The Case of The Empty Offices
PHOTO| Rick Saia
Tufts Cummings School of Veterinary Medicine
It's back to the 1980s when it comes to the office market along I-495, with rents at rock-bottom levels not seen in decades.
One of the Bay State's major technology beltways, the 495 corridor, from Littleton down to Plainville, is possibly the best bargain out there for growing companies with tight real estate budgets, industry experts say.
In fact, despite of a mix of ups and downs over the years, overall rental levels are back to where they last were when Ronald Regan was president, contends Christopher Tosti, a suburban office market expert and executive vice president at CB Richard Ellis, a commercial real estate firm.
And even as the economy shows signs of picking up, rent stability appears here to stay along 495.
In fact, while rents are rising or poised to takeoff in parts of Boston, Cambridge and 128, along 495 there remains more than enough empty space to keep rents in check for some years to come.
"I have been watching the (495) market since the 80s and I have seen a bunch of dips," Tosti said. "The rents today are about where they were back in the 1980s. There hasn't been an upward march."
Despite recovery, rising vacancy
There certainly has been no lack of big-deal drama along 495 over the past couple years, with the corridor recently seeing one of the biggest headquarters moves in years.
Now more than two years ago, Fidelity announced plans to move out of its long-time Marlborough campus and consolidate operations elsewhere.
The move blew a gaping hole in the 495 West market – that is until TJX opted to take down the 715,000-square-foot-plus complex last year as a new headquarters location.
Yet the TJX deal, as big as it was, has been unable to singlehandedly turn around the 495 market.
While Fidelity's campus has found new life with a new company, Hewlett Packard's 770,000-square-foot Marlborough spread sits empty, Tosti and other brokers note.
The economy and local hiring may have picked up modestly across Massachusetts over the past few years, but office vacancy rates have continued to rise along 495, real estate stats show.
Empty corporate suites along the 495 North submarket rose from 21.6 percent at the end of 2011 to 23.9 percent this spring, while on western 495, the vacancy rate jumped to 36.6 percent from an already staggering 35.5 percent, according to the latest numbers from Colliers International's Boston office. On the highway's southern stretches down towards Foxboro and the Rhode Island border, vacancy rose to 27.7 percent this spring from 25.5 percent at the end of 2011, the firm reports.
Things couldn't get much worse along 495 West, which has surpassed the 28.3 percent office vacancy rate seen in 2003 in the aftermath of internet bubble collapse. (The one exception seems to be the cluster of headquarters complexes and office parks on or near Route 9 in Natick, and Framingham, where rents and vacancy have held up better, though brokers not that the area is as close to the 128 market as it is to 495.
By contrast, 495 north and south, at the moment at least, don't appear to be in danger of setting new records for the amount of empty office space.
Vacancy along northern 495 hit a high of 33.7 percent in 2003. However, the submarket has benefited dramatically in recent years from IBM's big campus move in 2010, with the blue chip company now employing thousands of employees in Littleton and Westford. That has helped fuel growth in local software and defense sector firms.
And while a vacancy rate of 27.7 percent is hardly anything for brokers to boast about, 495 South is still significantly below the 35-percent vacancy mark reached in 2009, according to stats provided by Colliers.
But it seems unlikely that 495 will ever return, at least in the next several years, to the extremely tight market of the internet bubble years, when vacancy along the highway actually fell into the low single digits and rents soared.
Those gravy years came to an abrupt end in 2001, when the Internet bubble burst, sending companies like CMGI, which has acquired a massive 495 North campus in Andover, into oblivion.
With the distance of a decade, those boom years – the 495 West vacancy rate was 2.1 percent in 2000 – look more like an anomaly than a realistic benchmark.
"495 is hurting a bit," noted David Begelfer, executive director of NAIOP Massachusetts, which represents developers across the state. "Rents have not recovered or gone up much in the past 20 years."
Most of the demand right now is on 495 is coming from lease renewals, with companies sometimes looking for less space than they have now, notes Matt Giffune, a vice president at Jones Lang LaSalle and an expert on the 495 office market.
"In general, the 495 market is pretty stagnant and pretty sleepy – it is driven by lease expirations rather than pure demand," Giffune said.
Silver lining for corporate tenants
All of this is clearly tough news for real estate investors and office developers.
But for companies facing fierce pressure to keep overhead costs down, 495 is shaping up to be a low-cost oasis for companies, especially with rents poised to rise again along 128, and in the most coveted corporate perches in Cambridge and Boston.
Rents along 495 now average in low $20s per square foot, down by roughly 30 percent from a decade ago, brokers say.
And even better deals can be had depending where you are looking with decent office space in Marlborough to be had for as low as $17 a square foot.
In fact, there are several leases available in modern, multi-level office buildings in Westborough, Franklin, Framingham and Milford in the 1,000-to-5,000-square-foot range at lease prices in the $14-to-$17-per-square-foot range, according to commercial real estate site LoopNet.
If a company is willing to consider subleasing from another firm, that number could drop even further, Jones Lang's Giffune notes.
That's a bargain compared to the stiff competition for the best space now starting to drive up rents in selected parts of 128, Cambridge and Boston.
Rents at the Wellesley Office Park are nearly twice that, in the mid $30s per square foot, Tosti noted.
Office rents in Cambridge have jumped 10 percent in the last year, into the low $40s per square foot, while top office space in the Back Bay now averages more than $55 a square foot, according to commercial real estate firm Cassidy Turley FHO.
The 495 belt also gives companies access to a large and skilled labor market covering much of Eastern and Central Massachusetts and extending north into New Hampshire and south into Rhode Island.
"From a tenants' perspective, 495 has been on sale for a while," Tosti said.
End of spec development?
While bargain rents are good for companies looking for rental deals, it's not so good news for developers looking for their next projects.
After an explosion of construction in the late '90s, new office construction ground to a halt after the collapse of the Internet bubble.
And it could be several years more before vacancy rates and rents have fallen low enough for developers to take the leap and put up new, spec office buildings, Begelfer said.
Developers are instead turning their attention to build-to-suit projects for companies who need unique facilities.
Tufts University has rolled out plans for a 348,000-square-foot lab, research and office park on the school's Grafton campus. Jones Lang is leasing the property, marketing sites for life sciences companies interested in putting up labs and offices.
There's also a number of mixed-use projects in which apartments and retail are the focus with offices, if included, playing a complementary role.
Along 495 North in Littleton, for example, Sam Park is rolling out plans for a hotel, retail and offices near the IBM campus, said Paul Matthews, executive director of the 495/MetroWest Partnership.
"There are diminished resources to do spec buildings at this point," Matthews said. "You are seeing a trend towards mixed use, multiphase development."
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