

At $22.11 and $10.26 psf, respectively, average asking rents for both of-fi ce and R&D space remained fl at quarter-over-quarter but have declined 7.2% and 4.1% in the past 12 months.

Suburban Overall Availability vs. Average Asking Rent

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

$7.00

$12.00

$17.00

$22.00

$27.00

$32.00

2008 2009 Q32010

20072006200520042003200220012000

Overall Office RentOverall R&D Rent

Overall Office AvailabilityOverall R&D Availability

Market Highlights

0

2000,000

4000,000

6000,000

8000,000

10000,000

12000,000

14000,000

16000,000

Square Feet

2008 2009 Q32010

20072006200520042003200220012000

Direct OfficeDirect R&D

Sublease OfficeSublease R&D

Suburban Direct Available vs. Sublease Available

Offi ceInventory 74,752,089 sf




R&DInventory 52,674,829 sf


Net Absorption YTD 2010 (480,352) sf

Average Asking Rent $10.26 psf NNN Market Perspective

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Q3 201020092008200720062005200420032002200120001999

Sublease SF Available Unemployment Rate

Suburban Sublease SF Available

Boston Sublease SF Available

Massachusetts Unemployment Rate

Cambridge Sublease SF Available

Recession Recession

Sublease Available vs. Unemployment Rate


Market Total Total Availability Total Vacancy YTD 2010 Direct Weighted Inventory Available Rate Vacant Rate Net Absorption Average Rent

BOSTON OFFICE 59,750,735 11,159,213 18.7% 6,749,238 11.3% (485,248) $39.75

Back Bay 12,182,324 1,398,634 11.5% 854,977 7.0% 320,085 $41.84

Charlestown 1,748,336 186,167 10.6% 141,795 8.1% 14,364 $24.35

Fenway 1,911,890 186,682 9.8% 48,318 2.5% (149,082) $30.06

Financial District 28,202,230 5,928,263 21.0% 3,692,461 13.1% (462,146) $43.04

Government Center 1,878,278 372,278 19.8% 287,656 15.3% 35,494 $34.37

Midtown 1,863,609 376,711 20.2% 193,618 10.4% (41,593) $24.89

North Station 1,638,642 338,237 20.6% 99,693 6.1% (82,184) $28.26

South Boston Waterfront 6,187,511 1,851,431 29.9% 1,154,873 18.7% (26,411) $30.06

South Station 4,137,915 520,810 12.6% 275,847 6.7% (93,775) $36.56

CAMBRIDGE OFFICE 10,046,144 1,530,101 15.2% 1,068,911 10.6% 338,229 $35.65

Alewife/West Cambridge 1,714,404 388,018 22.6% 292,739 17.1% (35,553) $26.06

East Cambridge 6,160,198 908,796 14.8% 642,229 10.4% 371,522 $40.69

Mass Avenue Corridor 2,171,542 233,287 10.7% 133,943 6.2% 2,260 $34.16

CAMBRIDGE LAB 7,751,645 1,263,816 16.3% 1,006,757 13.0% 37,790 $49.26*

Alewife/West Cambridge 533,311 50,987 9.6% 50,987 9.6% 20,307 $34.13*

East Cambridge 4,900,679 911,248 18.6% 729,519 14.9% 59,467 $48.46*

Mass Avenue Corridor 2,317,655 301,581 13.0% 226,251 9.8% (41,984) $54.24*

SUBURBS OFFICE/R&D 127,426,918 32,599,669 25.6% 22,017,489 17.3% 97,013 $22.11**

128 Central 41,596,965 9,706,878 23.3% 6,828,260 16.6% 179,785 $25.37**

128 North 9,628,176 2,563,379 26.6% 1,773,178 18.4% 284,967 $19.69**

128 South 14,495,529 3,810,594 26.3% 2,541,054 17.5% (286,471) $18.19**

3/24 South 1,982,663 483,774 24.4% 398,897 20.1% 30,471 $22.05**

495 Central 17,559,942 4,193,311 23.9% 2,706,778 15.4% (47,692) $19.69**

495 North 31,706,695 10,204,769 32.2% 6,554,007 20.7% (336,433) $18.12**

495 South 4,292,816 937,591 21.8% 695,862 16.2% (1,550) $19.92**

Inner Suburbs 6,164,132 699,373 11.3% 519,453 8.4% 1,504 $22.52**

TOTAL 204,975,442 46,552,799 22.7% 30,842,395 15.0% (12,216) $29.79***Rents quoted on NNN basis **Average of offi ce rents only

Market Summary

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Glossary of TermsMETHODOLOGYThe information included in this report is the result of a compilation of informa-tion on Class A, B and C offi ce, R&D and investment properties located in the Boston area. The information was obtained by FHO Partners from representa-tives of each property.

All of the information gathered is stored in a FHO Partners database which is updated quarterly. From this database, total inventory, vacancy rate, rental rate and absorption fi gures may be calculated and presented.

Total inventory may change from year to year as a result of newly constructed or newly renovated buildings, recently remeasured properties, or signifi cant change or deletion of a particular building status. The database is thoroughly checked and balanced from year to year. The appropriate adjustments are made in order to balance the fi gures and calculate the most accurate vacancy and absorption fi gures.

DEFINITIONSInventory:Includes all existing competitive offi ce and R&D buildings over 20,000 sf as well as signifi cant buildings less than that size. Under construction, government, medical, educational and 100% owner-occupied buildings are not included.

Direct Space:Space available directly from the building owner. Includes space available for occupancy within the next 24 months. Does not include space in under construc-tion buildings.

Sublease Space:Space available through a lessee to a third party for the remainder of the original lease term and/or beyond. Includes space being actively marketed.

Vacancy Rate:Space, available both directly and by sublease, that is currently vacant and being marketed for immediate occupancy. Does not include space under construction.

Availability Rate:Available space is generally defi ned as space that is being actively marketed and/or available for occupancy within the next 24 months.

Construction Completions:Buildings which have received their certifi cate of occupancy in the stated time period.

Under Constructio n:Buildings which have had excavation work commence, but have not yet received their certifi cate of occupancy.

Offi ce:Space designed for general offi ce use. Buildings are generally two or more stories and off er tenants a higher-level of fi nish than R&D space.

R&D:Space designed for high technology, offi ce or light industrial use. Buildings are generally one or two stories. Net Absorption:The net change in occupied space over a given period of time. Calculations are based on available space.

Rental Rates:Gross: Rents which include tax and operating expenses, but generally not electric-ity.

Triple Net: Rents where the tenant is directly responsible for all tax, operating and utility expenses.

Weighted Average Rent:An average rental rate that is weighted by the amount of square footage available at each respective rental rate.

495

495

90

95

93

95

24

3

2

128

128

3

Chelmsford

Lowell

Westford

Acton

Littleton

WilmingtonBillerica

Andover

Tewksbury

Boxborough

MaynardHudson

Marlborough

Woburn

SouthboroughWestborough

Hopkinton

Concord

Framingham

Milford

Franklin

Wellesley

Lynnfield

Peabody

Stoneham

Lexington

Bedford

Burlington

Lincoln

Newton

Waltham Medford

Somerville

AllstonBrookline

Needham

Natick

Wakefield

Saugus

N. Andover

Methuen

Lawrence

DanversBeverly

Malden

Revere

Foxborough

Mansfield

Taunton

Brockton

Pembroke

Rockland

Dedham

Norwood

Westwood

Braintree

Weymouth

Hingham

NorwellRandolph

Canton

Quincy

495 South

128 South

495 Central

3/24 South

Boston

128 North

128 Central

495 North

Inner Suburbs

Submarket Map

©2010 FHO Partners. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to FHO Partners.

For more information contact:

Ashley E. LaneDirector of ResearchFHO PartnersOne International PlaceBoston, Massachusetts 02110

Direct Tel: +1 (617) 279 4570Email: [email protected]

Bethany A. BockmannResearch Analyst FHO PartnersOne International PlaceBoston, Massachusetts 02110

Direct Tel: +1 (617) 279 4589Email: [email protected]

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fho partners 3q 2010 market report

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