Commercial real estate revs up

By micky baca

The positive momentum in commercial real estate that has several area brokers celebrating record sales for 2005 is expected to continue into 2006. And while realtors say there are many factors that bolstered their results, they single out a willingness by area companies to finally add staff and expand their facilities in the improving economy as the biggest driver of the upbeat market.

From Greater Worcester to the Route 495 area to North County, Katz says his company’s number of sales and leases is up 20 percent for 2005. David Begelfer, CEO of the Massachusetts office of the National Association of Industrial and Office Properties in Needham, says he’s seen increased occupancy and stable or increased rents in all real estate markets from Worcester to Rte. 495 to Boston. He notes an "almost insatiable demand to purchase real estate" by investors seeking alternatives to stocks and bonds. Result: a 10 to 20 percent increase in sale prices per square foot.

And Philip DeSimone, senior vice president at Boston-based Spaulding & Slye Colliers (which was recently purchased by Chicago-based Jones Lang LaSalle), says expansion of major companies such as The TJX Cos. Inc., Staples Inc. and Genzyme Corp. are part of a positive momentum that has brought substantial absorption in the Metrowest region’s vacancy-plagued commercial real estate market, though the region still has a way to go.

Barring another disaster like 9-11, real estate experts in the region expect continued business growth and accompanying demand for commercial space to bring them a happy new year in 2006.

Katz Companies: Robust on all fronts

The Katz Companies, in its 91st year of operation, added three brokers this year and expects to add three more next year, according to Katz. While he says the commercial market is usually a tradeoff, where either office space or industrial dominate the demand, this year it’s been robust on both fronts.

Katz says many of his clients are seeking warehouse and distribution space in Worcester to take advantage of the city’s central location and good infrastructure. He expects that to continue because, he says, "All roads lead to Worcester." He’s also seen a "market acceptance" of converting mill buildings for residential loft space, increasing demand in that segment. There’s been some absorption of office space, particularly Class A, he adds.

A recent report by the Worcester Regional Research Bureau, Downtown Worcester Office Occupancy: 2005 Survey, pegs the overall office occupancy rate in downtown Worcester as unchanged from summer ‘04 to summer ‘05, at 88.7 percent. However, the city’s third-quarter occupancy rate compares favorably both to the national average of 84.9 percent and to Greater Boston and the 495/Mass Pike areas, at 84.5 percent and 76.9 percent respectively.

Katz and other brokers note that the Worcester market tends to be more stable than other parts of the region. The city did not experience the occupancy spike in Class A space that other areas, such as Metrowest, did in the late ‘90s. Neither did it face the high vacancy rates in the bust after 2000.

Katz says Worcester needs to do a better job of competing with the nearby towns that attract companies like EMC and Boston Scientific. It also needs more pad-ready sites and a competitive tax rate, he says, to go with its abundant workforce and infrastructure. Surrounding towns offer far lower business tax rates than does Worcester, which causes startup or incoming companies to locate one or two towns out.

Glickman Real Estate: Brokers cite growth

Newer commercial real estate companies are also citing record growth this year. Peter Kovago, a partner at Worcester-based Glickman Real Estate Inc., says his 12-employee firm will see a 60 percent revenue increase for ‘05. He attributes much of that increase to the fact that the company is "not a mature business" and has been in a growth mode since it was started about 6 years ago.

Kovago says Glickman Real Estate has been seeing increased demand for Class A and higher-end Class B office space, as well as some opportunity in retail space as activity in that segment has increased. As for industrial, he says, "It hasn’t been great, but it’s better than it was a year ago." Industrial rents for the region remain on the low side, Kovago says. It is difficult to meet demand for industrial space in Worcester, he notes, where there is little land available for such use and the cost of razing older mill buildings to create sites is still not cost effective.

Geographically, Kovago says, the Blackstone Valley area has been strong in 2005. Auburn also is sought after for industrial use because of its favorable highway access.

Kovago expects Glickman Real Estate to have another record year in 2006. He hopes to see the industrial space rates increase, he says, as the better space gets used up. And, he says, he’s excited about the potential of the retail climate in the Worcester area, though energy cost and higher interest rates could pose challenges in ’06, he says.

Kelleher & Sadowsky:

A solid year

John McKinley, president of Worcester-based Kelleher & Sadowsky Associates, says 2005 has also been one of his company’s best years "if not our best year ever" for sales. Like Glickman, K&S attributes part of its growth to its maturing as a company and the increased experience of its sales staff, which stands at 10 but could increase next year.

McKinley says it was a "solid year," characterized by realistic prices and steady, continued demand for local industrial and commercial space. Also, there’s growing optimism in the business community, with clients less concerned about rising interest rates than they are about the prospect of making money.

When businesses lack confidence, as they did just after 9-11, they are more likely to "squeeze into the space they have," McKinley says – but clients have been getting more confident every year since then.

While the greatest demand in Central Mass. remains in and around Worcester, McKinley says the city has a lot of mill space that is unsuitable for the current demand for single-story facilities. Since Worcester lacks ample industrial space, some nearby areas are benefiting from the spillover. The Route 146 area, including Sutton and Millbury, he says, is "becoming very hot," particularly for retail. In contrast, North County has good highway access, but lacks commercially zoned land.

McKinley counts the quest for light manufacturing space as one of his company’s greatest challenges.

Fine Properties:

Strong leasing climate

Real estate veteran Jane Fine of Worcester-based Fine Properties Inc. says clients found incentives in 2005 for both leasing and buying. Fine says her firm did an extraordinary amount of long-term leases this year, trending toward 10-year spans rather than the previous two-to-five-year terms. One reason is the tax advantage to leasing rather than buying. On the other hand, the lower interest rates and favorable pricing, particularly in areas with excess commercial space, prompted more commercial sales as well.

Fine says most of her clients were "trading up" to larger spaces, though, some were downsizing. She notes brisk R&D activity and high-end industrial. And there was a big demand for smaller industrial buildings of 5,000 to 10,000 square feet. She has seen commercial prices go up in Worcester, but says industrial space remains too low at $5 to $10 per square foot. Fine expects 2006 to be the same or better than 2005 for her five-person firm.

Spaulding & Slye: Metrowest making progress

Spaulding & Slye’s DeSimone says not only is the expansion of established companies in the Metrowest region fueling positive absorption in the office space market there, but some start-up activity is also increasing demand. He cites heavy activity in Natick and Framingham, where there is less than 10 percent availability and where rents have climbed by 20 percent. In fact, DeSimone notes, when Staples wanted an added 60,000 square feet of office space near its Framingham headquarters, the company couldn’t find it there. So, he says, Staples leased space in Westboro instead.

The tight market in Natick and Framingham has created spillover demand for space in Southboro where rents increased in 2005. But Marlboro and Westboro rents still remain low because of higher vacancy rates. Marlboro’s 40 percent availability rate is likely to take another 18 months to absorb before rents rise, he predicts. "The bottom is probably behind us, but it’s going to take a little while to come back," he says of Metrowest.

While DeSimone expects market momentum to continue slowly in 2006, he says the difficulty of finding talented workers in engineering and high tech could slow expansion.

NAIOP: Barriers ahead?

NAIOP’s Begelfer also warns that the state’s loss of skilled labor could be a barrier to commercial real estate. While 2005 was "basically a good year" for industrial and office activity, he says, employment growth in the state has been slow. What’s more, Mass. is losing 25 to 40 year olds "at a record pace" due to high living costs, which could pose serious trouble for future growth.

Begelfer also warns of the costly, lengthy permitting processes facing Mass. companies, compared to the rest of the country. Our state will have difficulty keeping in-state business, never mind attracting new ones, "if we don’t change our attitude here," he says.

Nonetheless, Begelfer expects continued improvement in the commercial market along 495 and slow growth throughout the region.

Finard & Co.: Retail

opportunities in stock

Donald Mace, Finard & Co. LLC vice president and director of leasing for its retail brokerage division, is very upbeat about the retail real estate market, saying that new space has been added and absorption rates have been improving over the past few years.

While declining to cite specifics, Mace says there are many new projects in the works that support growing confidence in the Central Mass. market. Among them, Routes 146 and 9 are strong for retail. High points are the success of the Shoppes at Blackstone Valley in Millbury and the Lincoln Plaza in Worcester.

Overall, Mace suggests, regional retail vacancy rates were modest in 2005 and data suggests a low supply. There’s still a need for more big-box retail space, he says. And there’s also a strong demand for retail locations under 25,000 square feet to serve "closet retailers" and restaurants.

Many proposed retail projects will hit the market in 2006, he says, to meet a solid demand.

As area real estate experts ring out a year that was positive across the region’s commercial markets, Katz sums up the hopes for the new year this way. "We’re prudently bullish for continued growth," he says. "The 2005 results tell us in a rather compelling way that it’s a broad-based, forward-thinking market that has achieved some absorption and is torqued up for more..."

Micky Baca can be reached at mbaca@wbjournal.com