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Optimism Abounds Heading into 2012

Excerpted from officeSTATus Winter 2012

An absorption streak extended to three quarters as tenants absorbed 861,000 sf of commercial office space in the Greater Boston market in the fourth quarter of 2011.  The positive demand streak is substantial, accelerating and widespread, as occupancy levels have increased by 2.0 million sf.  The current quarter’s absorption is the greatest such amount since 2007, and positive demand was posted in the Financial District, Back Bay, Cambridge, and most of the suburban submarkets.  This demand activity is set against a backdrop of surging management optimism as measured by the Institute for Supply Management, as both Business Confidence and Employment outlook indicators recovered to very high levels, after falling to near-neutral levels as of last quarter.  Boston MSA unemployment of 6.0 percent has decreased 0.9 percent over four quarters and is 2.5 percent below a national unemployment rate of 8.5 percent.  The actual number of persons employed in Greater Boston has increased 1.1 percent during the same time period, contrasting the current dynamic with periods where unemployment fell due to a falling participation rate, or number of people actively seeking work.  Investor enthusiasm shows that at least a part of the current positive sentiment is not limited only to the Boston region, as the Dow Jones Industrial Average has risen ten percent in the fourth quarter.  The locally critical tech sector has also benefitted, with the Morgan Stanley High Tech Index rising seven percent since the end of the third quarter.

A particular demand for space in a limited number of key areas, having been sustained since before the current three-quarter overall positive absorption streak, has severely depleted vacant space in areas which many tenants consider to be their preferred locations.  Both the Back Bay and East Cambridge submarkets are under seven percent vacant.  Thirty percent of the vacant space in Waltham as of the end of 2010 was absorbed in 2011, dropping vacancy from 26.7 percent to 18.6 percent.  While the 19.1 percent vacancy rate in the Seaport District would not, in itself, signal low supply conditions, rapidly increasing appreciation of the area and its in-progress development of amenities could likely create a significant depletion of the 991,000 sf of vacant space there during 2012.  Despite a sharp increase in construction activity, the 1.6 million sf of office product under construction is 100 percent pre-leased, not helpful to tenants looking for space and partially symbolic of the inability to fill larger requirements in existing product in high demand locations.

The current supply  imbalance in an expanding environment is dramatically impacting demand patterns and partially re-shaping the urban core.  Creative firms unable to find suitable space in Cambridge have found space along Route 128, in Watertown or in the city’s successful “Innovation District” – an area including the Seaport District and a small part of the Financial District.  Back Bay tenants have also infilled Class B facilities and driven demand in peripheral areas, including the Financial District, where positive demand in the past three quarters bucks a sharp negative demand period seen 2008 through 2010.  Rapidly decreasing vacancy in Waltham will likely drive demand radially along 128, as well as to that town’s more vacant Class B inventory.  While numerous concerns permeate the economy, the region’s focus on business-to-business (research), consumer non-discretionary (biopharma), and strong sectors of consumer businesses (discount retail) position it well within the global and national economy. Accommodating a moderate amount of potential growth in areas where tenants hope to locate appears the region’s primary concern.

Categories: Research
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